Thursday, April 1, 2010

The Offshore Imperative

We've been hanging out on the beach in Florida and I've been reading a history of the offshore oil industry (nice timing, Mr. Obama). One of them, The Offshore Imperative, has struck me as the best history of the domestic oil industry I've ever read. Usually, the histories are either blatantly pro-industry, glossing over all drawbacks, or have serious omissions (no M. King Hubbert in The Prize).

The Offshore Imperative is a history of Shell Oil Company, the American subsidiary of Royal Dutch Shell. The title comes from the fact that Shell Oil, in order to meet its reserve replacement requirements, had to go offshore to find oil. All of the onshore oilfields were either taken, depleted, or required political connections that a foreign company could never hope to attain (for example, LA Block 340 that Huey Long's Win or Lose Oil Company sold to Texaco). It used its advantages in geophysics, geology, and engineering to its advantage. Dollar for dollar, nobody beat Shell at the offshore game.

Normally, I flip through the acknowledgments and just ignore it, but this one I read through and I discovered this book had some interesting history. One of the last presidents of Shell USA commissioned the book to be a corporate history of the entire company, including refining, marketing, etc. The author begged to do a history of just the offshore work, but the president said no. The author got his funding went through the Shell internal archives and interviewed all sorts of retirees and was progressing with the book when Shell got hit with a string of reorganizations and the Shell Reserves Scandal. The president that hired him went away and his replacement ignored the book project, demoting the book project to the purview of the PR department, who seized it as a chance to put out a glorified press release. Eventually, the author was told that Shell didn't want the history anymore and he was released from his contract. The author used all his research to put together the history of the offshore industry he always wanted and the run-around he got from Shell management served the book extremely well, in my opinion. He got a lesson in the dark side of the oil business that gave the book a better balance and perspective (but I don't think that anyone will be confused and think the Greenpeace wrote the book).

What grabbed my attention immediately was the first sentence talked about how M. King Hubbert, a Shell geologist, predicted in the 1950's that US oil production would peak in 1970 and go into terminal decline from there. He was widely scoffed at at the time, but his prediction turned true and despite massive discoveries at Prudhoe Bay, offshore Gulf of Mexico, and skyrocketing oil prices, nothing has topped 1970 peak production of ~10 MMB/D. Normally, within the industry, Hubbert, despite his major contributions to fluid dynamics and geophysics, is sort of ignored or laughed at. The fact that a "corporate" history would mention him right off the bat was a good sign.

The other thing that struck me throughout the book was the huge role New Orleans played in the development of the offshore oil industry, not so much on the business/finance side, but so many of the engineering, geological, and geophysical advances from the 50's to the oil bust of the 80's happened in New Orleans. Bright spot seismic, OEDECO's Mr. Charlie & Blue Water I, and the engineering behind the tallest offshore platforms was all done in New Orleans. The city was, in a way, the Silicon Valley of the energy industry and that all ended with the oil bust of the 1980's. Houston stole New Orleans' crown. One question I've pondered is was there anything New Orleans could have done better to keep its crown?

A huge chunk of the early oil industry's personnel were Cajuns. One Shell geologist, Rufus LeBlanc, a "self described barefoot Cajun boy from Bayou Tigre" worked out the basics of sedimentary geology and, more importantly, was mentor to the next generation of Shell geologists. When Pecten Cameroon needed skilled workers, it was Cajuns that filled in. According to the book, they "felt right at home among the mangrove swamps, sweltering humidity, and French-influenced culture and cuisine."

When Shell did screw up, the book didn't shy away from the gory details. Much of Shell Oil's pre-WWII production came from the wetlands surrounding New Orleans and there are extensive citations to Bayou Farewell (another excellent read) and the scientific papers talking about the contributions of pipeline canals to wetland erosion. This Jazz Fest sign is a lot closer to the mark than some would have you believe...

If I could summarize the book in 8 words, it would be this- Shell Oil: Brilliant engineers and geologists, dumb businessmen. Whenever Exploration and Production (E&P) lost control of the wheel, bad things happened. Shell blew billions of $'s on unsuccessful drilling off the coasts of Virginia, Oregon, and Alaska, meanwhile the MBA's constantly penny-pinched in the Gulf of Mexico, an area of proven oil production and already existing oil infrastructure! I'll grant them that hindsight is 20/20, especially with business decisions, but there were some dumb decisions made. For example, there was a budget meeting where they had to decide between seismic shots of northern Alaska, of which Shell had zero data on, or extremely expensive drilling off the coast of Oregon. The Shell engineers correctly deduced that it would take at least 2 billion barrels of oil to be economical in Northern Alaska, so the executives pushed the drilling program instead. Unfortunately for them, Prudhoe Bay Oil Field has produced 13 billion barrels and counting. Another screwup was in the late 80's/early 90's, Shell was really hurting for cash and it invited BP on as a partner. Shell had a huge competitive advantage in its extensive oil leases held in deepwater fields that nobody else had the expertise to develop. While Shell defused costs on one big project, BP turned the knowledge gained to their advantage and, as of the books printing, BP (not Shell) is the largest acreage-holder for deepwater Gulf of Mexico.

The book is worth a read for anyone interested in oil industry history. I'll definitely keep it around as a reference. Given the recent news, here's a question to ponder: Will the offshore industry blossom anywhere else in this country? West Coast, Florida, and the Baltimore Canyon (VA/MA/NC) were pretty much busts when they were drilled in the 70's and 80's. Offshore Alaska found plenty of gas and non-commercial quantities of oil, but in order to justify huge costs, discoveries need to be at least billion barrel sized. We'll have to see.


G-FUNK said...

Great post - as a pure blood coonass who works for one of Shell's major competitors (who recently moved shop out of NOLA, unfortunately) - nothing pisses me off more than how badly the city of New Orleans did nothing to retain the oil companies. But thats what NO does best - chase away the best and brightest. I predict Shell will be moving out sometime in the next decade as well.

I don't know about Shell being the best at offshore though - seem like ya'll been running shit in the ground lately :P plus ya'll don't hire PE's to do PE work.

Good recommendation - I'll check out the book.

Clay said...

People have been predicting Shell pulling out of New Orleans for literally decades. After Katrina, we had Frank Glaviano lay his body across the tracks to prevent Shell from even considering it. It may happen someday, but I doubt it will be anytime soon.

I don't work for Shell. I work for an engineering company that does some work for them, though.

Here's a bio of one of the Shell Structural Engineers:

ASCE has given Shell more Outstanding Achievement medals than any other organization. Cognac, Bullwinkle, and Auger (and soon Perdido) are the most important platforms in the Gulf, at least from an engineering breakthrough perspective. The book goes through a lot more of why Shell's so much of a leader offshore.