Category Archives: Petroleum

Offshore drilling

I’ve been writing a little bit about Exxon and Schlumberger lately.  I got interested in these companies and the petroleum industry in general because it they are such a gigantic part of the economy (a huge chunk of the top 10 most profitable companies are in the industry).
Most of my blogging so far has been to explore the financial statements from Exxon and Schlumberger.  I like knowing the numbers, but I also wanted to have some sense of what’s really going on at the ground level.  There was a great article called Dispatch from the Oil Frontier in Popular Mechanics.  The article focused on off shore drilling, which I saw quite a bit of from a distance on my cruise in the Carribean.  Not surprisingly, much of the oil on solid ground has been excavated and companies like Shell have moved underwater.  The author estimates there might be as much as 56 billion barrels of oil.  For comparison, Exxon last year produced about 4 billion barrels of oil in 2007.  So there’s a lot to be had, but by no means an unlimited supply.
Some quotes and impressions from the article…

There have already been successes.  In 2004 Shell broke the record for the deepest producing field–the Coulomb, at 7570 ft.–when it tapped a formation 144 miles southeast of New Orleans.  Tow years later, in 7,000 ft. of water 270 miles southwest of the city, Chevron successfully tested its Jack No. 2 well in a field that may hold 15 billion barrels.

That’s a staggering depth when you think about getting the equipment to dig and pump when you’re hundreds of miles out in the ocean on a relatively tiny oil rig. 
I was curious how you get down that deep when you’re in the middle of no where, and the article helped me start piecing it together.

At this point the Boudreaux has already installed a 90-ft-long steel casing into the seabed and capped it with a wellhead and a 48-ft-high tower of controls and hydraulic valves known as the blowout preventer.  Then, nearly 8,000 ft. of aluminum-alloy pipe in 75-ft. sections, known as the riser, was connected to the seafloor assembly.

I also figured you can’t really have humans down there at that depth, given the pressure.  Indeed this is the case:

This automation is in sharp contrast to the technology of earlier rigs, which required roughnecks on the drill floor and in the derrick to disconnect and connect sections of drill pipe by hand, a laborious, dirty and dangerous process.  Ten years ago it would have taken 75 days to drill a well 18,000 ft. deep; the Boudreaux’s crew can do it in two weeks.
In deep water a rig can’t stand on the bottom, which means it either has to be anchored with dozens of miles of chain and cable, or float freely, held in place by GPS-guided thrusters.
And then there’s the ocean itself.  At a depth of 8,000 ft. the pressures are enormous–3,500 psi.  no human hands can operate equipment on the seabed.  That means remotely operated vehicles (ROVs) have to be able to work in those pressures, day in and day out.  And the range of temperatures plays havoc with drilling mud.  “it’s 44 degrees at the seabed and 275 at the drill bit,” says Ricketson, keeping an eye on the turning drill, “So that mud has to function at extremely high and low temperatures–only new synthetic mud can do that.”

I had already seen a little bit on TV about life on these rigs, and it was interesting to read more about it.

There’s a gym onboard and a flat-screen TV in every room, but the crew members mostly do just one thing, and that’s work.
Day or night seems the same; you lose track of time–at 3pm or 3am there’s always someone pumping iron in the gym, a few guys sipping coffee in the mess hall.  You forget where you are, until you step out onto the smoking deck–a flat, steel pace witha  few aluminum benches–remove your hard hat and safety glasses and realize you’re standing on a huge spigot in the middle of nowhere.

I can picture some guy on the smoking deck looking back at the cruise ships, each lit up like a Christmas tree against the dark horizon, going through the shipping lane in the Gulf of Mexico.
Financially, it would be no surprise if the price of oil was going up, because this stuff is expensive.  That made it easier to understand why you’d want the Schlumberger approach of low capital investment and high human investment.

All this tech doesn’t come cheap.  A typical offshore development in 100 ft. of water costs $100 million; just the test well for Chevron’s Jack No. 2 cost $100 million, and the U.S. Minerals Management Service estiamtes the cost of developing a deepwater field can exceed $1 billion.  Shell won’t say what the Perdido regional development will cost, but Noble is charging Shell hundreds of thousands of dollars a day for its rig.  Shell has already spent $554 million on leases in the gulf–that’s just for the right to drill.

More on the petroleum industry

I wrote last month about Exxon’s record annual earnings.  It got me interested in the petroleum industry, since it’s ultimately a big chunk of the energy that rest of the world.  I read more today about a company called Schlumberger (what a boring name!), and it piqued my interest.
Schlumberger appears to eschew direct ownership of oil fields, and instead targets where to inject itself in the value chain.  It partners with nationalized petro companies like Saudi Aramco, Mexico’s Petróleos Mexicanos (Pemex), Gazprom and Rosneft from Russia:

The company is increasing its cooperation with Big Oil’s most prominent rivals, state-owned oil companies, and it’s helping a group of smaller upstarts that are seeking to get into the business, such as hedge funds and private equity outfits. Just outside a suburban neighborhood near Dallas, for instance, it has drilled a half-dozen gas wells financed by New York hedge fund Och-Ziff. While the majors typically want to own rights to oil reserves in the fields they operate—and take a share of the profits—Schlumberger has long been happy to work on a contract basis, getting paid a fixed fee for its services. “Schlumberger is the indispensable company,” says J. Robinson West, chairman of PFC Energy, a Washington consulting firm. “They are involved in every major project in every important producing country.”

This makes sense given rise of nationalization in the oil industry, where as much as 90% of the oil supply is run by governments.  Ultimately, the profit is to be found in the human assets and involvement.
Comparing Exxon and Schlumberger is interesting.  Schlumberger gets a return on invested capital of 27.12% and a return on assets of 20%.  Exxon has done about 28% over the past 12 months, which is similar, but it’s return on assets is 17%.  Exxon’s income per employee is $494,640.  Schlumberger does $73,950 of income per employee.  So Schlumberger ties up less capital equipment in assets to produce its profits, which is admirable.  However, they are not as effective at turning their employees’ efforts into profit.  I am just getting famliar with using ROIC and ROA as a measuring stick, so for reference I looked up Microsoft.  It does 51% and 26% respectively.  Not surprisingly, software burns less money to product it’s profit.

In praise of Exxon

With Exxon reporting record profits, count me as one of the few that thinks this is a good thing.  If you have a 401k, chances are you own shares of Exxon’s stock and have benefited.  The company’s largest shareholders are companies like Barclays, Vanguard and Fidelity that manage mutual funds owned by you and me.  Last year alone, Exxon returned $35.6 billion to investors.  If you wrote that as a check to each of the 113 million household in the U.S. it would be $314–talk about a real economic stimulus package!  Meanwhile our government is causing rampant inflation, with its funny money backed stimulus package.  Blame our government, not Exxon, for higher gas prices.  For those paying with U.S. Dollars, oil has quadrupled in price over the past four years.  Four years ago an ounce of gold would buy you roughly 12 barrels of oil; an ounce today would get you roughly 10.

Some observations worth pointing out and concretizing:

  • Exxon reported net income of $40.6 billion over the past year.  In the past year alone, they have grown profits by $900 million.  To put just the $900 million of income growth in perspective, that’s the entire profit from a company like Safeway that operates more than 1,700 stores and works all year to make that much.
  • Over the past 5 years, the company has more than doubled its overall value (i.e. market capitalization), creating over $200 billion in value to investors.  Discounting PetroChina, which is a nationalized company, Exxon is the most valuable company in the world.
  • The company produces on average 6.5 million barrels of oil daily.  After refining, this is enough gas to fuel the average daily driving of some 63 million people.
  • 5 years ago, the company was already one of the world’s largest.  In the past 5 years, they have managed to take an incredibly large company and double its revenue.  During the same time, profits have quadrupled.  Words alone could not convey how difficult it is to take a mega cap business like this and grow it.  General Electric, another mega cap, has tried and grown revenues just 25% and income 56%–fantastic numbers, but pale in comparison.
  • Exxon is also fantastically efficient, employing 106,100 people.  This sounds like a lot, but let’s put that in perspective.  McDonalds employs more than 4 times as many people, yet has less than a 10th the profit to show for it.  Comparing inside the petroleum refining industry, it operates at a higher profit margin than most of its competitors–including BP, Chevron, Conoco, and Shell.  Average revenue per employee is a staggering $3.8 million.  Again to put this in perspective, Google–now famous for hiring geniuses–harnesses just 25% as much revenue from each employee.

There is an excellent speech by their CEO, Rex Tillerson, from a few years ago that crystallizes how their business works and the role they play in the industry.  Some of my favorite quotes:

  • “By the year 2030 – less than twenty-five years from now – the world’s energy needs will be almost 50 percent greater than they were last year, driven mostly by growth in developing countries.”
  • “Such growing demand for energy reflects a growing demand worldwide for escaping poverty, attaining higher standards of living and achieving greater prosperity. Energy use correlates directly with economic development, and in the hierarchy of human needs, energy ranks high.”
  • “So the real question is not whether we will soon reach peak oil, but whether we can reach peak performance in the responsible production and use of oil and other fossil fuels.”
  • “Every day, consumers around the globe use 230 million barrels of energy, measured in terms of ‘oil equivalent’, from all sources. Oil alone is consumed at a rate of 40,000 gallons a second. Put another way, in the time it takes me to deliver these remarks, people worldwide will have used over 50 million gallons of oil.”
  • “About 55 percent of U.S. oil supplies originate in North America. No other region – including the Middle East – meets more than 15 percent of U.S. oil needs. It may surprise some to learn that the United States imports more oil from Mexico than we do Saudi Arabia.”
  • “Federal and state governments in this country have ruled off-limits an estimated 31 billion barrels of recoverable oil and 105 trillion cubic feet of natural gas. And the majority of those amounts are not found in the Arctic National Wildlife Refuge. They are found in the Rockies and off many of the coasts of the continental United States.”