Oilfield Life After the COVID-19 Crash—Part II
Many OFS companies have pulled away from the unconventional resources and redirected their efforts into alternate energy and clean technology. There is a limited bucket of money available for these companies to invest in new technology, and with every dollar diverted to ESG, those dollars are taken away from traditional technologies.
In May 2020, I wrote an article forJPT that tried to make sense of what was happening to the oil and gas industry. Remember, this was after the discovery of the pandemic that shut down the world’s economy for many months. Factories and businesses went dark. Roads were empty. People were hunkering down, not knowing or understanding how bad this virus was.
All of this meant that demand for hydrocarbons came to a screeching halt. I had just listened to the earnings calls from Halliburton, Schlumberger, and Baker Hughes, and the outlook was doom and gloom—every executive was trying to reduce spending by millions of dollars.
This came to the detriment of scores of employees and especially those within technology departments—many of which were shuttered.
I said at the time that the industry should be satisfied with whatever technology was available because it would be several years before we would see any new technology. So, how did I do in my prediction?
I will let you judge, but I think we have seen examples of spin being put on what amounts to normal work. Any advancements are mostly cosmetic, with no real, new groundbreaking developments. Now that 2 years have passed and we are cautiously looking around the corner at the world opening up, what do we have to look forward to?
Once again, I listened to the first-quarter earnings calls from the “big three” oilfield services (OFS) companies. The outlook was much more optimistic, and we heard some of the new slants on those calls.
When I wrote the original article in 2020, the letters “ESG” were seldom mentioned in conversation, and especially not on earnings calls. Now, the OFS companies are all about what they are doing to seduce those ESG investors.
Why are they worried? Because all the “traditional” big money that once went into the old-fashioned oil and gas sector is now being swayed by this “new” concept of ESG, which is simply the criteria around environmental, social, and governance practices in any company.
What’s Old Is New Again
I put “new” into quotes because from my experience, ESG does not represent a new concept; rather, it’s a clever way that bankers and consultants have packaged what every major company has had as part of its charter for many years.
While each has been mentioned separately and not bundled as ESG has been, every corporation has provisions for being good stewards of the environment, being fair and equitable in its hiring practices, and being compliant with the law at every turn.
What has changed is the political environment that we live in today, with the 30-second headlines, the reporting of how bad capitalism is, and how terrible the world is compared to the past.
In the earnings calls, new technology was not ignored. In fact, it was mentioned more this time than it had been in the past. For example, Halliburton mentioned technology 32 times, Schlumberger 18 times, and Baker Hughes 19 times. What is different is the direction these technologies are taking.
In the past, technology might have taken the form of a new measuring device, new widgets to improve fracturing, or new software to find more oil and gas.
The big thrust now is “transition” technology. In other words, these companies are funneling money away from the traditional oil and gas technologies and toward those related to ESG. Most notably these funds are going toward carbon capture, utilization, and sequestration (CCUS), hydrogen production, geothermal energy, and other alternative sources.
Each of the major OFS companies has set up entire new divisions aimed at these new technologies. Indeed, some qualify as being completely new, but in other cases, OFS is pulling in older, less recognized services (e.g., geothermal) under this new umbrella.
Popular, But Risky
While admirable and forward-thinking, the industry may not be mature enough to fully provide the return to the investor’s real value when it comes to ESG-centric technologies.
Why do I say this? It comes from my own experience—one that I am going through right now—in working on a CCUS study in the Gulf of Mexico. The project’s aim is to use depleted gas reservoirs to store large volumes of CO2.
We have discovered that the biggest struggle on this project is actually not a mechanical or reservoir property problem. It is the current state of government regulations and how they not only slow down but often hinder proper movement.
There is a specialized permit (Type VI), which is aimed at CO2 injection for enhanced hydrocarbon production—not pure injection for storage. The agencies that oversee the CCUS in the US are the Bureau of Safety and Environment Enforcement and the Bureau of Ocean Energy Management. As it happens, they are often at odds regarding their respective regulations.
The former wants to force offshore platform owners to remove nonproducing platforms as quickly as possible, while the latter is looking for ways to utilize these platforms for alternate use such as aquaculture, alternate energy production, or CCUS projects.
As mentioned, the regulations have been tailored for the extraction of gas and liquid from underground reservoirs. Now, we are trying to make sense of the injection of liquid and gas into depleted reservoirs that have no relation to the original intent of the production of hydrocarbons. Such uncharted territory is rarely explored or conquered quickly or easily.
The Roller Coaster Continues
Another problem these companies face is the ever-changing roller coaster that is the highly cyclical commodities world we live in. Additionally, there are workforce issues that need to be addressed to adapt to the changes.
The original article lamented how tens of thousands of jobs were eliminated with the downturn in operational activity, the shuttering of offices and facilities, and major cuts to R&D dollars. Now, the industry is scrambling (once again) to find qualified people to fill its expanding number of job openings.
Many workers in the youngest generation, thrown out through no fault of their own, made what I consider a smart move. They shunned the traditional oil and gas industry for greener, more stable pastures in banking, investments, construction, medicine, and other high-paying jobs.
We are also seeing the double-whammy effect of the Great Crew Change happening as the Boomers march further toward retirement age. We anticipated a gradual attrition of those experienced folks, but COVID-19 slammed those ideas in the face.
Many of the productive Boomers were sent away before they were ready; others decided to take whatever package they were offered and quietly retire. With the upturn happening, I see strange hiring practices that still shun the older generation and look to put in younger, less-experienced folks. The effects of this could loom large as the world comes to grips with its dependence on a steady stream of increasingly hard-to-access hydrocarbons.
We Need an Energy Plan More Than Ever
With special regards to the US, a comprehensive, long-term energy policy is desperately needed, one that supports the technology required for the future and also understands the necessity to bridge energy supplies.
On top of these other problems, we are now faced with the political upheaval of war in Europe.
Without getting into all the geopolitical drivers, we must face the reality that Europe has been seduced by the seemingly never-ending supply of energy from Russia. At the same time, Europeans must make the decision whether to phase out, and in some cases ban, hydrocarbon production in their own countries while depending on hydrocarbons from Russia.
There are several problems with this.
First, the US and Europe are discovering that a steady supply of internally produced energy is vital to the health and safety of each country’s citizens as well as their national defense strategies.
Second, by hiding the “dirty” hydrocarbons behind the tree of another country, one does not eliminate the pollution or global warming problem—the problem is merely exported. The same volumes of hydrocarbons are produced and consumed, but certain nations don’t have to feel guilty about it.
Third, while we all know and understand the need and desire to have alternate energy for our consumption, we cannot shut down one source overnight and expect another source to take its place immediately.
We Should Not Be Surprised
How does this new environment pertain to what we are doing in the oil and gas industry, both from the operator’s perspective as well as that of OFS?
We are no doubt in a rapid state of change. However, as I suggested in the original article, we knew these changes would be coming.
Prior to the pandemic, many innovation efforts were aimed at software while hardware took a back seat. The OFS companies, the biggest operators, and even some talented people in standalone companies were investing a lot of time, money, and effort into figuring out how this old industry could fit into the new digital world.
Larger and larger portions of budgets were going into software development, ways to move data from the wellsite to the cloud and back out to the users, and to the development and use of artificial intelligence, machine learning, and the internet of things.
I also pointed out that real innovation has come from the backyard tinkerer, the person who gets frustrated doing the same thing with no progress, and the one who knew there must be a better way to make things happen.
With more interest in the ESG trend, the larger OFS companies will be spending less on their traditional task of searching for hydrocarbons and more on their efforts to merge ESG practices into the digital world with automated monitoring, automated record keeping, and more in-depth analysis of business, ranging from financial to hiring practices to government reporting.
The smaller, agile, boutique company is now the primary source of new ideas. These companies will make the new tools, the new software, and the new services that we desperately need to move forward in this rapidly changing industry. For example, the industry has been dabbling with the concept of remote operations centers for many years. On the OFS side, efforts are aimed at programming logging-while-drilling tools remotely and making sure data is flowing (but not truly analyzed); on the operator side, companies like Shell, ExxonMobil, and Chevron are creating their own internal data centers.
However, the smaller companies have been at the forefront of developing new analytical software for use in real-time decision making and some new entries are starting to dominate the market, taking shares away from the big boys.
Hydrocarbons are not going away any time soon. And we will need a bridge from the mature liquid/solid hydrocarbon that is dirty compared to those very immature and uncertain clean energy sources. In the past year, we have seen some very quiet but disturbing trends, especially in the US.
Most of the big OFS companies have pulled away from the unconventional resources and redirected their efforts into alternate energy and clean technology. There is only a limited bucket of money available for these companies to invest in new technology, and with every dollar diverted to ESG, we must realize those dollars are taken away from traditional technologies.
With the political upheaval in Europe and Russia’s supply of energy being choked down, most European nations are realizing that they are vulnerable to a single-source supplier for the majority of the energy they consume. We will watch as decisions are rapidly made; we have already seen some major movements in the UK and Germany in their renewed interest in hydrocarbons.
We must realize that changes like that take time and patience and that in any move to new sources of energy (beyond wind and solar, which are not logical as full replacements), we must continue to strive for the cleanest hydrocarbon available.
I suspect we are looking at a 30- to 40-year timeframe that needs more emphasis on an abundant supply of cleaner-burning hydrocarbon and the potential ultra-clean new energy. To me, that points directly at a bright future for natural gas—but I will leave that up to the other experts.
Are there solutions to all of these problems? Of course, there are. Will they be easy? Probably not.
To quote the late US President John Kennedy when describing our quest for putting a man on the moon, “We do these things not because they are easy, but because they are hard.”
This meant that we had the desire, the intelligence, and the fortitude to make it happen. This should still be our goal. We can get there, not because we must, but because we can.
Duncan Blue is the owner of Duncan Blue Consulting with 45 years of experience across the globe with several major service companies working in new product development and product management. Blue has published several papers and articles and holds several patents, most notably one that led to the Baker Hughes Rig Count revamp. He can be contacted at firstname.lastname@example.org.