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Interview

with John Bell, Chief Executive Officer, Australian Drilling Associates

12.05.2011 / Energyboardroom

As is fitting with any founding CEO, we are interested in understanding your vision behind the establishment of this company. What in particular did you see lacking in the offshore drilling market which you believed Australian Drilling Associates could fill?

The vision I saw was to build an outsourced international drilling department and project management company – a virtual traditional drilling department where we could make a contribution to the industry by optimizing on personnel resources and drilling equipment. We provide well engineering and well planning, materials and logistics management, procurement of well consumables, contracting of all associated services to drill, HSE management, and well operations management just as any oil companies drilling department would. Many of the major E&P companies have not recruited or trained drilling personnel since 1985; therefore experienced resources are in short supply worldwide. I believed that a full complement of an outsourced internationally experienced drilling team would be more cost effective and efficient for junior to mid size E&P companies, and would be more advantageous than appointing an engineer or drilling manager and forming a multi-disciplined group of people who have never worked together as a team bringing different company cultures and backgrounds for the occasional one or two well drilling campaign. After 35 years in the industry it is my firm belief that drilling wells is not necessarily the core business of some oil companies.

Our first multi-well, multi operator drilling campaign was in 1996, we created a consortium which comprised of three independent oil companies and drilled a series of wells with a jack up off the coast of Victoria and South Australia. The benefits were quite significant for the operators collectively, at the time it was not easy to access drilling rigs for each of their drilling campaigns in isolation of each other, mobilisation costs were prohibitive for them individually however as it became a five well programme the commercial burden was reduced and shared. A jack up was being released by a major oil company in the Bass Strait, we took advantage of the availability and proximity by contracting the rig and creating our first consortium under our drilling cooperation agreement. The key word in such an agreement is cooperation, we, the operators and drilling contractor must cooperate with each other under clearly defined responsibilities, to successfully reap the benefits, sharing costs and equipment.

The rapid rise in oil prices in 2006 created a worldwide shortage of offshore drilling rigs, every oil company wanted to drill and the demand for offshore rigs in Australia was unprecedented. Australia is a big continent the geological basins are spread north, west and east with huge distances between them, the well locations are on vast license areas covering thousands of square kilometers. The major oil companies with multiple wells and long term contracts on rigs had no spare capacity slots for the single well operators which historically had been available. It was also difficult for the smaller independents to get the attention of drilling contractors for a one or two well programme, particularly when rig utilisation worldwide was peaking at 98%. Mobilizing a rig to Australia is expensive, even to mobilise a rig from the Timor Sea to the Bass Strait for example, will take approximately 45 days which in itself incurs huge mobilisation costs. I therefore saw the need amongst the independents to drill wells but they were unable to access rigs from the major oil companies or drilling contractors for a one or two well programme. Thus the opportunity arose in 2006 to create consortiums comprised of junior independents, medium sized E&P’s, including a major international oil company and the Chinese National Offshore Oil Corporation (CNOOC) with sufficient term to attract certain drilling contractors with rig availability. The consortium model spread the mobilisation and demobilisation costs, reduced third party and well consumable costs as a direct consequence of purchasing volume and gave flexibility in their campaigns to drill more wells or reschedule the timing of their wells with the added commercial benefits normally expected for major oil companies. The consortium model and number of wells created sufficient term to be of interest to drilling contractors who in 2006 to 2008 would only accept 12 to 18 month term contracts generally from a single operator.

Over the past two years ADA managed several consortiums which equated to one billion dollars worth of exploration and appraisal wells. This included two gas fields that drilled and completed from start to finish including platform installation, one in the Bass Strait and the other offshore New Zealand.

Since developing your consortium model there has been a proliferation of junior and independent oil and gas companies in the Australian market, notably on the Australian Securities Exchange. Are your services more so a cause or effect of this trend?

The junior and mid-sized companies operating offshore have been our main client base during the global cyclical phases of oil prices and activity oscillations in Australia and New Zealand. However since the collapse of oil prices and the world economy in 2008, limited availability of finance for projects until recent times and the events of Macondo in the Gulf of Mexico and Montara off Western Australia, we may see fewer independents exploring as operators in Australia and New Zealand. I have for sometime believed that the future of our outsourced business will be with national oil companies (NOC’s). The NOC’s now have access to 86% of the world’s oil producing countries and are increasingly moving into new unfamiliar territory, it is this expansion that will create opportunities for outsourced services where we may be able to provide mobile drilling teams for exploration drilling campaigns in regions outside of the NOC’s country of origin. This will be particularly appropriate when their resources are stretched and international expansion continues, major international oil companies (IOC’s) will present similar opportunities. The difference, is that the independents have limited resources where the NOC’s and IOC’s have their own in-house experience with significantly large cohesive drilling teams, wielding more purchasing power than the independents. However for the reasons stated earlier I believe in time we will be able to provide a valuable service to these larger organisations in isolated drilling campaigns and remote locations, building and managing consortiums providing the same benefits of rig and third party cost sharing as have been achieved for the independents.

While our client base might change, the independents and junior oil companies will still be party to our consortium model around the world and certainly still in Australia.

Although oil prices are on the rise again and appear to have some sustainability the independents in Australia have not been active for some time and show no sign of change at present. Finance is more readily available for the energy industry so we may see an upsurge of activity from the independents in Australia and New Zealand in 2012. On the other hand many of the juniors may want to farm out and pass on the increasing cost and risk to some of the more substantial E&P companies.

Can we expect a greater shift in HSE consulting and compliance amongst your portfolio of services?

HSE and managing operations safely is our priority, not only from keeping people safe from getting hurt but also from the commercial aspect of lost productivity. We are about to see a major shift change in the offshore industry globally where operators and contractors will need to demonstrate their competency and ability to mitigate risk more stringently to the regulators and their shareholders than ever before. We have yet to see the full impact of the aftermath of Macondo and Montara and what bearing it will have in the inevitable regulatory changes. I imagine the regulators will require operators to demonstrate financial capability to withstand pollution aftermath, demonstrate competency and capability to manage their risks on a more comprehensive level than previously expected and a larger degree of accountability should be evident in the industry. ADA’s objective will be to ensure that our client’s future drilling campaigns are in full compliance with new regulatory standards building upon company’s collective experience and HSE strengths ensuring we maintain our good standing with the various state regulators and our competence as an offshore operator. In anticipation of these regulatory changes we have reviewed our internal operations management, well control procedures, well auditing, rig selection criteria and will be implementing competency checks for our future contracted services and contracted personnel. I believe that the new regulatory standards will create opportunities and perhaps a greater necessity for cooperation between operators in terms of de-risking and managing future incidents of the magnitude of Montara and Macondo. This approach will most certainly come to the fore in our future consortiums.

Managing a consortium requires coordinating various operating cultures of companies, each of whom have different financial capacities and drilling targets. What is the blueprint for success behind your model?

Pulling together a consortium is indeed difficult each operator has their own agenda, some want priority, others have timing constraints and budgets to consider. It takes persistence, tenacity and patience on our part but most of all cooperation between all parties and willingness to reach a common objective to re-define the economies of scale by sharing. Our first step in the process is to identify the number of wells in the region or basin committed and to be drilled; we then screen those who are ready to drill, have the financial capacity and internal approvals in place, then we must begin working together to make it happen. It is also our role to convince the drilling contractor that they will have sufficient term, continuity, a single point of contact, one contract, an HSE system common to all, a bridging mechanism and all liabilities can be covered.

The implementation part of the process is mercurial, all parties are put under some form of pressure to meet the agreed objectives of the whole and sufficient momentum to contract a rig, the entire process to execution of all necessary agreements can take more than six months. The process is also driven by the demand to drill and rig availability which requires an early and irrevocable commitment from all parties to secure a suitable and available rig to meet the requirements of each consortium member. The consortium model will only work effectively with a critical volume of wells, and if it meets the drilling contractor’s expectations.

How does ADA build synergies with those juniors looking to grow their technical capacities and develop into operators?

I believe our greatest demonstration of building synergy with juniors was the successful development of the two gas fields mentioned earlier. Origin Energy invited ADA to be their outsourced drilling department responsible for all aspects of planning, drilling and completion of the development wells to first gas. In both instances we were very much involved with the platform design and installation which entailed working seamlessly with their subsurface group and their other contractors. Origin did not have the engineering and operations skill set they required and saw outsourcing as a more efficient way of managing their offshore business rather than building their own drilling department in what was the first offshore entry into field development. We managed each project from start to finish which established a successful working relationship that spanned almost 10 years. It cannot be cost effective or value adding for juniors to have their own drilling department if they have sporadic short term drilling campaigns. Origin was a prime example of working with an operator who ultimately had ambitions to grow their technical capacities and develop. We have also worked with many companies who have their own in house experience, working as an integral part of their team.

We were privileged to work with CNOOC in the Timor Sea, one of the largest NOC companies. They clearly had the offshore experience, technical capability and resources but had no experience working in Australia. ADA and CNOOC teams worked together, both in our office with their engineering, geological and logistics team and their Drilling Supervisors offshore working alongside ours. This was a mutually beneficial relationship, they gained insight into working offshore Australia and we benefited from their participation in the consortium and more importantly gaining a cultural understanding which will give us a better understanding for future business with Chinese and other international companies coming into Australia.

What are the main technical challenges that you have faced in Australia which have bred well management expertise and now give you the confidence to export your model abroad?

Our areas of operation have been in the Browse Basin, Timor Sea, Bass Strait, and offshore Taranaki, New Zealand. Australia is not known for difficult drilling, compared to some other parts of the world, however nor is drilling in Australia to be underestimated as it does have its own unique formation problems. Logistics management can be challenging with the vast distances between shore base and the offshore locations in certain regional basins. We have Cyclones and evacuations to manage in the North and North West in what can be normally considered benign metocean environment outside of Cyclone season. Australia has a harsh offshore environment in the Bass Strait equal to the North Sea in severity but less consistent metocean conditions off the Victorian and South Australian coast can be equal to the exposed approaches of the Atlantic in terms of severity. It is interesting to see that operators in Australia are now moving toward bigger offshore drilling rigs with increased deck space and deck loading capability, better mooring and station keeping capability which will help and improve logistics management and the various environmental, metocean conditions.

Perhaps the most innovative thing we have achieved is the consortium model itself. In 1996 we were probably one of the first companies in the world to undertake consortium management in its purest sense whereby the entire project was outsourced; we managed every aspect from start to finish on behalf of the E&P companies. We have peers in the industry who have emulated to some extent our consortium model and of course rig clubs which are very different to our model, are now common with the major oil companies worldwide. This is a model which can be exported anywhere in the world where there is a number of operators with short individual drilling campaigns which when combined can create a longer term drilling campaign collectively.

How do you see the current – and by many expert predictions, sustained – spike in oil prices affecting the consortium model?

There is no denying that our business rose very rapidly on the crest of rising oil prices from 2005 to 2008. High oil prices encourages exploration and development of otherwise non commercial projects which in turn drives up the demand for rigs, global utilisation and rig day rates escalate very quickly in these conditions just as they did in the late 70’s and early 80’s and again in the preceding years of 2008.

When oil prices are down, drilling activity historically drops off and day rates fall, this is the best time to drill exploration wells but it is also a time when budgets for exploration are cut. Consortiums could function very well in these circumstances if there were sufficient volume of wells to drill.

Juniors in offshore will be hit by stringent regulations and you are turning your attention to South America. Is Australia slowing down for ADA?

Australia has not slowed down since the economy collapse however exploration and small development projects in the oil industry have been shelved for various reasons. The major oil companies have recovered and become reasonably active after the initial shock of collapsing oil prices, however the segment of industry we work with slowed down which impacted on ADA and other outsourced peer groups because of the lack of junior independent activity offshore and less demand for offshore rigs. However we have an expectation that offshore activity should increase in 2012 and other openings in Australia are beginning to manifest as new business opportunities for ADA as new players come into the region, old projects are revitalized and new licenses to be drilled in this largely unexplored country.

It is true that we have focused on South America over the past three years, first Brazil as an emerging economy and Colombia although not a BRIC country very close behind in its GDP growth, followed by Peru, three out of five of the best performing countries in South America. Brazil, Colombia and Peru are ideal regions for onshore and offshore consortiums, with limited number of rigs, a surging economy, huge foreign investment and a large number of commitment, exploration and development wells to be drilled.

The decision to seek business opportunities in South America had nothing to do with the possibility of new stringent regulations in Australia or the downturn in activity; we had already established ADA as a company in these South American countries in 2007/2008 on the expectation of the kind of growth we are now seeing.

Why the lack of interest in coal seam gas drilling?

Coal seam gas has grown in strength over the past few years. I remember attending an oil conference in Perth 1998, 90% of the presentations were about coal bed methane gas, all presented by fledgling companies and many have become extremely successful. I often regret not paying attention to CBM at the time as it is indeed a booming industry today drilling a volume of wells that will never be seen offshore, albeit shallow onshore wells! We have drilled onshore wells, the spread costs are much lower compared to offshore, and whilst we are always mindful of keeping well costs down there is a greater need in onshore drilling as the majority of wells are drilled on limited budgets. We rarely see the opportunity for a consortium model because the drilling campaigns are limited in duration and are generally sporadic, unless it is one of the larger operators with onshore interests such as Santos, then the parallels of the offshore industry are similar where the independents are operating in isolation with few options available for rig access. Our consortium model could be applied very successfully with a reasonable volume of wells and coal bed methane drilling certainly offers the volume but not the opportunity. Geothermal wells are generally deep wells that require oilfield experience and technology however and will ultimately result in significant numbers of wells to be drilled with heavy duty land rigs; however the geothermal industry is not quite there yet.

What is your strategy for partnering with the NOCs in foreign markets, many of which have local content requirements? How does Australian Drilling Associates become International Drilling Associates?

We have always been an international company, prior to establishing my drilling project management company under the name of ADA in 2004; I had established and developed a drilling project management company in 1994 with my first company operating in Australia, New Zealand, South East Asia and the Mediterranean. We have already set a precedence working successfully with national oil companies and as they expand internationally I believe we can partner with them in their own country and internationally. We will always be faced with the challenge of infiltrating a large organisation because of their in house capability versus our company size but I believe the economics and their own desire for diversity will eventually work for us.

Movement into new oil and gas provinces and operating different petroleum plays will inevitably require higher degrees of workforce training. Yet the diminishing training levels in the industry which you referenced earlier are compounded by a growing skilled labour shortage. What stresses does this place on your operations and what are your priorities to cope with these trends?

There is no doubt we are faced with the same labour shortage issues as any oil company. When our services are contracted, we are, rightly so, expected to provide experienced people.

We offer a cohesive team that can be spread over multiple projects, for multiple operators optimising a scarce resource. Thus rather than six drilling departments for six different operators, we have one department which makes for more efficient use of a scarce commodity. However it is incumbent on ADA and other service companies to train graduate engineers for the future, as well as the oil companies. We take the opportunity to bring new blood into the industry and train them alongside our more experienced staff on the projects that we manage without any adverse impact to our clients expectations of our deliverables.

As you engage new markets and compare their potential to Australia, do you think that “Australia Oil & Gas Inc.” is sufficiently organised, unified, and mobilised to become a regional energy hub and world leading exporter over the next decade?

Australia is well organised and experienced; it has a significant, well proven infrastructure to a world class standard. It has a regulatory body that works with the industry and, for the industry. Australia has always been known for innovation and getting things done, therefore I am very positive about Australia’s future in the industry, it has the ability to attract more foreign investment and maximize on its own opportunities. New deep water horizons are opening up; the country is still under explored and more importantly Australia is an excellent environment for international operators and ticks all the boxes of political and economic stability, fiscal regime, infrastructure and well understood geology.

I personally take every opportunity to promote the prospectivity of Australia when traveling overseas and strongly encourage those I meet to make contact at government level, attend our industry conferences and invest in Australia. We can transfer a lot of oil and gas knowledge and experience as we have in other industries and other countries.

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