Guest blog by S. A. Shelley: OWOE bloggers and other industry analysts often discuss technical and economic aspects about energy, such as oil demand or cost of renewables. But not enough attention has been focused on the changes in business thinking that has reduced engineering capability in Houston since the oil downturn in 2014.

Technical Capability Loss

Houston was arguably the engineering technology leader for deepwater projects for at least 20 years prior to 2014.  Unfortunately, since the last oil downturn, the broad deepwater engineering technical capability that was concentrated in Houston has essentially evaporated in the wake of layoffs of engineering personnel and the often contrived consolidations of contractors, service providers or equipment merchants. Much of these reckless consolidations have been the result of financial and accounting consultants advising firms how to survive based upon historical norms and immediate accounting needs, while rarely considering long term vision, planning or capability. Regrettably, the loss in technical knowledge has been staggering and almost completely misunderstood by too many.

To an accounting or financial consultant an engineer is an engineer, and too often engineers of varying capability are thought of as interchangeable. Nothing can be further from reality. Engineering, misjudged by many, is just as much an art as medicine in which years of experience build a knowledge that cannot (yet) simply be transferred into code or quickly to a new hire. Boomer engineers are happy to mentor newbie engineers when given the opportunity, but therein lies one of the problems as the big producers and engineering houses have been too quick to show the door to the boomers to cut costs. It bodes not well for future deepwater projects, and recent projects are already showing this to be true. But before I expand on this, let me explain a bit about some of the changes in business thinking in Houston since 2014.

The Kananaskis Konference

In June of 2015, a super-major invited three other major producers to meet and discuss deep water project executions: I call this the Kananaskis Konference (because alliteration is awesome and also because some of these meetings were held in Kalgary, Kanada). The objective of the Konference was to share knowledge about how to develop deepwater projects more quickly and cost effectively. To understand these objectives requires a bit of history.

Super-major producers have historically been very much involved in deepwater projects from specifying and managing engineering design to overseeing installation vessel operations and the like. Super-major technical personnel understood the need for, and benefit of, starting with a good concept design with well-defined objectives and inputs, and then progressing the project with diligent weight control procedures, careful risk identification and risk mitigation strategies and competent structural engineering solutions. Super-majors were able to push deepwater technology from 300m in the 1990s to 3,000m by 2014. During the 1990s and early 2000s, it took the super-majors years of investment in technology development in order to produce specifications and procedures to make deepwater oil and gas developments feasible and safe (mostly). Over time, many of these specifications and procedures were adopted in some form by industry organizations and the industry as a whole now benefits from that knowledge.

In contrast, the smaller majors who followed were much more likely to limit their involvement to specifying larger scopes and then turning detailed engineering and operations to contractors. The smaller majors tended to follow the super-major funded deepwater technology, not develop it and this appears to have worked well for these majors. Other consequential differences were in the time from discovery to production.  A super-major needed at least 10 years or more from discovery to production, while the majors more often achieved production within 6 years of discovery.

At the Kananaskis Konference then, five key points that make projects more cost effective for the majors as compared to the super-major were identified:

1. Risk
   • All majors tended to choose the lowest cost option to develop a field
   • No new technology – new technology is avoided: Use known, proven technology.
2. Appraisal and Development
   • Quick from discovery to production with no lengthy (costly) appraisal program
   • Replication is a key
3. Engineering and Standards
   • Majors use contractor specs vs more conservative company-prepared specs
   • Owner engineer teams are small and work with the contractors
4. Fabrication
   • Use contractors’ subcontractors for inspection
   • Mesh into the contractors’ organizations
   • Use a few, select fabricators and suppliers
   • Procurement managed by the contractor
   • Site teams are small:  6 for a Spar hull overseas; 12 for a topsides in Gulf of Mexico
5. Contracting Strategy
   • Very consistently use the same 6 or so big contractors
   • Personal relationships with contractor owners / key executives is a big trust factor (but curbs the ability to punish contractors for bad outcomes)
   • Know the work and the client

All this can be boiled down into a few key strategies: focus on low cost, put your trust in the contractor, and develop relationships for the long term. Unfortunately, this can lead to cartel-like behavior with a handful of firms essentially controlling the industry.

After the Kananaskis Konference

Since the Kananaskis Konference, two of the three majors have completely withdrawn from any future deepwater offshore ventures and have in fact sold off or shut-down existing deepwater assets. So much for long term thinking. The super-major itself, has adopted a lowest cost contracting strategy with overseas suppliers because, “It’s so cheap over there that if there are any problems we can pay for fixes and rework and still save money…” In effect the super-major has gone from careful, well planned and coordinated deepwater developments to overcoming errors with cheap labor and bulk materials. We’re already seeing how such a strategy is working out with the Shell Prelude Floating LNG (FLNG) project, a poster child of poor decisions and poor project management (Forbes, BoilingCold).

Engineering Contractors

Returning to the engineering contracting side, there still are some very, very good, large and small engineering firms in Houston to whom one should have no problem tossing a few billion dollars in financing or towards projects. Unfortunately, there are also a few lingering contractors who shouldn’t be doing anything more complicated than a water slide into a local community pool.

Consider a very recent large deepwater floating system being engineered by a partnership between a legacy reputation firm (that since 2014 laid off over 80% of its technology workforce) and the engineering arm of a major offshore fabrication contractor (that had virtually no experience with floating systems). Within half a year of engineering, the partnership completely lost control of weight, responded by adopting some very unorthodox structural solutions, and mishandled some major risks. In effect, 20 years of technology development led by super-majors was thrown out in 1/2 a year (well done!).

This should concern everyone in Houston:

1. The producers, because if they cannot get good engineering in Houston, they will eventually need to look to overseas contractors;
2. The producers (again), because they have put almost complete trust in the contractors, and their project personnel are often too inexperienced or too understaffed to recognize or catch technical blunders, putting project outcomes in jeopardy;
3. The other Engineering Contractors, because bad engineering in Houston drags down everyone’s reputation.

This is What Cartels Do

A cartel protects the weakest and in the long run, everyone will work to the lower standard. Consequently, as with all cartels, after a while the end product will be expensive, inferior and dangerous  (EconomicsOnline, experts123  ). Cartels cause price stagnation, reduce productivity, stifle innovation and degrade work quality (MinneapolisFed).

Thus if the cartel assumes that there are only 6 competent engineering contractors in Houston, then producers run the risk of quality and capability drift. Instead of verifying competence on each project, the cartel assumes competence and misjudges or ignores competence drift along with the ever growing risks associated therewith. The danger exists now in technology and competencies regressing industry-wide in Houston. This cartel group thinking will also manifest itself in Houston’s inability to shift and find ways to profit from newer energy technologies. “Hope” and “That’s how we’ve always done it” are not winning strategies in the face of change and even less likely to stop future asset write-downs.

To Err is Human; To Really Mess Up an Industry Requires an Ivy League MBA

With no apologies to the graduates of the Ivy League business schools: You’re mostly a bunch of schemers with short term vision who don’t understand what you manage, only how to manipulate data for short term gain. Stop that. With the wave of tight oil bankruptcies, the evidence is coming to light. Why should grandma’s pension or investment fund or any private equity ever again invest in tight oil if the history of shenanigans proves to be systemic? 

Two of the engineers say executives explicitly told them to inflate reserves. Others say the requests were implied, with only engineers who produced aggressive estimates landing promotions (Bloomberg).

Houston, You Can Solve This

If Houston is serious about reclaiming and then retaining its status as the premier global offshore engineering and energy hub, it needs to bravely cut the deadwood, nourish the innovators and maintain consistent and continual quality and competency checks. If it can’t do that, then Houston may soon find itself marginalized in a changing offshore energy market.

Global Problems

The decline in engineering competence in Houston is not just a Houston problem; it is a global problem across many industries employing engineers that are managed by financiers who put business objectives ahead of technology outcomes. One only needs to look at recent events at Boeing – “This airplane is designed by clowns,” who in turn are “supervised by monkeys”…. (Bloomberg and Bloomberg ), large mega-projects such as the Ottawa LRT or defense contracts to see how wide-spread and frequent  project failures and extreme cost overruns are.

The problem is that everyone in society pays for these blunders and it is going to get worse until both big companies and big governments stop believing in cartels and relying upon high level personal relationships: Put some checks and balances in place before writing more cheques.  For Houston, errors are paid for by everyone a few cents per gallon at the pumps.

Vive l’Alberta Libre!

P.S. OWOE has a cadre of very experienced boomers who will be happy to consult on solutions to fixing this mess.

P.P.S. OWOE thanks its many industry sources and reminds everyone that OWOE will protect source anonymity all the way to the Supreme Court and even while in gaol.

Guest blog by S. A. Shelley: A long, long time ago in a land far, far to the north, during a training class the instructor told a parable of twelve donuts. Eat one, you are not full; eat two, still not full. But eat all to the twelfth and you will be full. So why not just eat the twelfth donut? Because in all forms of reality, one must make a series of steps to achieve one’s goals. So it is with the energy transition; you have to have several steps and can’t just jump to the last one (candlelit cave dwelling organic farming for all).

Thus, I am saddened by the many Social Justice Warriors (SJWs), especially the most righteous ones in Canada, who demand that all forms of fossil fuel consumption must cease immediately in order for the planet (peoplekind) to survive. That won’t work without instantly throwing society into chaos and jeopardizing peoplekind of all genders, creeds and irrationalities. To achieve the goals of energy transition, one needs a vision and a path, a series of attainable steps. One must also work with existing technology while developing new technologies. A significant first step can be using natural gas as a transition fuel to replace more intense carbon emitting technologies. Natural gas must not be so quickly dismissed by intersectional SJW saboteurs.

Guest blog by Mr. R. U. Cirius: Here are some interesting and somewhat offbeat energy stories that haven’t gotten much media attention during the first three months of the year.

UoA Windship renewable energy vessel

Students from the University of Acadians (UoA), not to be outdone by their archrivals at the Massachusetts Technology Institute (MTI) (see story below), have turned their focus toward harnessing wind energy. Last year, after placing 20th of 20 teams at the Canadian National Concrete Canoe Competition, the students decided their expertise was better suited to larger vessels. By focusing their collective background and skills on the problem, they developed a new, high-tech, 100% renewable fuel, cargo vessel which they have named Windship (see Fig. 1). They believe it will revolutionize marine transportation in the 21st century.

Guest blog by S. A. Shelley: In Part 1 of this blog on Oil Supply, l examined the supply-demand history of oil over the past decade, which has set the stage for the dramatic changes in the industry that are just beginning. In this blog I’ll explore some of the likely consequences and will venture to predict some of the dramatic events to come and some of the likely irreversible impacts recent events will have on the world oil industry.

Guest blog by S. A. Shelley: A few years back, I wrote that at some point in the future (now-ish) oil produces may need to resort to providing incentives for ICE buyers, or undertake more extreme measures to ensure sufficient oil demand. Well, oil producers have not yet undertaken either of those steps and, as noted in a recent blog, we’ve now hit peak oil demand. So producers were resorting to the next best means of balancing the supply-demand equation by curtailing supply in order to support oil prices. At best this was a short term solution to a growing long term problem. Now with the beginning of the oil supply war, we see that curtailing supply has failed completely, and, as predicted in my February 2, 2019 blog, somebody has decided to produce the hell out of its reserves while there still is a market for oil. This will not be a short war; it will be long and drawn out, and the eventual winners will not be who everyone now thinks they will be. In Part 1 of my blog on this topic, I’ll examine the supply-demand history of oil over the past decade, which has set the stage for the dramatic changes in the industry that are just beginning. In the upcoming Part 2 I’ll explore the likely consequences.

Note from your OWOE editor: Houston has always been a city whose fortunes have risen and fallen with the price of oil. Now it is being hit with two crises at the same time – the coronavirus pandemic which is significantly cutting oil demand, and the Saudia Arabia-Russia battle for market share which is flooding the world with oil and forcing down its price (see Fig. 1). The result has been immediate and drastic. The almost instantaneous drop in price from the $50-60 per barrel range to the $20-30 per barrel range is worse than the drop in 2014 that almost destroyed the US oil business, with some analysts predicting the possibility of $5/bbl oil. Oil companies are looking at every way possible to cut spending quickly, including cancelling projects, idling rigs, instituting hiring freezes, and laying off staff. Add on top of that the fear of transmission of the coronavirus and need for social distancing are having what could be a long-term impact on oil demand as well as making it even harder to work, assuming one is fortunate to keep a job in this climate.

Guest blog by SA Shelley: (Note from your OWOE editor: This demand blog was written a few weeks before the oil supply war started. The oil supply war and corresponding drop in oil prices will be discussed in an oil supply blog in a few weeks. However, the author firmly believes that COVID-19 and a likely economic recession are short term demand shocks. Long term demand decline resulting from shifts in technology and consumer behavior, key issues addressed in this blog, is inevitable.)

The world has hit peak oil demand. I wrote it, I’m standing by it, and no apologies to anyone for this.

Guest blog by S. A. Shelley: There still is continuing debate in California as to how much of what kinds of renewable energy are needed in order to achieve net-zero energy by 2045 . California is blessed with an abundance of renewable energy resources, especially solar, wind and geothermal, and California is still the 6th or 7th oil and gas producing state in the country (see also ShaleXP). But California has not yet harvested any of its significant renewable offshore energy resources.

Guest blog by Amanda Tallent: Although the principle of wanting warmth and light in our homes has been constant, the way that we provide these necessities has evolved tremendously over the last 150 years. This makes the future exciting to think about, as we are finding new ways to be sustainable yet innovative when it comes to providing energy in the United States and globally. The team at The Zebra has given insight on the topic, sharing the history and probable future of energy use. 

Guest blog by S. A. Shelley: As some people, including most notably the Prime Minister of Canada, are confused about greenhouse gas emissions, both during production of electricity and during transportation, I feel that it is time to write a quick blog about this. I will focus mostly on CO2 emissions, which are believed to be the predominant greenhouse emissions driving global warming, even though the effect of methane (CH4) emissions on warming are roughly 20 times as potent (see edf.org, greenplanet.org, and Scientific American), and some other industrially produced gases that are ubiquitous in modern life are yet exponentially more potent.