Volume 66, Number 3

PESANews
June 2012 www.pesa.org

In tHE nEwS
PESa Elects Officers at annual Meeting
Chairman Chris Cragg Oil States International, Inc. Vice Chairman Charlie Jones Forum Energy Technologies 1st Vice President Paul Coppinger Weir SPM Immediate Past Chairman John Gremp FMC Technologies, Inc. Treasurer James Renfroe GE Oil & Gas Secretary Paul Butero Baker Hughes Inc. Gulf Coast District-Texas Joe Winkler Gulf Coast District-Louisiana Gary Halverson Cameron Surface Systems Mid-Continent District Johan Pfeiffer FMC Technologies, Inc. Explorers of Houston Robert Workman National Oilwell Varco Membership Charles Currie, Schlumberger Emerging Leaders Liaison Galen Cobb Halliburton Energy Educators Pat Bond, Light Tower Rentals

Annual Meeting 2012

Arab Spring, U.S. shale to affect geopolitics for generations
the possibility that Israel could attack Iran. We do need reform of the futures market, but its irrational to think that traders shouldnt assume a war premium. When the initial unrest happened during the Arab Spring, many thought it was an exaggeration for oil prices to rise. That shows a lack of understanding of modern Middle Eastern history. Just because Gaddafi is gone, its not the end of the story. When I talk about the Arab Spring I like to remind people what happened in the 1950s and 1960s. Gamal Abdel Nasser deposed the king in 1952 during the first Egyptian revolution. In 1956, he had a war with Britain, France, and Israel over the nationalization of the Suez Canal. That was the first modern-style energy crisis and it was as large as the disruption in the 1970s. When Nasser first came in, he was not an Arab Nationalist n See Jaffe, Page 3

Amy Myers Jaffe, James A. Baker III Institute for Public Policy, Rice University

Editors Note: This essay was compiled from Amy Myers Jaffes keynote presentation at the 2012 PESA Annual Meeting. We are at a transformative time, both geopolitically and technically. The entire fabric of the Middle East has changed, and technology has brought huge advances with shale plays.

Historical Guide
My view of oil prices is that the problem is above ground, not undergroundits geopolitical, and Ive been saying that for twenty years. The price started going up when unrest began in Egypt; when it spread to Libya, it went higher; and price is up now because of

Chesapeakes plan is simple: lease, drill, find finance for huge properties
Many in the industry consider Chesapeake Energys business strategy to be complex. Not at all, as Jeff Fisher, Senior Vice President of Production, told PESAmembers at the Mid-Continent Meeting. I would agree that the size of our operation is complex with 160 rigs we have grown immenselybut our business strategy is fundamentally pretty simple, he says. Were an organic growth company leasing, drilling, and finding a way to finance these huge assets. Frankly, some of the assets that we acquired were bigger than the balance sheet, so we had to build joint ventures to help move them forward. The strategy has earned a leadership position for U.S. E&P companies, as Chesapeake is the largest gross producer of natural gas in the U.S., the number one driller of horizontal wells, and a top-15 producer of U.S. liquids. He added that the company is leading in the capture of world-class unconventional resources with acquisitions in five of the countrys most prolific plays over the past four years. n See Fisher, Page 14
Jeff Fisher, Chesapeake Energy

annual Energy Educators Sporting Clays tournament

Nov. 2, 2012 11:30 a.m. to 5:00 p.m. American Shooting Center, Houston

EvEnt CalEndar

For more information on PESA events, please call (713) 932-0168.

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Editorial

PESA a product of a dedicated membership

I can never tell if PESAs annual meeting is a culmination of a productive and successful year or if it is a preview of what to expect for the next 12 months. Either way, we are indebted to PESAs leadership for their dedication, involvement, and their ongoing push to make PESA even more valuable. Iwant to thank Immediate Past Chairman John Gremp for his determination that PESA become more involved in whats going on in Washington, D.C. Last years Washington Fly-In was an excellent way to begin, and the 2012 Fly-In provided even greater opportunities for members to meet with Congressmen and their staffs, government agency representatives, and the oil and gas associations we work with during the year. The general consensus was that while we are more involved than in the past, we still have a long way to go in telling the industrys story in Washington. PESAChairman Chris Cragg, shares Mr. Gremps enthusiasm for becoming more involved in the political arena. Thanks also to Chris Cragg for a great annual meeting. I hope you will have time to read our newsletters summaries of all the informative presentations included in the two-day program. Mr. Cragg has put in place an impressive line-up of district and committee chairmen who will meet in July to plan activities for the coming year. A list of PESA Committee Chairmen will be sent to members in June, and we hope you will volunteer for the committees which interest you. Best wishes for a great summer. Sherry Stephens PESAPresident

Our story must be told, we need your help

This is an exciting time for our industry. The 2012 PESA Annual Meeting focused on the new world in which we operate. Both domestically and internationally, there are opportunities today that are truly transformational in nature. As an industry, we historically do a good job of addressing operational challenges. Our member companies are innovators and solution providerswe operate in places far and wide; we meet the needs of our customers; we know how to get things done. However, there are areas that need improvement, and this is where Id like our efforts at PESA directed in the upcoming year. We must do a better job of telling our story. We all know that our industry has a public relations problem. We must tell how our industry has a positive impact on the lives of people. First, our story is jobs. The nearly 200 companies that comprise PESA employ over 400,000 men and women. During the Annual Meeting, I asked by a show of hands how many executives in the room planned to grow their workforce in 2012. Nearly everyone raised their hands. Thats our story. And these are not just any jobsthese are great jobs. I dont believe there is an industry out there where a high school graduate can earn a better living. If youre willing to work hard and if youre willing to stay clean, you can provide well for yourself and your family, and more importantly, you can take pride in what you do. Secondly, our story is about science and technology. From geoscience developments to well construction, our industry is on the cutting edge of developing solutions. Its been said that we dont have a shortage of petroleum
PESA News is published by: Petroleum Equipment Suppliers Association 1240 Blalock, Suite 110 Houston, Texas 77055 Phone: (713) 932-0168 Fax: (713) 932-0497 2012, PESA

Chris Cragg (Oil States International, Inc.), PESA Chairman

resources in the worldits just a matter of time until we find, produce and develop more. For example, improving the ultimate recoverable reserves by just 1 percent or 2 percent in major producing fields would be a major game changer. The ability to drill a well in thousands of feet of water, and hit a specific target 17,000 feet below the seabed is an engineering marvel. The ability to drill a horizontal leg almost two miles long, thousands of feet below the surface is incredible. We have to highlight our technological achievements and educate officials and the public alike. Finally, our story is one of stability and security. While the oil and gas business will always be cyclical in nature, we are closer than ever to stability in this new operating environment. Long-term crude pricing should easily support development of many of the worlds largest oil and gas projects. The natural gas story in the U.S. is now one of abundance, rather than scarcity. And the U.S. has the potential to significantly lessen our crude imports from less-than-friendly nations. This stability story will help attract the best and
PESA Chairman Chris Cragg, Oil States International PESA Vice Chairman Charlie Jones, Forum Energy Technologies PESA 1st Vice President Paul Coppinger, Weir SPM

brightest to our industry, the emerging leaders of tomorrow. So what does this mean for PESA? We need to be proactive in education and community activities and attracting young people to our business. We must educate our elected officials at the city, state, and federal levels. We must educate friends, families and foes alike as to what our industry means. But we can only make progress with your involvement. Weve done a great job of expanding membership last year and we need to continue that. You can encourage other companies to join PESA. You can make the investment to get involved in PESA at the committee level. And you can expand the involvement in your company well often have only one or two representatives from each company involvedhave your whole company take advantage of the opportunities at PESA. Im looking forward to a great year as PESA Chairman, and I appreciate the opportunity to work with the outstanding group of people that is our membership. Chris Cragg Oil States International, Inc. PESAChairman
PESA President Sherry A. Stephens PESA Vice President Michael Perini PESA Director of Communications Chris Evans

PESA, Petroleum Equipment Suppliers Association, and the PESA logo are all registered marks of the Petroleum Equipment Suppliers Association.

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JaFFE
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PESANews

Socialisthe was just a guy who thought the British needed to be kicked out and the king was corrupt. Over time he developed an ideology that spread like wildfire in the Middle East, but it didnt start for two years. By the time the Suez crisis hit, he wasnt a socialistthat came about because of a conflict with the U.S. and Western powers over the Suez Canal. When he realized the position he was in, he turned to the USSR to back him with arms. When youre watching the Middle East on CNN today, think about Egypt in the 1950sthe Suez crisis was four years after he took power. And Gaddafi, who took power on that same historical wave of Arab nationalism and socialism, didnt come until 1969, almost 20 years later. Some of the things that drove the latest revolution in Egypt occur in nearly every oil producing state in the Middle East: a bulging youth who are largely unemployed, a government that doesnt have a good plan for creating jobs, people feel that their personal freedoms are inhibited, and people think that the system isnt run fairly. Reform in the Middle East is going to be a long-term trend, and its going to be unstable. In the West, our hope and belief that having the right to vote and a somewhat more free press will make a country more stablethats not 100 percent accurate. In Kuwait, theyre democratic, they vote, and they have a somewhat free press. The Prime Minister of Kuwait made some unpopular decisions in December, and the public was so angry that people stormed his house. As a result, the Prime Minister had to be removed by the Emirthis is in a country where the Emir had already given away a years worth of free steak and sugar as well as a $2,500 bonus for being Kuwaiti.

could create for the Saudis. There are 3 million Shia practitioners living in the eastern province where 95 percent of Saudi Arabias oil is produced. If even a third of the Shias decide they arent going to work at Ghawar, that field isnt going to produce. Thats a huge risk for the oil market. The good news is that Saudi Arabia is a better oil ally than theyve been in the past they have built floating storage in Rotterdam, Japan, and China and there is a fleet of tankers sitting outside the Strait of Hormuz, and they have a pipeline across their country if the Strait is cut off. They have prepared for oil production to be cut, and thats reason enough for the oil market to have a premium. Meanwhile, imagine youre part of the Israeli public, and you regularly hear that the missiles that bombed you in 2006 came from Iran, and now theyre trying to test a nuclear warhead. Depending on what happens with these peace talks, I dont think we can rule out a war. Every side has their own dynamic, and its bigger than any U.S. interest or world economy issue. If youre in Azerbaijan and have been under the yoke of the Mullahs since 1979, and you have an opportunity to have the lines of the Middle East redrawn and have self-determination, its a powerful image. Its messy in the Middle East, and it will be for a while.

Shale revolution
In our old world, the resource wasnt where the lights were on, so we had to invest in a lot of tankers for LNG and oil. Now we have a tanker glut, and its because we have shale where the lights are on. This is going to be transformational in terms of geopolitics, industry infrastructure, and the industrys need to respond to stakeholdersits no longer just federal governments run by an unelected person, its going to be regular people from Pennsylvania. If your trucks are going through town and past an elementary school, is that a problem

the Iran Conflict

The Iranian conflict is also very complex and follows the Sunni-Shia divide. Imagine Saudi Arabia, a Sunni state and a regional power that strongly believes that a so-called Shia crescent of countries that are elective with Shia governments cannot be allowed. Thats how they view Iraq. King Abdullah will not speak to Nouri al-Maliki and vice versa. They also believe, perhaps with some merit, that Maliki is an Iranian puppet. The focus of the future of the Middle East is Syria. Its a Sunni dominated society, run by a small minority that has a close alliance with Iran. If the Iranians lose Syria, they lose a lot of their military and strategic power. Saudi Arabia knows that, as does Qatar and other Gulf states, and theyre backing the opposition in Syria to the hilt. Iran, in turn, has gone to the Russians and Chinese. Theres also the risk that the Iranians

or not? Those are the issues that will come up here, in Europe, and in China. In the Baker Institute we did a study for the Department of Energy on the geopolitics of shale. The implications are hugeshale means we wont be as reliant on the Middle East, and Russias business in Europe goes down to 10 percent of the European market. The DOEs initial response was that we had the resource too high. When we started this modeling, we started with 200 Tcf of shalewere now up to 650 Tcf in our model. In any case, all these changes happen in the 200 to 300 Tcf range. Further, we also underestimated the amount of liquidsat first we thought there was North Dakota and that was it. Then the industry moved to the Eagle Ford, and now were told that production could be 500,000 to 1 million barrels of production in that play. There are a lot of others, and the latest thing is that Occidental is returning to the Monterrey Basin. They say there are three levels of shale that could provide oil and could triple Californias oil production. Shale has its issues. Something coming down the pike is the venting or flaring of methane, which is a far more polluting greenhouse gas than CO2, during shale productionwere three to six months from that being a national issue. There are several universities doing methane vent studies and I think it will be on the front page of the New York Times very shortly. Its the next thing for which the industry will need a response. We should learn from Macondo not to take any incident lightly. The public needs to be informed and it has to be transparent. If not, someone else will highjack the actual information and tell the public something more frightening. Earthquakes from shale are a good exampleyou might say theres no way it can happen, or that regulating Class 2 wells is the responsibility of the EPA. The lesson of Macondo is that if theres one guy out there who wont put his injection well in the right place, the whole industry can all stop drilling in that state.

Amy Myers Jaffe, James A. Baker III Institute for Public Policy, Rice University

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Navigating the challenges at home

Analyst, U.S. energy execs discuss the resurgence of American oil and gas

New Reality

Left to right: PESA Chairman Chris Cragg (Oil States International, Inc), Mark Papa (EOG Resources), David Welch (Stone Energy), Marshall Adkins (Raymond James & Associates), and panel moderator Steve Jacobs (Decision Strategies).

Oil, natural gas markets begin to rebalance

The peak highs of oil prices and deep lows of natural gas prices are coming to a close as the markets begin to rebalance themselves. Marshall Adkins, Managing Director of Energy Research for Raymond James & Associates, gave a brief forecast for rig counts, natural gas, and oil. Natural gas prices will be lower for longer, but were near bottom, says Adkins. But the surprising thing at the moment is the pace at which U.S. oil production is reversing itself it now means were in a rangebound world for oil prices between $60 and $100. of 8 percent this year. E&P cash flows will be up significantly this year at 36 percent. But Adkins doesnt think that all of those gains will be placed back into more rigs. We think theyre going to pay down debt and improve their balance sheet. Next year, we think oil prices will pull back, and gas prices will remain low, and those E&P cash flows will slow down.

rig Count
The industry is in the midst of a meaningful shift away from dry gas wells. In January 2010, one-third of all rigs were dry gas. By the end of next year, it will be less than 10 percent, says Adkins. For this year, we have the dry gas rig count falling by 150 rigs, which happened a little faster than we thought, he says. But the oil rig count will outpace the decline in gas rigsthe oil rig count will go up by about 200, mostly in the Eagle Ford, Bakken, and Permian, for an overall increase

natural Gas
Raymond James has been bearish on gas since 2007. From here, however, Adkins says its going up. It doesnt scream higher because were hugely oversupplied this year, but it starts to correct itself and we are in a $4 to $5 gas world for the next decade. We forecast $2.50 this year and $3.25 for 2013. n See adkins, Page 7

Marshall Adkins, Raymond James & Associates

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PESANews

Offshore industry moving to deeper, older formations

As an oil and gas basin, The Gulf of Mexico re-invents itself every few decades. While always a testbed for offshore technology, the Gulf has evolved from a shallow shelf production area to a worldclass deepwater play, says David Welch, President and CEO of Stone Energy. He showed field size distribution curves for all wells drilled in the Gulf. We started drilling on the conventional shelf back in the late 1940s and 1950s, explains Welch. If you were to explore on the shelf today, you might find something thats an average of 15 Bcf or lessyou cant afford to take exploration risks for 15 Bcf if your exploration wells are going to hit one out of every three or four times. The first re-invention of the Gulf was in the 1990s, in which deep gas fields began to come online. The average size of the deep gas fields is about 100 Bcf, he says. Today, you could take a little exploration risk if it has liquids in it, which a lot of these natural gas fields in the Gulf do. The current Holy Grail in the Gulf of Mexico is deepwater. The mean field size distribution for deepwater wells is 90 million barrels, so Welch says operators can afford to take a risk for the prospect of a successful discovery. Our company has a very interesting thing now with the Parmer discovery, in which were a 50/50 partner with Apache. Our discovery well has 500 feet of oil pay in it, he says. Were getting ready to n See welch, Page 6

Mark Papa, EOG Resources

Chasing incremental barrels by the billions

EOG expects to take 1.6 billion barrels of oil from the Eagle Ford shale over the next 25 to 30 years. But their CEO is far from happy. The company holds more than 500,000 acres in the play. That position, which is largest in the play, is estimated to hold 29 billion barrels of oil. Using current technology, we expect to produce about 6 percent of that oilabout 1.6 billion barrelswhich itself is a huge number and, we think, the largest discovery net to one company since Prudhoe Bay in 1968, says Mark Papa, Chairman and CEO of EOG Resources. But what that also means is that were going to leave 27 billion barrels of oil in place under our acreage. Thats pathetic. which he says are not Eagle Ford specific theyre applicable in all horizontal drilling plays. The first technique is more precise location of the laterals. The Eagle Ford pay zone is 150 feet thick. When we started out, our directional drilling guidance was to stay somewhere in that zone, and go 4,000 feet, he says. Now we know theres a specific 20-foot interval, and if you keep the lateral there, you get much better wells than any other 20 foot section. Everything having to do with fracking is going bigger in the chase for better wells longer laterals, cemented laterals as opposed to external packers, more proppant, and more frac stages. EOG has also gone big in micro seismic, a technology of which Papa says the company is the largest user in the world. Usually on a frac job, you just hope its doing what you want down hole, he says. With micro seismic, you can measure in real time what is happening down hole. You can speed up or slow down pump rates and a lot of things on the spur of the moment to get the optimum frac.

Huge Incentive
While the Eagle Ford is expected to yield only a 6 percent recovery factor, its the same for both of the other major liquids-rich plays in the country. The Bakken shale has a 10 percent recovery factor, and the Permian Basin area is about 5 percent. Making better wells and earning better recovery factors is EOGs mission for the near future, says Papa. They are making progress. In 2009, when we first got our results from the Eagle Ford, our best wells produced 1,000 barrels a dayif we take that same rock today, the best wells are 4,000 barrels a day, he says. The better wells you get, the better your recovery factor is going to be. Remember our prize is not a 100,000 incremental barrels, were trying to get an incremental 1 to 2 billion barrels. Multiply that by $100 a barrel, and youll see why this is a huge deal for us. Papa shared some of the basic techniques used to improve EOGs well production,

areas for Service Growth

The shale oil plays represent a huge opportunity for growth in the service and supply sector, says Papa. He said that the sectors executives should follow the technical trends in the plays, as they often lead to new business opportunities. The first area is artificial lift. In our Eagle Ford play alone, we estimate that well drill 3,500 wells. All of them will have to have beam pumps, gas lift, or down hole hydraulic lift, and all have to be optimized for horizontal wells, he says. n See Papa, Page 6
David Welch, Stone Energy

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rest of the industry theres not a lot of hope at least until 2015. Whether the price goes to $1 or $4, its still uneconomic as far as were concerned, he says. Its likely you wont see us making any dry gas investments in the next 2 to 3 years. For oil, Papa expects the shale boom to continue, which will help reduce imports of foreign oil. The increase in production, however, will not Following all three panelists presentations, PESA members had an open affect pricing. The question and answer session, which was moderated by Steve Jacobs. companys business plan calls for a range The reason for the linkage is supply and between $90 and $110 WTI. demand for chemical feedstocks, particularly Papas view on rig count takes a somewhat ethylene. To create ethylene, chemical different tack. He cited a growing concern producers in the U.S. can use ethane, a far within the industry that natural gas liquids cheaper alternative to naphtha, a refining (NGL) prices, like natural gas prices before derivative. Dow Chemical, Shell Chemical, it, would de-couple from crude oil and crash and others have announced the construction due to higher production volumes. or expansion of ethylene plant crackers that Historically, the group of ethane, propane, will be built in the U.S. and butane have traded between 40 and 60 That gives us some belief that were not percent of crude oil. Last year, the average going to be subsumed with so many natural was about 55 percent. gas liquids that the price will be Weve done a fair amount of work, and permanently depressed and pushed like dry we believe the product prices of these comgas, he says. Put all those assumptions modities will continue to be linked to crude together, and were bearish on North oil and continue to stay in that 40 to 60 American gas, reasonably bullish on global percent range, he says. Thats important, oil, and bullish on North American NGLs. because it tells us that rich gas drilling is What that tells me is that the aggregate rig likely to continue, because the liquids portion count is likely to continue to be strong over will provide the substantial economics. the next 2 to 3 years. Macondo was catastrophic. Welch says that an analysis of all Gulf of Mexico wells prior to Macondo showed a statistical probability of one catastrophic well failure every 28 years. Since Macondo, the industry has added numerous protocols to prevent a similar accident such as third-party BOP certifications, dual cement steel barriers, and more. With those measures in place, the statistical probability of a well failure is once every 112 years. Thats just with whats been done so fartheres an industry taskforce going on that we think will reduce the probability of having another Macondo-type incident significantly more, he says. And if we did have one, we have intervention capabilities that did not exist at the time of Macondothe Helix and the MWCC well control systems and it would be controlled within 10 to 21 days, as opposed to the 87 days of Macondo, reducing the spill size by four fifths. On the containment side, Welch says that industry has greatly increased its capacity between Clean Gulf and MSRCC, the Gulf producers now have access to 360,000 barrels of oil per day containment capacity. Macondo was 40,000 per day. In addition, Stone Energy is among the originators of what was originally called the blowout risk assessment taskforce. The group is a collection of 12 companies that are systematically mapping out the construction of a deepwater

Thats just EOG in one playevery one of the wells that constitutes the oil growth in this country will need artificial lift. Chemicals are another area for burgeoning growth. If X was the number of chemicals used for an average gas well, then its 4X for our oil wells, says Papa. We need paraffin removers, corrosion inhibitors and the like, and youll see a burgeoning growth as this oil boom continues. The greatest potential opportunity for growth is secondary recovery of the shale plays. Papa says that he doesnt think secondary recovery is on the radar for any other E&P companies or many service companies. With infield drilling, better fracs, and better location of laterals, the company could potentially double its recovery factors to 12 percent. Not good enough, he says. Every oil field around the world that has gone through primary recovery, is going through some sort of secondary recovery even Ghawar, says Papa. The concept is if youre able to achieve 10 percent in primary recovery, then under secondary recovery you should be able to get another 50 to 100 percent of incremental oil. Displacement has worked in conventional rocks all around the world. Now were dealing with unconventional rocks, but whos to say that secondary recovery wont be just as successfulthe economic incentive is there.

rigs & Prices

Papa says that EOGs view on North American natural gas is consistent with the

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wElCH

Is It Safe?
Every operators worry after the Macondo disaster was whether the industry would be able to drill and produce the deepwater Gulf safely, says Welch. On the shelf, the industry has drilled about 46,000 wells and about 4,000 wells in deepwater, says Welch. Many don't realize this, but about 25 percent of the time you have a well control situation where you have to use the blowout preventers. So, on average, we had over 1,000 well control events in deepwater, and almost 7,000 on the shelf. Out of those, we had a catastrophic blowout four times on the shelf and once in deepwaterobviously,

spud the appraisal well this month or next month, and depending on what we find with this appraisal well, we will either have an interesting small, non-commercial thing; or we could have something that equals the current reserves of our company. Were kind of like treasure hunters out there and its an exciting business to be in. The other reason operators want to go deeper into the Gulf is well rates, says Welch. Wells range from 1,000 to 4,000 barrels per day on the shelf, while well rates in deepwater can be as high as 30,000 barrels per day or more.

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Huge new wells are driving the oversupplyof the 10 largest shale plays today, eight of them are at least 500 percent more productive than the industrys wells five years ago. In addition, many rigs are drilling in areas that have liquid and dry gas components, causing a surge in gas supply from non-dry gas wells. In 2012 through 2014, we expect 2 to 2.5 Bcf of growth from the non-dry gas areas, says Adkins. Dry gas was 95 percent of our production growth historically. Going forward that goes away, and U.S. gas supply still grows with very few dry gas rigs running because of associated gas from oil wells and liquids rich plays. When natural gas prices crashed in January, the market was oversupplied by 2.5 Bcf per day. Adkins says that the market did what it was supposed to doit created change in the system and a lot of switching away from coal. As of January, we had about 5 Bcf a day of switching, and we think its higher today, he says. Thats why we think were at the bottom at $2it will begin to bounce up later this year. In 2014 and beyond, it will be a balanced natural gas market, which says its a $4.50 commodity.

Oil
The amount of oil supply coming online is staggering, says Adkins. The industry is on course to reverse four-plus decades of oil production decline in just five years. In two to three years, the U.S. will be the well. For each stepthere will be thousands of permutations the group is looking to illustrate how smaller failures can lead to a catastrophic blowout. Theyll put together a bowtie diagram that shows all the planning steps that you can take in each block to ensure youre not going to have a blowout, and then the operational steps and barriers, he says. This work is underway, and should be complete sometime later this year. Thats how we justify to ourselves that we can do this safely.

largest oil producer in the world. or fourth quarter of this year, I think Saudi In raw crude were going from 5.5 has to start cutting production, he says. million barrels per day of production to 9.5 They need to cut 1.5 million barrels in million barrels in 2015, he says. Were up 2013 to begin to balance the market, but 500,000 barrels per day this year, part of even then it doesnt balance because that is because offshore has declined by petroleum inventories will be at unheard-of 200,000 barrels per day. Next year, were levels. This cannot happen. Prices will forecasting 1.2 million barrels of growth in come down to where Saudi will cut U.S. oil supply, assuming that offshore production further, or we will slow drilling breaks even. If anything, with the level of in the U.S. sometime in 2013. The oil activity in the Gulf, it could be higher. market is extremely tight today, but if oil While the obvious impact is less prices stay anywhere near where they are, it dependence on imported oil, the underlying gets out of hand and prices will fall. impact is that oil prices will come down. Adkins believes that the U.S. oil boom is But, Adkins says, in a sense, thats bullish a bigger story than just industry success. for natural gas. The winners in this oil boom are If you bring the price of oil down and infrastructure builders, refining, and service slow the amount of liquids drilling, then companies, he says. The bigger winners you slow gas supply growth and the system are U.S. manufacturers, our trade deficit, rebalances a little faster, he says. Were and the U.S. dollar. This is a huge story for in a range bound world, between $60 and our country and I think we will hit energy $100 long term, though it could easily go independence before the end of this decade, higher short term. assuming prices remain high enough to OPEC excess capacity has acted as the continue drilling. market balancing mechanism for years. Traditionally, when OPEC excess capacity dips below 1.5 million to 2 million barrels, prices surge. Right now, Adkins believes that OPECs true excess capacity is less than 1 million barrels per day, mostly in Saudi Arabiaa very bullish market indicator. The problem is, Paul Coppinger (Weir SPM) listens to Adkins forecast. starting in the third with wide azimuth seismic to try to see around the salt. However, the next generation is already moving forwardcoil azimuth seismic. Rather than shooting seismic in a grid pattern as with wide azimuth, coil azimuth has seismic boats sail in a closing circular pattern. The yield is a more accurate map of the subsurface. In the deepwater Gulf, we have 3D wide azimuth coverage over a wide area and were starting to see some really good images, he says. The deepwater Gulf is a crucible for technology development and these subsalt wells are becoming routine, though theyre not cavalierly drilled. The next frontier of drilling in the Gulf is older, and likely deeper formations, says Welch. Early conventional production in the Gulf hails from source rock that is 3 million years old. Deeper shelf and early deepwater plays are from source rock in the Miocene age, about 15 million years ago. The Wilcox fields are from the Paleocene period, about 60 million years ago. And the BP Tiber prospecta 3 billion barrel prospectis estimated to be late Cretaceous, or about 100 million years old. If you look at the geology of the Gulf, you can see how different levels of source rock deposition have created many opportunities for us, he says. Were not at the bottom of it yet, given the technology that enables us to drill very deep wells.

Keeping It alive
New technologies keep the Gulf alive and will help it grow in the future, says Welch. A

unique feature of the Gulf is the Louann Salt formation. When salt is hot, its lighter than rock so it rises in the formation. When it reaches rock of the same or greater density, it spreads out in all directions. It has no set depth, thickness, form, top or bottom. When you try to put a seismic wave through the salt, it may be going through a mountain of salt or it may go through a thin strip of salt, but it certainly disrupts the acoustic waves that are used as the basis of seismic, says Welch. You think youre getting a picture of one thing, but youre really getting a picture of something else. These wells might be $150 million to drill, so you need a clear picture. The industry came forward

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Navigating the challenges abroad

Success of U.S. shale may not be repeatable overseas, but other oil projects soar

Global Shale?

From left to right: Panel moderator Galen Cobb (Halliburton), John Surma (U.S. Steel Corporation), Cindy Taylor (Oil States International, Inc.), Lew Watts (Regester Larkin), and PESA Chairman Chris Cragg (Oil States International, Inc.).

CEO contrasts U.S. shale with Euro monopolies

That shale oil and gas has been a revolution for the industry is beyond question. But now, the effects of increased production are trickling through the wider economy. For the steel industry, the increased availability, stability, and affordability of natural gas has brought the greatest changes seen in more than 40 years, says John Surma, Chairman and CEO of U.S. Steel Corporation. Like many manufacturers, U.S. Steel has slowly switched from coal as a primary power source, to natural gas. The cost savings have been hugethe company saves between $15 and $16 per ton of finished steel. Compounded over 20 million tons of product per year, the company has reduced its spend by more than $300 million. Reducing our costs by $15 per ton doesnt happen very often. Usually, we kick and scratch for a year to come up with 50 cents a ton, says Surma. Our tubular business had a good year this year and last yearwere specializing in the demand for heat-treated OCTG casing in North America for all the shale activities, says Surma. Late last year, we commissioned a new heat treating and finishing facility just west of Cleveland, which will help serve demand for shale developments. We developed that project 3 to 4 years ago and we commissioned it just in time for the Utica shale. Their bottom line has been saved by the cost savings brought about by natural gas, which is a direct reflection of the energy intensive steel-making process. U.S. Steel is a fully integrated company and operates an iron ore mine in Minnesota. The rock is detonated to rubble and transported to one of the companys raw steel facilities. There, the ore is smelted. n See Surma, Page 10

the Process
U.S. Steel is the eighth largest steel producer in the world, and the largest tubular manufacturer in the U.S. Nearly all of their facilities are based in the U.S., but half of their production is exported.

John Surma, U.S. Steel Corporation

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International shale development not as easy as hoped

The world wants shale. Unconventional oil and gas changed the American landscape, bringing an abundance of new hydrocarbon supply and jobs. Shale formations are scattered throughout the globe, and many are estimated to hold vast reserves of oil and gas. Naturally, the countries that hold these shales want to replicate the American process at home. But increasingly, theyre finding its not that simple, says Lew Watts, Chairman of Regester Larkin Americas.
Cindy Taylor, Oil States International, Inc.

Geopolitics move producers to safer havens

Like any other oilfield service company, Oil States International, Inc. follows its customers around the globe. Increased costs and geopolitical risks are leading many major oil companies and NOCs to seek safer havens of opportunity, says Cindy Taylor, President & CEO, Oil States International, Inc. While we enjoy spending money in the U.S. and creating jobs in our home country, we follow our customers and their investments, she says. But now geopolitical risk is leading them, and therefore leading us, to areas like the Canadian oil sands, Australia, and deepwater projects. Of the Goldman Sachs Top 330 oil and gas projects to change the world, more than half fall into those three categories. They are, however, expensive. Analysts have estimated that it will cost $1.2 trillion over the next five years to develop those 330 projects. A take away from the report is that 90 percent of these large projects are economic at $80 per barrel. In all likelihood, they do move forward, says Taylor. the drawing board beyond 2015. Consequently, Oil States business in the oil sands has grown at a compound annual growth rate of 30 percent over the past six years. For all the great opportunities, there are many challenges. Of the 330 major oil investment opportunities, these are the more marginal because of their all-in cost, says Taylor. From 2003 to 2007, oil sands companies saw a 140-percent cost inflationa typical single family home in Fort McMurray that was $250,000 8 years ago, is $750,000 today. The other thing that is evident in this basin is that production growth has exceeded infrastructure development, which is leading to an 18 to 25 percent market discount because the region is land locked, she says. There are risks including labor shortages, cost inflations, project cost overruns, and there are a number of aboriginal groups that have consultation rights and a significant influence over the developments in the regionand the elephant in the room remains environmental concerns around the oil sands in general. The Keystone XL pipeline is intended to erase the production bottleneck. This is the most strategic oil pipeline initiative in decades. Its favorable to the U.S. but it has met tremendous opposition, says Taylor. If approved, it will link a stable and growing supply of Canadian crude oil production to our refineries in the U.S., making us less reliant upon Middle Eastern and Venezuelan oil, which would improve our energy security in the long term. While the outcome is still unknown, TransCanada will move forward with the southern leg of the route connecting Cushing, Oklahoma to the Gulf Coast. The northern tier is still questionable. n See taylor, Page 11

Unique Shale?
The idea of global shale is tantalizing. The EIA estimates that technically recoverable global shale reserves are vast: 1,069 Tcf in North America, 1,225 Tcf in South America, 1,042 Tcf in Africa, and 1,404 Tcf in Asia. Its a game changer because it provides the prospect of increased energy independence, says Watts. In traditionally consuming countries like Poland, it reduces the power of monopolies, and who would have thought that onshore U.K. would have significant volumes of gas? Even NOCs are taking notice. Some, like Petronas, are interested in the business aspect of developing the resource. Others, like the Chinese, are somewhat interested in the resource, but really want access to the technology for their domestic resources, says Watts. Other are looking to replace declining conventional production like Indonesia and Oman. And then there are companies like n See watts, Page 10

Oil Sands
Canada is the largest supplier of crude oil to the U.S. and holds the third-largest oil reserves in the world, 97 percent of which are in the oil sands. Our customers have found that very attractive because its accessible, there is low geological risk, and good political stability, says Taylor. Reserves are estimated at 170 billion barrels, and spending is escalating significantly and is expected to reach $125 billion by 2015. Currently, there are four major mining projects and 16 in-situ projects; 27 more in-situ projects should start and have first production by 2015; and then 94 more insitu projects and 19 mining projects are on

Lew Watts, Regester Larkin Americas

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SUrMa
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annual MEEting - day 2

In North America, business was pretty difficult for us. Our sector got hit particularly hard in the recession and weve been clawing our way back little by little, says Surma. Most of our markets these days are moving along reasonably well in 2012, and we expect some growth led by automotive, energy and machinerythe big exception is construction. In Europe, U.S. Steel doesnt own a raw material source. The company purchases carbon and ferrous materials primarily from Russia and the Ukraine, and prices are influenced greatly by what happens in China. We have virtually no control over our cost structure there, he says. The European debt crisis has been hard on us. We operated a plant in Serbia that did fairly well for a time, but it is at the absolute center of austerity land.We sold the plant back to the government for a nominal amount. Slovakia is better, as its within the sphere of Germanic manufacturing systems. We do a lot of automotive business and other higher value added products, he says. Being in the EU gives us certainty, low tax regimes, favorable manufacturing policies, and of course were very much aware of the shale potential in Poland. The greatest single issue the company faces is environmental policy. However, since 1990, the steel industry has reduced emissions per ton of steel by 30 percent. We reduced our emissions not because someone told us to, but because conservation makes good business sense theres fewer Btus going up the stack. In Europe, however, reduced emissions has become policyone that Surma says doesnt work. We operate in Slovakia, and the EU has what amounts to a cap-and-trade system. It has been foolish, ruinous, and has done nothing but drive industry away from Europe, he says. Its also done nothing to reduce emissions, unlike what weve done in the U.S. because it made good business sense. Were concerned about overreach by the EPA, and they have no real legislative mandate to do so. Were in a very difficult place right now, and we hope well find the right solution in Washington. Finally, tax reform is another major issueU.S. Steel enjoys many of the same tax benefits as oil and gas. According to an analysis of one major accounting firm, rescinding depletion allowances and other manufacturing deductions will take $48 billion from manufacturing, says Surma. The analysis shows financial services and retail get the benefit, and Im not so sure thats where this country wants to be. I was at a benefit with a Senator, and I told him that hes going to take money away from people like us who make things, and give it to Wall Street and WalMart. I asked if he wanted to run on that platform, to which he answered hed have to rethink it. Outside the U.S., its not clear sailing, he says. Nearly every shale basin in the world has major obstacles. In the U.K., 200 Tcf of natural gas sits below Blackpool, he says. There are big questions with geology, though Quadrilla is working on it. As for fiscal terms, good luck. They need to get from a 60 percent government take, which is the norm in the North Sea, to having fiscal terms that will allow it to be developed. After the U.S. and Canada, Poland was the number-one shale prospect in terms of attractiveness two years ago. Many

It takes 1,000 pounds of coke to reduce 1.4 tons of iron ore to pure iron, which can then be refined to steel. We use lots of energy to make our product, a lot of which comes from coal about 10 million tons per yearbut increasingly were using more natural gas, he says. Over time, weve found that we can reduce the amount of coke we need by injecting natural gas. We cant eliminate coke because we need carbon for reductive purposes, but the ability to use affordable natural gas to bump out very expensive coke is an extraordinary development. Surma used the companys facility in Slovakia as a counterpoint. Currently, it takes about 5 million Btus of natural gas to make a ton of steel from start to finish. Here, if gas is $3, it will cost us $15 to make a ton of steel. In Slovakia, were at the end of the pipe from Gazprom, and gas costs $12, so it costs $60 per ton of steel versus $15 here, he says. Enabled by the cost savings, Surma says the companys leadership is looking to expand one of the raw steel facilitiesa $1 billion project that will add many new jobs. The company, however, is not stopping there. Natural gas is leading them to explore new technology. Were also looking at alternative iron and steel making technologies such as gas-based, direct-reduced iron, he says. All the environmental worries, all the capital thats required, would be eliminated. Were looking to use natural gas as a reductant in a tunnel furnace to make direct-reduced iron at about half of our costs now.

Policy & taxes

Most of U.S. Steels facilities are in the U.S., but half of their production is exported.
Mike Kowalski (Sunbelt Steel) listens to Surma.

wattS

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start to look at these plays, its not as easy as they thought.

ADNOC and Aramco, who want to understand the threat, says Watts. Theyre worried about the effects. Some people say its easy, others say its difficult, so lets see how difficult it is and understand what we have. But not all shales are alike. The U.S. shale may prove unique, or nearly so, for its ability to be developed. In China, they recently reduced their shale estimates to 886 Tcf from 1275 Tcf, he says. Thats a sign that once people

International
According to Watts, there are seven prerequisites for economic shale gas: geology, rights to hydrocarbons, correct regulatory framework, good fiscal terms, political will, social acceptance, and service sector capacity. For example, the U.S. has very good geology; landowners own the hydrocarbon, so rights are simple; the regulatory frame is nearly complete; theres now political will with even President Obama accepting natural gas;

theres social acceptance in most areas where the resource lies; and plenty of service capability is available. We also have very good fiscal terms. Contrast that with resource rent models like in Indonesia where the government take is 93 percentits just enough to make a profit, he says. If that were active here, we wouldnt have shale gas or oil. We have a benign fiscal system which allows us to produce oil and gas that would be uneconomic otherwise. Its a major thing to think about when you start talking about international shale.

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are everywhere, and there are inflationary pressuresvery common themes to what we see in the Canadian oil sands.

deepwater
Deepwater has been an industry focus for decades, and now production is escalating significantly thanks to discoveries in Brazil, West Africa, Southeast Asia, and the U.S. Gulf of Mexico. However, the production growth and increasing discoveries lead to similar bottlenecks as the Canadian oil sands and Australian resourceslogjams in infrastructure, people, and supply chains. Taylor says that as many analysts have predicted, among the winners in deepwater production are service companies. There will be huge orders for SURF (subsea, umbilicals, risers and flowlines) equipment and services, subsea equipment and services, and more. The great news for us is that were service companieschallenges create opportunities, she says. Were increasingly getting to more technically challenging areas in deeper waters. Studies project a 39 percent annual growth for projects in water deeper than 1,500 meters. Deepwater drilling rig expansion is still moving forwardthere are 64 drilling rigs under construction, and 20 percent are contracted with Petrobras. A report from Quest Offshore forecasts for 120 FPSOs, more than 20 TLPs and Spars, and 25 floating LNG facilities. Massive supply chain expansion will be required, says Taylor. I think of the daunting investments ahead in Brazil and other areas, compared with the infrastructure and supply chains that are in place today, and its very clear that material investments and expansions have to be made. Energy transportation systems are maxed outwe need to make investments in rails, ports, and pipelines to efficiently transport the product that we produce. As I look across the globe I see a very bright future. by 2020. In February 2012, foreign analysts announced that China will be able to produce about 23 Bcm. In March, the government removed all information on the October 2011 target, and the new target is 6.5 Bcm in 2015. This is an example of what happens when people start to look at shalethe optimism quickly goes away, says Watts. With geology, there are so many basins there, theyve got to have something similar to the U.S. They also lack the correct regulatory frameworktheres no third party access to pipelines, period.

Cindy Taylor

taylOr

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australia
Oil States has a strong position in Australia by the acquisition of a company in December 2010. Taylor says they were attracted by the investment potential Australia is the number-one or number-two producer and exporter of a number of key commodities including metallurgical met coal, iron ore, thermal coal, gold, and uranium. In addition, there are significant investments being made to expand LNG facilities on the northwest shelf, and the coal seam gas developments that will feed LNG investments in the Gladstone region. Our customers have a high degree of confidence in the long-term pricing and thats enabling them to make the infrastructure investments necessary to increase production, companies have moved to the country. There were 109 concessions granted from 2007 to 2011 with 13 exploration wells completed by February 2012 and 14 more wells this year. Were still awaiting the first declaration of commerciality, which is significant, and geology is a huge question mark, he says. Theres a line when rocks are ductile or brittle. I use the term that were not fracking, were shattering rock. If the rock is ductile, it wont shatter. A lot of Polish shales are right on the border of ductile versus brittle, and theres very few announcements about it.

she says. There were 94 major development projects ongoing in 2011 with a combined capex of $173 billion, and that was up 31 percent from fourth quarter 2010. Its projected that iron ore infrastructure capacity will have a compound annual growth rate of 13-14 percent by 2015, and coal volumes are expected to increase by 60 percent in the same timeline. If the current growth rate continues, Australia will exceed Qatar as the largest exporter of LNG by the end of the decade. For service companies like ours, this creates tremendous opportunities and great advantages, and it will also present similar challenges to the oil sands, says Taylor. Australias population is about 40 percent smaller than California, and 90 percent of the people live on the coastline. Nearly all of the mining or LNG projects are either inland or in coastal regions where there is no population. Its challenging the infrastructure: supply chains are strained, labor shortages

In Argentina, Watts says the jury is still out on geology, but it does appear interesting for oil shale. The Vaca Meurta field is similar to the Eagle Ford. If I were to rank Poland and Argentina on geology, Id go Argentina first, he says. But no way do they have the correct regulatory framework. The big issue is third-party access to pipelinesyou can find all the gas you want, but if you dont have a way to get it out, then youre held to ransom by YPF. And good luck with fiscal terms as well. Shell made a big bet in South Africa and has a lot of pending

rights in the shale fields. But there is a moratorium on fracking. First, Watts says, nobody really knows about the geology, but more importantly, there is zero social acceptance. The shale plays are right in the middle of the main farming area, which are dominated by the Afrikaners that have huge political clout, and no water, he says. There is a saying they have: around here, the rain comes on legs. They say that you cannot do this. In China, he says that the story is not straightforward. In October 2011, the government said they would produce 80 Bcm

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annual MEEting - golf & tEnnis

Thank you to our sports tournament sponsors:

Golf tournament
The Benz and Poellot-designed Gainey Ranch Golf Cluba perennial PESA member favoriteserved as the highdesert backdrop for the 2012 Annual Meeting Golf Tournament.

First Place

Third Place (Score: 121)

Lewis Cadwallader (Schlumberger), Ron Callaway (Greene, Tweed & Co.), Greg Cain (Wilson), and Ray Brown (PPHB, LP).

Longest Drive (Mens)

Russ Laas (Hart Energy)

Golf Champs
Second Place

First Place (Score: 118)

Mike Kowalski (Sunbelt Steel), Russ Laas (Hart Energy), Jerry Lastovica (Flexitallic), and John Kulasa (NedCorp).

Longest Drive (Womens)

Cindy Taylor (Oil States International, Inc.)

Second Place (Score: 120)

J.C. Hernandez (Wells Fargo), Don Greenlee (Oil States International, Inc.), Bob Greenwood (Bestolife Corporation), and Ed Hemphill (Forum Energy Technologies).

Closest-to-the-pin (Mens)
Lewis Cadwallader (Schlumberger)

Closest-to-the-pin (Womens)
Bonnie Wright (Wife of Jim, Cameron)

Third Place

Left: The participants of the 2012 tennis tournament. Below: The final match pitted Edwin Cook (husband of Kate Brader, Regester Larkin) and Linda Newman (wife of Dan, Norris Production Solutions) vs. Susan Winkler (wife of Joe Winkler) and Kevin McEvoy (Oceaneering). Cook and Newman won the tournament.

tennis tournament

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Friday night
This years Friday-night celebration continued last years precedent of shunning tuxes and ties in favor of a more casual atmosphere. Among the couples attending were, from left to right: Paul and Belinda Coppinger (Weir SPM); Russell and Beverly Ginn (Sunbelt Steel); Doug and Marie Polk (Vallourec & Mannesmann); John and Cindy Gremp (FMC Technologies, Inc.); and Robert Workman and Karen Moore (National Oilwell Varco). Comedian Chris Bliss was the entertainment for the night, wrapping up with a spectacular juggling act.

Thank you to our Annual Meeting sponsors

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nEws
leadership position brings with it a spotlight on the company. Our industry created an opportunity for our nation that wasnt expecteda chance to be self sufficient in terms of energy, he says. That has brought a lot of scrutiny on our company and the industry. We had to recommit ourselves in terms of EHS performance. We rely on everyone to raise the bar. Safety is about behavior and employees taking responsibility. Following the Deepwater Horizon tragedy, the need for further increased safety is even more important. We all must up the game now more than ever. For us, it is the recognition and belief that 99 percent of all incidents are preventable, he says. We will share openly and relentlessly with our contractors, partners, and other key stakeholders to build the safest possible operation. The environmental aspect of oil and gas production is also rapidly changing the industry. There are more regulations and more scrutiny. Weve done a tremendous amount of work to green up our operations, says Fisher. We challenge everyone here to raise the bar for environmentally friendly production. We have the right productnatural gas is the obviously cleaner fuel but we still have to earn the license of acceptance from the public. The good news is that we can do it, but we have to show it. Chesapeake started their in-house drilling and oilfield service companies small, but bottlenecks in the industry led the businesses to grow. We saw the opportunity that as the industry continued to grow, we could vertically integrate our companynot only in the drilling business, but pressure pumps, water hauling, oil hauling, and so on, he says. Its designed to de-bottleneck the industry and give us the resources we need as we move into new plays like Ohio, where no infrastructure exists. These do not provide the majority of business for us, and we are still dependent on the service and supply sectors support.

FISHEr

Positions
In keeping with Chesapeakes simple business plan, the companys resource plans for the future are where theyve always beenin the onshore lower 48, or high and dry, says Fisher. Chesapeake has leading positions in 12 of the top 15 unconventional liquids-rich plays in the U.S. They are #1 in the Anadarko Basin (including Granite Wash, Cleveland, Tonkawa and Mississippi Lime plays), #1 in the Utica Shale, #2 in the Eagle Ford Shale, #3 in the Niobrara Shale in the Powder River and DJ Basins Top, #5 in the Permian Basin (including Avalon, Bone Spring, Wolfcamp and Wolfberry plays), and Top 10 in the Williston Basin. They also have leading positions in 4 of the Top 5 unconventional natural gas shale plays in the U.S. They are #1 in the Marcellus Shale, #1 in the Haynesville Shale, #1 in the Bossier Shale, and #2 in the Barnett Shale. To gauge the quality of these plays, look at our operating partners from the international arenaBP, Statoil, CNOOC, and so on, says Fisher. These companies chose to come to the U.S. for unconventional production knowledge. This technology will go worldwide in time. The company is redirecting the capital savings to liquids rich plays. Liquids were 10 percent of Chesapeakes capex in 2009, and will be 85 percent in 2012. Liquids production is expected to be about 30 percent of total production and 60 percent of revenues in 2013. Yes, were part of the problem of low gas prices right now, and we recognize that, he quipped. Were moving our rigs off of dry gas playsabout 50 have been moved from the 2011 averageand were immediately curtailing 8 percent of gross operated production, or 0.5 bcf per day, which may increase to 1 bcf per day if conditions warrant. Fisher says company

Jeff Fisher, Chesapeake Energy

executives are most excited about three key plays: the Eagle Ford, Granite Wash, and Utica. Chesapeake started in Eagle Ford a little bit late, with leasing beginning in August 2009. They have since captured a top-2 position in the industry with 460,000 net acres running 32 rigs. Oil production is now at 30,000 bbl per day. The Eagle Ford is a big operation, and one of the most attractive returns in our portfolio. Western Oklahoma is a core area for the company, and the Granite Wash play is very active. Fisher says the play is a high-yield, high condensate play, and though the company is running 15 rigs, its just getting started in terms of

productivity. A long list of opportunities awaits, he says. Were very excited about our new discovery in Ohio, the liquids rich Utica shale, he says. Were really just getting started here. This play is like the Eagle Ford in that is has all three phases: oil, wet gas, and dry gas windows, but economically, its superior. Chesapeake began leasing in mid-2010 and has 1.25 million net acres of leasehold, by far the largest position in the industry. The leasehold represents about 40 percent of the potentially drillable acres in the Utica.

a new world
Fisher says that Chesapeakes

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There is no magic formula to becoming a CEO

world, not all of whom speak the same language as the corporate office in Houston. It wont be easyit will take a long timeit will require strong leadership from the top, but once achieved, well be a different companyour leadership team can envision 10 years from now having a culture of being better, not just bigger. Every employee deserves to know the direction of the company, and they deserve to hear it from the top. But thats not the only constituent of a company, and this might sound obvious now, but in our case the Board needed a clear direction from us. They needed to understand our strategy and buy into the vision about what our company could look like 10 years from now. Im not sure I completely grasped the impact of that until after one of our Board meetings. One of our members came up to me and said, You know, John, thats the first time that weve really understood the strategy of the company. In subsequent meetings the Board seems to be more aligned and in sync with all the decisions we make as a management team.

John Gremp, Chairman, President & CEO, FMC Technologies, Inc.

Editors note: This essay was compiled from John Gremps presentation for the Executive Address Series, in which he discussed his perspective as a new and first-time CEO. Its a little different when you take on the role of CEO for the first time. FMC Technologies, Inc. is a lot like other PESA companieswere leaders in technology and in the markets we serve. In the 10 years that weve been FMC Technologies, our revenues have grown four times, our profits have grown seven times, our stock price has grown 10 times, and we earn one of the highest multiples in the industry. In short, I became the CEO of a very successful company. For my first Board meeting, I was sitting outside the Board room and they voted for my approval as CEO. I walked in to applause. There was a pause, and I realized I was supposed to say something, but I hadnt prepared any remarks. I said, Its a privilege for me to be CEO of this great company, and its my intention to make this great company even better. We finished the board meeting and I realized that I had no idea how to lead a great company, let alone make it better. My leadership team and I have spent the past year figuring out what it means to lead a great company and make it better.

Change or Fade away

As it turns out, most great companies dont stay great. Of the 500 Fortune 500 companies in 1955, only 71 exist today. Jim Collins, a professor at Stanford, studied these companies and what happened to

their greatness. It wasnt so much what the industry or the outside world did to them, it was what they did to themselves. They were reluctant to change because the business model that made them successful blinded them from making the changes they needed to make. So my management team and I realized that in order to continue to be a good company, we needed to challenge ourselves when things were going well. Were still in the early days of this, but I want to share with you, as a new CEO, how we think and how the leadership team thinks about the future of our company. We found that a clear strategy is helpful in not only telling you what you want to do, but what you dont want to doit tells the direction of the company, gives a vision of what the company will look like in 10 years, and what we need to do to make that vision happen. Finally, once the strategy is established, its critical that the entire organization is aligned around that strategy. One of the characteristics of our company, as well as other PESA member companies, is growth. But our management team decided that it wasnt good enough just to be bigger, we wanted to be a better company, and theres a difference. To be a better company, the management team decided that we needed a cultural change, not that there was a problem with our cultureit has, in fact, contributed to our success. But we define better as delivering a higher level of quality in everything we do in a way, frankly, that the industry has yet to demonstrate. Its ambitious, the idea of changing the behaviors of 14,000 people around the

Personal Experience
FMC is the only company Ive ever worked for. Ive been there 37 years, so I thought I knew the company and its culture pretty well. I had the opportunity to run all of our businesses for four years as COO, and I served as President for one year before becoming CEO. I wasnt complacent, but I thought, Ive run all the businesses, so how different could this be as CEO? Its very different and I didnt understand that until I was in the role. Theres an aloneness that comes with the role. Several years ago, Andrew Gould, the former CEO of Schlumberger, did an interview in which he was asked what its like. He said, Frankly, its quite lonely, youre on your own. It doesnt mean that youre lonely, as in youre not engaged with a lot of people, but for me, for the first time in my 37-year career, I didnt have a boss. Yes, I have a Board, but the Board reminds me, Were not running the company, John, you are. Were advising you and support you, but youre it. As Andrew said, the buck really does stop with you. The decisions you make are bigger, and thats natural, but I didnt grasp it until the Chairman of Spencer Stewart told me, The reason the decisions are so big is because the easy ones are all made below youits only the big ones that get to your desk. Finally, one thing I did expect but didnt realize how pronounced it would be, is n See Gremp, Page 16

16 PESANews

The Emerging Leaders Committee sponsored the seventh session of the highly regarded Oil 101. The course featured experts from member companies outlaying the drilling process from geology to end-of-life reservoir issues. Speakers for this event were:

Oil 101

nEws

Keynote Address B.P Huddleston (Huddleston & Co., Inc.) . History of the Industry Steve Jacobs (Decision Strategies) Economics of the Oilfield Collin Gerry (Raymond James & Associates) Geology and Seismic James Geary (Hess Corporation) Rig Systems and Drilling Karl Appleton (National Oilwell Varco) Completions and Flow Equipment Mark Teel (Schlumberger) Well Servicing and End-Of-Life Wes Heiskell (Schlumberger) Subsea Drilling & Production Miguel Hernandez (FMC Technologies, Inc.) Refining & Transportation Chris Doss (Mustang Engineering)

Miguel Hernandez (FMC Technologies, Inc.)

Attendance for the event was 260.

Collin Gerry (Raymond James & Associates)

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GrEMP

communication. A CEO is always sending a message. The microphone is always on, and its magnified and amplified for good or bad. As I said, its the CEOs job to communicate the direction of the company to all constituentsin that sense, the communication and the amplification of articulating the strategy is critical and works well. But the microphone is never off.

Career Paths
Before I was CEO, it seemed nobody cared about my lessons learned. But once youre CEO, everyone wants to know if theres some sort of secret to getting there. There arent any secrets, and a lot of my lessons learned are common sense, but they will help you in your career. The first is to be open-minded about your career path. When I was in graduate school, I studied finance, and I envisioned a career in finance. I hoped one day to be a controller within one of the divisions of FMC. That happened a little earlier in my career than I had thought, and I didnt have a plan beyond that. One day the operations manager at the division at which I worked asked if I had ever considered a job in operations and working in the shop. I told him Id only been in the shop twice, and once was by mistake. I told him Id never thought about it, and he told me that they had a position open as materials manager. I told him that I

didnt even know what that was, and more than that, why did he think Id be any good at it? He convinced me it was something I should try. I did it, it was new to me, and I enjoyed it and found a new career path. A couple of years later, our company was growing our defense business. Joe Netherland called me up and said, We have a position open in San Jose, were growing fast, and wed love for you to interview for two positionsone is an assistant materials manager, and another as assistant purchasing manager. I did, and Joe asked me what I thought. I said I loved materials management, so sign me up. I go back to my division, and Joe calls me and says, John, we really loved your ideas, and wed love to offer you the position of assistant purchasing manager. I thought, okay, Im not really interested in that, but he convinced me to come out to San Jose again. Joe told me, We really have two purchasing managing jobs openone is building our purchasing systems and planning, the other one is heavy procurement. So I finally agreed to do the systems and planning job because it was similar to materials management. He came back and offered me the other job. I was frustrated, but I agreed. The lesson for me throughout all of those careers moves, was that I didnt really understand what I needed at the time. I was going where I was comfortable. But learning how to negotiate large forgings and $100 million aluminum plate contracts with Alcoa was exactly what I needed. Being on the shop floor was the experience

I needed. Fortunately for me, there were people above me helping me with my career and guiding me into roles that I wouldnt have naturally moved toin fact, I resisted them. Be open minded, and the learning experience you have could contribute to your career in significant ways. The second tip is that when you think about your performance, I like people to think about not only what they accomplished over the past year, but what they learned. Accomplishments are great, but what you learn can actually be more important in terms of your career. Think back to what you can do today that you couldnt do a year ago. Focus on your skills and what you learned, and your career will be fine. When I think about all the roles Ive learnedall the technical and functional aspects of the jobsthe one thing that you never completely learn is the ability to be a leader. Every job is different or larger, but even as the CEO and Chairman of our company, Im still learning about leadership. Youll always learn about how to be a better leaderthat will never stop, even when you become a CEO. Finally, I strongly urge you to take advantage of PESA. I remember over 30 years ago going to my first PESA meetingthe networking, the opportunity to understand this industry, and the ability to build relationships was probably one of the best things that ever happened to me. The Emerging Leaders Committee is making that happen for all the young leaders in our industry and I appreciate it very much.

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Though 125 years old, Marathon is emerging from its first year as a newly independent E&P company. Year one for Marathon Oil Corporation was a good one, says David E. Roberts, Jr., Executive Vice President and COO. With over 200 percent in reserve replacementall in liquids-rich playsand 150 percent growth anticipated for 2012, the company is a competitor he told PESA members at the 2012 Gulf Coast-Texas meeting. The story of Marathon being able to compete with the independents moving forward is that we can grow the businessweve moved from a realm of being compared with majors where they typically promise zero to 3 percent growth and deliver none, to being compared with asset groups that think 5 percent is loafing along, says Roberts. The wedge that will feed our growth matches our skills in the unconventionalwere aiming for 200,000 barrels per day growth, and it will be 80 percent liquids and well spend $3 billion a year to get there.

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Marathon execs bet companys future on three oil plays

Roberts says that the industry, and fracturing in particular, should be regulated. But, the regulation should stay at the state arena with strong officials who are locally minded. The worst thing that can happen to this industry is for us to become a federally regulated industrythats disaster for anyone, irrespective to the chatter coming out of Washington, he says. Drilling rates have gone down on public lands in the past four years, while theyve risen astronomically on private landsthats something we cant have happen. It all goes back to adhering to the highest operating standards, and it goes down to each operator and supplier, and the number-one priority is to protect our employees, contractors, and the community we live in. Finally, Roberts says that the operator and supplier relationship must change. He finds it amazing that as in industry that defines itself by constantly adopting new technologies, the dynamics of a relationship are so difficult to change. We talk today about who has the power in the relationship to me, those are outdated concepts, he says. We are a collective industry. Each of us have ceded certain responsibilities and capabilities over the last 20 to 25 years, so we find ourselves more dependent on each other than ever. Today, he says Marathons biggest challenge is finding reliable supplierspeople that can do the job safely and in the aggressive schedule that the company sets. Were looking for new ways to relate to people who can bring us that reliability, and Im willing to pay more for it, he says. We no longer have the capability, if we ever did, to do this ourselves. A vertically integrated Marathon is gone, so it will be relationships that allow us to move into new areas, do different things, and define how we do our business in the future. We want people who are willing to integrate their businesses into ours to reduce cycle times.

David E. Roberts, Jr., Marathon Oil Corporation

do or die
Marathons success or failure will largely depend on its success in the three large basins in the U.S. in which the company will compete. While Roberts says that the company is pleased with their holdings in the Bakken and Anadarko Woodford, the Eagle Ford is the most important. Our move into the Eagle Ford is our stamp as to what kind of company were going to be and how were going to be perceived, he says. Since November, weve stood up 16 drilling rigs, we have three frac crews, with a fourth coming in Juneit will give us the capability to add 20 new wells and completions a month on a continuous basis, with about 2,500 wells planned over the next 10 years. This will be, over all the things weve done in the 125-year history of our company, the largest single capital exposure weve taken on.

Roberts says that Marathons Eagle Ford holdings will grow to a 100,000 barrels per day in the next five yearsby any standard, its a world class oilfield. Weve got a lot to do in terms of drilling costs and completion costsan $8 million well in the Eagle Ford doesnt sound like much compared to a $150 million well in the Gulf of Mexico, but when you turn 2,000 of them, its $16 billion, he says. Focusing on that will be critically important to us.

double-Edged Sword
Roberts says that while the opportunities are great, so are the challenges. In his 30-year career, never has he seen a greater opportunity for the U.S. business, but he also cant remember a more difficult time. Our license to operate is under attack by those who either dont understand or outright oppose hydrocarbon production, he says. We focus on issues like fracturing, and people dont understand the processyou can say until youre blue in the face that weve drilled millions of fractured wells with no ill results, you can say weve been doing this for 50 years, but until we cross the level of understanding of what people need to know in terms of what we do, well continue to struggle. The key to maintaining the

industrys license to operate is continuing to earn the publics trust on a day-to-day basis, which means adhering to the highest standards. Unfortunately, were all cast in the same light as the worst operator. So, the focus does not have to be against the regulators, it has to be against the worst actors in each basin, says Roberts. Its tough in south Texas right nowthese are people that have never seen anything like whats going on right now. We get letters from people who see constant truck traffic, dust in every direction, and as a native Texan, the heart-breaking thing is all the litter. Its just not right, and its not sustainable. We have to get better, we have to take care of our neighbors, and we have to police ourselves. Additionally, he says that in order to gain and maintain the publics trust, transparency is the only way to move forward as an industry. Were participating in FracFocus, and all the wells that Marathon drills are listed in there along with every chemical that we put in the ground, he says. We recognize that it could be a problem, because its a searchable database and people are going to be able to use it against the industry one day. The price of transparency is high. But if we dont do this, then people think we have something to hide, and we dont.

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Deepwater is increasingly becoming more attractive to producers around the globe. As less-than-positive geopolitics dominate many land-locked reservoirs and dozens of new deepwater discoveries are made, offshore drilling has become a major focus for the industry, says David Williams, Chairman, President & CEO of Noble Corporation. Speaking at the PESA Gulf Coast Louisiana Meeting in Lafayette, Williams says that deepwater production is rapidly expanding and will continue to do so for the immediate future. For example, in 2000, 2 percent of global oil and gas production came from deepwater. Today, its 7 percent and deepwater is forecast to comprise 10 percent of global production by 2020. Sustainable crude oil prices, excellent exploration success, and geographic expansion are the major drivers of deepwater activity, he says. The prospects for deepwater activity remain excellent through 2014. So far, 130 billion barrels of oil equivalent have been discovered in the worlds deepwater basins. But the challenges are immense, says Williams. Our engineering challenges are second only to the space programwe use advanced technology, manage massive weights and sub-surface pressures, and there is a critical need for experienced personnel.

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Deepwater is growing; no slowdown in sight

David Williams, Noble Corporation

Major Growth
Noble is among the largest offshore drilling contractors in the world with 79 rigs. While the company is performing well in the current marketthe company boasts a large contract backlog and increased cash flow in recent yearsWilliams says that a major fleet transformation is underway. Our customers are opting for the best high-spec rigs in both jack-ups and ultra deepwater floating rigs, he says. They want the latest generation of drilling rigs, equipped with the maximum capability available. This is improving activity and day rates across all regions and segments, most notably in ultra deepwater. Nobles rig utilization numbers bear out that statement. Utilization of standard jack-ups is about 70 percent and standard deepwater rigs are utilized at about 80 percent. Meanwhile, the companys highspec jack-ups have a utilization of more than 95 percent, while the latest ultradeep rigs are near 100 percent. Operators are reassessing their global deepwater programs in light of sustained higher-than-expected crude prices, says Williams. As prices have remained at $90plus levels, exploration and production spending is on the rise. From 1999 to 2011, E&P spending increased by 12.9 percent, but forecasts now call for international E&P

spending to double 2009s levels by 2015. Adding to sustained high crude oil prices, skyrocketing E&P spending, and customer demand for the newest rigs, shipbuilding economics are now very attractive, he says. The result will be massive new additions to worldwide drilling capacity through 2015. Before 2008, the total average new-build rate of drillships, semi-submersibles, and jack-ups was about 10 per year, he says. Over the next three years alone, 148 new rigs will come onlinethis is driven by successful exploration and a desire to replace the aging jack-up fleet. Noble has more than $5 billion in capital commitments to date, with three drillships delivered in 2011. They are adding five premium new-build drillships and six premium jack-ups in the next two years. The companys building program will drive strong earnings and cash flow growth over the next three years, says Williams. Globally, spot day rates are setting new highs and contract terms are lengthening excluding the 26-rig Build in Brazil 15year program, the average contract length is 3 years with an average day rate of $537,000. While deepwater production is expanding, the geography of deepwater is doing the same. The so-called Golden TriangleGulf of Mexico, South America, and West Africacomprised 77 percent of all deepwater discoveries from 2006 to 2008. Today its down to 54 percent due to emerging opportunities in eastern Africa, Australia, the Far East and more. Customer demand is building across most regions including the U.S. Gulf of Mexico, Brazil, Africa, and Far Eastmost

industry capacity is committed for this year, he says. Drilling success remains high with the expansion into frontier locations like Tanzania, Kenya, and New Zealand.

U.S. Gulf
While worldwide rig utilization remains at about 90 percent, the U.S. Gulf of Mexico was a consistent hotbed of activity until the Macondo disaster. Before the spill, floating rig utilization was nearly 100 percent, fell past 90 percent, but has rebounded 97 percent. Jack-ups utilization fell from 80 percent to 70 percent, but has rebounded to 92 percent. Shallow water activity has been slowed by low gas prices and the North America shale playstheres high idle capacity, he says. But the Gulf of Mexico is an impressive hydrocarbon region, especially in deepwater. Of all deepwater discoveries from 2006 to 2011, nearly one-fourth of the 181 were in the Gulf of MexicoNoble had five of those. The rebound in rig utilization in the Gulf is a direct result of the well permitting process recovering, says Williams. From 2010 to 2011, only 7 permits were issued in waters greater than 1,500 feetin the first four months of 2012, 11 permits have been issued. The day rate environment is supported by tight supply and demand dynamics, sustainable crude oil prices, and excellent exploration success, he says. Look for a continuation of shallow and deepwater capacity additions as aged equipment is replaced and shipyard economics remain attractive.

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tournament Champs

Adam Peakes (Tudor, Pickering, Holt & Co.), Gary Stratulate (Axon Energy Products), David Cunningham (Tudor, Pickering, Holt & Co.), and Jim Hogan (Baker Hughes). Second Place

Explorers Golf 2012

Weather was virtually perfect for PESAs Explorers of Houston Annual Golf Tournament, held March 1 at Redstone Golf Club. The event was chaired and organized by Committee Chairman Robert Workman (National Oilwell Varco). Above: Scott DuBois (Premier Pipe) takes his third shot, a chip, from a long Par 5. Right: G.S. Tan. (Keppel Amfels) discusses strategy for a long putt. Bottom Right: Andy Kirkjian (Global Oilfield Services) connects off the tee on a long Par 4. Below: Galen Cobb (Halliburton) chips a shot very close to the hole on a short Par 4.

Rusty Knight (Forum Energy Technologies), Steve Twellman (Forum Energy Technologies), Mike Chamberlain (MRC), and Joe Barnes (MRC). third Place

Mike Monteferante (Halliburton), Don Greenlee (Oil States Industries), Mike Vinzant (Halliburton), and Chad Woodward (Halliburton). longest drive Anthony Hooper (Baker Hughes) Straightest drive Matt Holifield (Consolidated Pressure Control) Closest-to-the-Pin Bill Crabbe (National Oilwell Varco) Closest-to-the-Pin in two Randy Miles (Patterson-UTI)

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U.S. Oil and Gas Field Equipment Exports
(in U.S. $1,000) JAN FEB Mexico 25,134 46,977 Angola 17,672 17,408 Singapore 71,866 51,869 Brazil 48,172 53,760 Russia 22,452 28,089 Venezuela 19,158 36,676 U.K. 34,638 17,979 U.A.E. 21,104 39,176 Saudi Arabia 54,058 25,054 China 21,835 18,730 Australia 16,151 12,191 Korea 22,966 6,736 Colombia 16,205 18,568 Malaysia 4,132 5,390 Egypt 8,894 15,588 Subtotal: All Other: Total

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PESA News Petroleum Equipment Suppliers Association 1240 Blalock, Suite 110 Houston, TX 77055 First Class US Postage Paid Houston, TX Permit No. 04805

Top 15 Destinations for Q1 2012

MAR 106,705 66,107 56,638 42,858 35,552 32,790 32,577 25,158 24,867 24,395 22,080 18,940 18,724 17,740 17,736

Source: U.S. International Trade Commission

404,437 394,189 542,869 241,155 260,972 222,660 645,592 655,161 765,529

Brazil is an attractive investment for service industry

Brazil is booming, and many PESA member companies are in country with more to follow. For this years Legal Seminar, Alexandre Chequer, a Partner with Mayer Brown, LLP, discussed doing business with Petrobras, and Aguinaldo Cruz, Local Content Manager with Cameron, reviewed local content issues and related challenges. The country has 12.8 billion barrels in proved reserves, which is expected to triple after the pre-salt discoveries, and 417 billion cubic meters of natural gas. Brazil expects to invest $500 billion on energy projects over the next 20 years, and 62 percent of the pre-salt area and most of the sedimentary basins are still unexplored. Companies that operate in Brazil work with Petrobras, as they operate 93 percent of the countrys fields. By 2020, the country will need 53 deepwater drilling rigs, 504 supply vessels, and 84 production platforms. Their growth targets are the largest in the world with 2.7 million barrels per day in 2009, increasing to 3.9 million in 2014, and 5.4 million in 2020all are confirmed discoveries. Chequer says that all contractors research and development in the country, and create a managerial skill set. Doing business in Brazil is a good opportunity and three factors support it: the geology; growing production; and while the regulation is complex, it is well-managed, says Cruz. Local content rules were expanded in 2010 by the Brazilian government and now range between 55 to 65 percent. The local content obligation is now included in concession agreements, transfer of rights contracts, and production sharing contracts, which are passed from the ANP (Brazils National Agency of Petroleum), to oil companies, and finally to suppliers. Local content of goods is calculated excluding the value of imported parts. Local content of services is calculated by taking into account salaries and additional taxes of Brazilian citizensforeigners with Brazilian permanent visas are not factored into local content calculations. All machinery, electrical, transportation, and services are subject to local content rules and penalties apply when the measure is not achieved.

Mark Wolf (Cameron) led a question and answer session with Alexandre Chequer (Mayer Brown, LLP) and Aguinaldo Cruz (Cameron).

are subject to a bid process, as direct contracts only occur when a supplier owns proprietary technology, or is among only a few companies that have access to a desired technology. To work with Petrobras, a company must register as a supplier, which certifies that the company has been approved by the Petrobras legal, technical, financial, and tax qualification requirements. However, Chequer says there are recurrent issues with registration including the complexity of the registration itself, difficulty in identifying the correct categories for a company, and it can be difficult to obtain

clarifications from Petrobras. Even if your company has experience with Petrobras in the Gulf of Mexico, but not in Brazil, you have to prove that you are able to build local capability to work for Petrobras in Brazil, he says. Local content is here to stay, especially in Brazil, says Cruz. In fact, its spelled out in the Oil and Gas Industry National Mobilization Programs motto: Everything that can be done in Brazil must and will be done in Brazil. Local content requirements are designed to allow for the creation of jobs in the country, strengthen the Brazilian economy, promote