2009 November PESA News

8/9/2019 2009 November PESA News

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They were the first to explorethe Gulf of Mexicos lowertertiary. They will be the first toproduce it. They will be the firstto bring an FPSO into the Gulfin a few months.

And now, theyre the firstNational Oil Company to receivePESAs ExplorersAward.Withseven of his senior executivestaff attending, PetrobrasAmerica President Jose OrlandoMelo DeAzevedo accepted theaward at a ceremony in Houstonon Nov. 10.

The award is given annually

to the E&P company that hasdemonstrated excellence intechnological innovation andleadership in the industry.Petrobras exemplifies that edictin the finest way, says CharlieJones, Chairman of the PESA

Explorers of Houston Committee

and Forum Oilfield TechnologiesPresident and CEO.

Jones says that the first timehe heard of Petrobras was 20years ago as a young subseaengineer working for Cameron.At the time, he was designing

equipment for the very deep

waterabout 1,000 feet.We thought we were hot

stuff working at that depth, andthen some drawings came acrossmy desk that were bid requestsfrom Petrobras, says Jones. It

Volume 63, Number 4 October-November 2009 www.pesa.org

PESANewsIN THE NEWS

Gulf Coast-LADistrict MeetingJan. 28, 20105:30p.m.to7:30p.m.PetroleumClub, Lafayette,LAFYI: Speaker is Doug Suttles,COOof BPE&P

Gulf Coast-TexasDistrict MeetingFeb. 23, 20105:30p.m.to7:30p.m.IntercontinentalHotel,HoustonFYI: Speaker is ChuckDavidson, CEOofNobleEnergy

For more information on anyPESA event, call (713) 932-0168.

EVENT CALENDAR

Petrobras America President Jose Orlando Melo De Azevedo accepted theexplorers award on behalf of his executive team Nov. 10.

Explorers Award

See Explorers, Page 8

Bill Coates is as an optimistfor 2010.

While Coates, the President of

Schlumberger Oilfield Services,North America, says theindustry is on the brink of astrong multi-year upcycle, 2010will lay the foundation.

There are two poles ofthought for next year, one isvery bullish and one isnegativemine is probablydown the middle, says Coates.Compared to where we arenow, I think its a positive story.

His presentation, A SlightlyOptimistic View of 2010,delves into the human impact of

the downturn, howSchlumberger models supplyand demand for U.S. gas, and

how that translates into rigactivity for 2010 and 2011.

The Human Impact

Service companies with aNorth American focus had amiserable year. In the recentthird-quarter earning reports, themajor service companies weredown 40 to 50 percent on a year-over-year basis.

That has a real humanimpact, says Coates. If youre

PetrobrasAmericareceives PESAshighest honor

Coates: Industry on the brink of an upcycle

See Coates, Page 5

Volunteers NeededTwenty volunteers are needed

to teach effective leadershipskills or business ethics at any ofthe three Houston PetroleumAcademiesthe academies arean ongoing partnership betweenPESA, IPAA, HISD and otherindustry members.

The teaching opportunityrepresents a one time per week,seven-week commitment. Each

class lasts about 90 minutes.Each volunteer will co-facilitatewith another volunteer, and mayteach all seven courses togetheror alternate teaching dates.

Each volunteer must completea Junior Achievement Trainingclass, which are scheduled foreither Dec. 9 or 14thetraining class is two hours. Acurriculum will be provided.Volunteers may choose to

teach either leadership skills orbusiness ethics, and also may

choose at which school they willteachMilby High School,Lamar High School, or WestsideHigh School.

For specific class times anddates, or to sign up, call SarahHewitt at (713) 737-5856 oremail [email protected].


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PESA ChairmanRobert Workman,

National Oilwell Varco

PESA Vice ChairmanBill Coates, Schlumberger

PESA 1st Vice PresidentJohn Gremp, FMC Technologies, Inc.

PESA PresidentSherry A. Stephens

PESA Vice PresidentMichael Perini

PESA Director of CommunicationsChris Evans

PESA, Petroleum Equipment SuppliersAssociation, and the PESA logo are allregistered marks of the PetroleumEquipment Suppliers Association.

PESA News is published by:Petroleum Equipment SuppliersAssociation9225 Katy Freeway, Suite 310Houston, Texas 77024Phone: (713) 932-0168Fax: (713) 932-0497 2009, PESA

2 PESA News EDITORIAL

Industry headed for recovery in 2010If it is possible to feel somewhat optimistic

while you are still in a downturn, I am there.Of course I would be happier if more

projects were moving forward, fewer rigs

were laid down, oil prices were a little higherand natural gas prices were a lot higher. But Ithink now, more than a year into our currentoil and gas malaise, we are starting to see anindication that the light at the end of thetunnel may soon come into view.

Over the past year, it has been a rough ridefor everyone in our industry. We haveexperienced swings of more than $100 perbarrel of oil and $9 per mcf of gas and haveall been forced into bunker mode to triminefficiencies and costs. It wasnt fun, but wedid it and this time we did it right.

As a whole, our industry has proven thathistory is an excellent teacher. Rather than

slashing spending and personnel to the boneas was done in several prior downturns, eachcompanys leadership team took on the partof a surgeon with a scalpel, trimming justenough to keep the business strong, intact,and poised to succeed after the downturn.

And that is where we are todaypoised tosucceed in an improving market. Withjudicious cost cutting and the industryworking together to solve our collectiveproblems in the downturn, I think that while2010 will start slow, were heading for recovery.

Adapt. Evolve. Revolutionize.

Less than a decade ago, NOCs startedmaking their presence known throughout theglobe. Many in the industry saw them as anemerging customer base, and conventionalthinking was that theyd simply be anothercustomer and we would help them adapt toour way of doing business.

Then we came to the realization thatNOCs control the vast majority of theworlds reserves and they were quicklycoming up to speed in terms of knowledge,well expertise, and technology application.NOCs were clearly not just another customerand certainly were different than ourtraditional customers, IOCs. We needed to domore than adapt, so the keyword becameevolve. Service and supply companiesbecame more intimately involved with theirNOC customers, with a few companiesbeginning joint venture research institutes.

And now, as a new offshore power risesfrom the pre-salt fields of Brazil, we againsee a huge change in the way we do businesson the horizon. The Brazilian governmentsfocus is beyond ensuring a ready supply ofproducts and services for oil and gasexploration - they are aiming for economicgrowth, jobs, and domestic industrydevelopment. The government is includingsignificant local content requirements in theircontracts, some as high as 50 percent.

I think this is the beginning of a revolutionin the way the service and supply sectoroperates. For one, it is a safe bet that othercountries that are able to set similar termswill do so. What this means is sweepingchanges for service and supply companies ineverything from our global supply chains totalent management programs. To remaincompetitive, companies will need toaccelerate development of their in-countrymanufacturing bases, create relationshipswith new partners and begin developing localpopulations into trained workers.

The Gas & Oil Industry

When speaking of our industry, weinvariably say oil and gas. Oil always comesfirst because, until recently, money andgrowth were to be found primarily in oil.

That may be changing.With the advent of shale plays, peak oil

concerns, environmental pressure andtechnological advances that allow for gas tobe an exportable product, we now live in aworld where gas is rapidly becoming aprimary energy resource. Much like oil, gashas become fungibleLNG can arrivevirtually anywhere in the world to obtain thebest price. As electricity demand continues togrow, new electric generation plants are

being built all over the world, and many ofthese plants are gas-fired.Shale plays are unquestionably reshaping

our industry. North America has vast gas re-serves in shale, and we are now proficient atgetting it to the surface. The shale play wellsare prolific, with some wells in theHaynesville producing 16 to 18 mcf per day.

This has two effects. The first is that Idoubt we will see $13 gas again anytimesoonbut, the good news is that many of theshale plays are profitable at prices as low as$3. The second is that the U.S. is going to usea lot more gas. Permitting a coal-firedelectric plant is more difficult these days, and

the price differential between coal and gas isnearing parity. Natural gas may indeed be thefuel of the near future.

PESA Chairman Robert Workman (National Oilwell Varco) speaks at the 2009 CID Annual Meeting.

See Chairman, Page 3


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3PESA NewsEDITORIAL

When the globaleconomy collapsedand commodity pricesplummeted, everyonein the industry was

searching for anythingthat could be consid-ered a silver lining.

For many industryanalysts and experts,the prospect ofincreased mergers andacquisitionsespe-cially amongst someof the larger oilfield service andmanufacturing companieswas one of thefew potential bright spots in an otherwisedepressing marketplace. Those mergers,outside of a few cases, havent materialized.So, why havent we seen more consolidation

in the industry this year?ComplexityEven in the best marketconditions, executing a public transaction istough. There is a general market perceptionthat deals should be accretive to earnings,and a simple common sense idea that dealsshould be accretive to cash flow. Given this,and given the inclusion of stock in most largepublic acquisitions, it can be difficult for thestars to align on a public-to-public deal.Share prices need to be aligned so that bothparties shareholders benefit from the transac-tion. Given the volatility of the public equitymarkets, particularly over the last few years,this has proven to be an incredibly difficult

task. Conversations can sometimes go on foryears before value gaps converge, shareprices align, and a deal can be struck that isequitable for both parties.

UncertaintyWhile the Dow is up 57

percent from its low point in March and oil istrading over $75, many question whether therally is warranted and sustainable. Is thegrowth in the Dow driven by improvingfundamentals and the genuine belief that theeconomy is recovering? Or is the Dowgrowth merely attributable to the U.S.governments stimulus programs and theFederal Reserves decision to maintainhistorically low interest rates? And is theincrease in oil prices based on the belief thatdemand will increase, or is it simply a hedgeagainst a declining U.S. dollar? Sinceacquisition valuations are based on aprojection of future cash flows, these

uncertainties present a significant challengeto potential buyers and sellers.Timing and ExpectationsIt was not

that long ago (July 09) when most of thepublicly traded oilfield service companieswere enjoying record stock prices, marginsand backlogs. Since most of those companiescan still clearly see those higher prices intheir rearview mirrors, some still believe thatthey deserve valuations commensurate withthose record prices. As time passes, andcompanies gain additional clarity around thedirection of the global economy, thoseexpectations may change.

Strong Balance Sheets/Diversification/

International ExposureMost of the largeroilfield service companies have learned fromthe past, and have positioned themselves tosurvive a sustained downturn in the market.They have built cash reserves to sustain

themselves through more difficult times; theyhave diversified their respective product andservice offerings so that they can participatein all stages of the cycle; and they haveaggressively expanded operationsinternationally where projects are typicallycontractual and funded or sponsored bygovernment entities, making them far lesssusceptible to temporary changes incommodity prices. As a result, thesecompanies now have the freedom andflexibility to wait and see how the marketplays out.

As weve seen with the announcements ofthe Baker Hughes and BJ Services merger, as

well as the Cameron and NATCOcombination, its not impossible to close abig public-to-public deal in this environment.However, given the previously mentionedchallenges, I believe that the vast majority ofthe deal activity that we will see in thenear-term will consist of larger oilfieldservice and manufacturing companiesacquiring for strategic fiteither a naturalextension of, or complement to, an existingproduct line, or an expansion ofinfrastructure and relationships in a targetgeographic market.

Jeremy ThigpenPESA Service Committee Chairman

Predicted M&A boom of 09 never materialized. What happened?

Jeremy Thigpen

The 2010 Forecast

It appears the worst of the downturn isbehind us, and recovery is on the horizon.

On the gas front, weather will, of course,play a significant role. But, the number ofrigs the industry has laid down in the pastyear will also have a profound impact on therecovery. Long-term weather forecastspredict a colder than average winter for the

Midwest and South. And, the Northeastsweather patterns are too unpredictable to bemore than a guess. On average, we expect afairly cold winter, which means we couldeasily make a big dent in gas storage.

We have too many rigs laid down tosustain the supply and refill storage at currentprices, particularly assuming that industrialdemand is expected to creep up in 2010 asthe U.S. economy improves. For the industry,it could likely mean more drilling and a fewmore rigs by fall 2010 and an overallimproved gas price from current levels.

LNG shouldnt play much of a role in theNorth American market as Europe is expected

to have another very cold winter this year.For oil, improvement lies in the worlds

economies. Other than the U.S., most of theglobal economy is in recovery fromrecession. This bodes well for worldwidedemand, creating a slight increase or in aworst case scenario, no growth. Demanddestruction appears to be over. A microcosmof the improvement can be seen in India withthe Tata Nano, a $2,500 car for the countrysemerging middle class - the car has a 200,000person waiting list.

Closer to home, the Federal Reserve saysthat the worst is over and we should see

some improvement in our economy by 3Q2010. Anecdotally, U.S. oil demanddestruction may not be permanent. A recentstudy of those who downsized or purchasedsmall cars and subcompacts last year for fearof permanently high fuel prices found thatmany regret the decision and would upgradeto a larger car if given the chance.

The More Things Change

Of all the upheaval that our industry hasfaced in the recent past, one key principalwill remain as it has for the past 100 yearsproviding our customers with world-class

service, be they IOCs, NOCs or anyone elserequiring our products and services.Customers have been and always will be aprimary focus as the service and supplysector strives for greater value propositions.

Companies achieve this by first engagingtheir customer to better understand theirparticular business challenges. Much as notwo oil fields are alike, no two customers arealike. Therefore, we must continuallyinnovate in not only our products andservices, but the way in which we providethose solutions to our customers. In the end, asuccessful company will leverage their

technological achievements with trained,professional and customer focused personnelFinally, we as an industry must remember

that were solving the worlds energy needsas a team. Its essential that vendors andcustomers jointly determine goals, implementperformance metrics, and follow a continuousimprovement process to be measured by allstakeholders to ensure the highest levels ofsafety, efficiency and effectiveness.

With that, well be poised to perform evenbetter in the coming upturn than we did in thelast.

Robert WorkmanPESA Chairman

CHAIRMANContinued from Page 2


4/12

Giving back to thecommunity and helping thosein need has never been easieror more fun.

The Sixth Annual Derricks& Diamonds Charity SoftballTournament will be held May1 and 2 at Big League DreamsSports Complex in LeagueCity.

Derricks & Diamonds is aone-of-a-kind event benefitingTexas Childrens Hospital

(TCH) Charity Care Centerand Hematology & OncologyDepartment. The tournamentshistory lies in a uniquepartnership between two of ourindustrys leading companies,National Oilwell Varco andSchlumberger. The goal issimple: unite the industryaround an event focused onfighting pediatric cancer andgiving back to the Houstoncommunity.

Since its inception in 2005,Derricks & Diamonds hasraised over $500,000 for TexasChildrens Hospital and itssecondary beneficiariesSnowdrop and PlexFoundations. In just five years,the tournament has grownexponentially and become oneof the highest rankedcommunity events benefiting

Texas Childrens Hospital.The growing success of

Derricks & Diamonds is atestament to the integrity ofour industry to reinvest in thecommunities in which we dobusiness, says Pete Miller,CEO of National OilwellVarco. It offers the uniqueopportunity to witness what ispossible when we unite toserve a greater cause.

Texas Childrens Hospital,

the tournaments primarybeneficiary, is one of thelargest freestanding pediatrichospitals in the United Statesand consistently ranks amongthe nations top 5 pediatriccancer institutions, accordingto the U.S. News and WorldReport. Derricks & Diamondsis committed to assisting TCHin their efforts to provide everychild treatment, regardless oftheir ability to pay.

The tournament goes beyondan ordinary softball event andprovides a unique atmosphere.The tournament exudes a spiritof inspiration which isembodied by each teams batboy or girl. As former andcurrent patients of TCH, theyrepresent the fundamentalpurpose behind thetournament. The format is a

co-ed round robin slow-pitchsoftball tournament where eachteam consists of employeesfrom donating companies.

The goal of Derricks &Diamonds is to unite the oiland gas industry around an

event that all levels of employ-ees and their families canparticipate in and be proud of.We invite you to join thisencouraging journey byassisting us in our efforts offighting pediatric cancer andparticipating in the 2010Derricks & Diamonds CharitySoftball Tournament.Participation from yourcompany is a crucial ingredientin our continued efforts andincreasing support of TCH andits patients.

Our employees have a firmcommitment to the communitieswhere they live and work andwe have been pleased with thesuccess of Derricks andDiamonds, says AndrewGould, CEO of Schlumberger.

With more of the serviceindustry involved and workingtogether, we can make it aneven greater success in thefuture.

To donate or find out howyou can get involved withDerricks & Diamonds, visit us atwww.DerricksandDiamonds.orgor contact us [email protected].

Michael NovielloNational Oilwell VarcoDerricks & Diamonds

Marketing Committee Head

4 PESA News EDITORIAL

Derricks & Diamonds TournamentOil and gas industry unites

to battle pediatric cancer

The tournament exudes a spirit of inspiration which is embodied by eachteams bat boy or girl. As former and current patients of TCH, theyrepresent the fundamental purpose behind the tournament.

The tournament complex has six fields designed to replicate YankeeStadium, Wrigley Field, Fenway Park, Ebbets Field, Crosley Field, and,shown above, Sportsmans Park.


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5PESA NewsNEWS

a service company in North America, yourespending between 20 and 40 percent of yourtotal revenue on compensation. So whenyour business declines, it has an immediateimpact on the size of your workforce.

The U.S. land force has been reduced by30 to 50 percent since last year. Hardest hitby the reduction are the younger, front-line

managers who were hired earlier in thedecade, says Coates.Its been a 1986-type of event for the

onshore business this year, he says. ForSchlumberger, the average seniority of theworkforce declined significantly from 2002to 2008 as we engaged in new hiringtheaverage was 2.5 years for 2006-2007.

Those workers, who knew nothing butgetting more and more business, are sud-denly faced with the worst decline that theindustry has had in decades.

At least with our own managementpopulation, trying to keep the morale and thefocus of the young managers has been amajor issue for us the past six months, says

Coates. As an industry, if we dont makethem feel better about themselves and ourindustry, its going to be bad for us.

Coates recommends that senior managerscommunicate with young managers to assurethem that 2010 will not be 2009 revisited.

Communicating with your young linemanagers is the single-most important taskwe have over the next few months, he says.If theyre not ready, its going to be difficultto become as efficient and safe as we can beas we start to grow with the coming upcycle.

He says that the hiring cycle for 2010 isgoing to be the most important hiring year ofthe next upcycle.

Were going to be in one of those funnysituations where we just got through thisterrible downturn and morale is spotty, butwe need to hire right this year, he says. Ireally think were at the beginning of thenext 3-to-4-year upcycle and if we under-invest in 2010, were going to get trapped ina cycle of rushing and doing poor hiring,which increases costs for everyone.

Good Stories

The North American service and supply

sector lives and dies by the U.S. rig count.From 1999 to 2001, a short upturn addedabout 6.6 rigs a week. Then, in the longupturn that lasted from 2002 to 2008, theindustry added rigs at a rate of 3.6 per week.

Within the past three to four months, therig count has started to rise again.

Were adding rigs at a point of 9.3 perweek, or if you look at the macro rig countwere up about 30 percent from the bottomin May, says Coates. I would caution thatif you look at every post-decline build, youget a little phase where theres aggressive rigbuilding, then it flattens out a little, and thenwere on the march.

When it comes to forecasting rig count,Schlumberger uses a number of indices andproprietary modeling programsmanyshow a positive outlook for 2010.

The first predictive indicator is compiledfrom data from the Energy InformationAdministration to create a consumption toproduction ratio. Going back to March 2008,rig count was still going up but the supplyversus demand indicator was going in thewrong direction.

Did we believe it at the time and did wemake our plans knowing this? Not really,everybody was busy and things seemed to begoing well, says Coates. There was an

indication on supply and demand saying thatwe were approaching an untenable situation.In the last two months, the consumption-production ratio looks like it has bottomedand it has been a reliable indicator ofchanges in the market.

Another mode is a line in the rig index,specifically small private companies becausethey tend to have contrarian behavior atturning points of the marketwhen costsare high they do less, and when costs are lowthey jump back in.

The small privates underworked versusthe average in late 2006, because fourthquarter 2006 was the pricing peak for theservice side, he says. The index to smallprivates shows increasing activity, whichindicates to me that something is changing ina positive way.

One predictor that could go either way isthe gas profitability index. The companytakes the price of gas, subtracted by the costof doing business as an operator.

Profitability has not yet returned, so thattells me we might have a little ways to go,he says. Based on operator profitability itlooks like $5.80 is a tipping point where theeconomics of a 10 percent rate of returnbecome reasonable and you expect rig countto grow. So you can take your gas priceforecast and tell if thats bullish or cautious.

Coates says the company drives a lot of itsassumptions based on how they think supplyis going to evolve. When Schlumbergerlooks at future supply, the primary mindset isthat the U.S.onshore gas market is the mostefficient in the world. Therefore, outsideinfluences like LNG do not set the price,

rather the U.S. onshore gas will contract orexpand quickly and predictably to balancesupply and demand.

Our model for supply, which alsoincludes demand, is that demand will equal70 Bcf by 2012, he says. Theres a lot ofdiscussion around LNG, but its a smallpiece of the puzzleour current modelshave about 3 Bcf/day coming in next yearand I think that might be a little high.Canada and the Gulf will continue todecline, and we expect the U.S. land to dowhat it needs to do to meet demand.

Another predictor is rig efficiency, whichis the average production per well versus

average decline. Currently, Coates says thatthe average decline does not quite matchproduction. This will not create a decline inrig count but does put a damper on thesignificant increase that might be expected.

In the end, Schlumberger is expecting apositive year in terms of rig count.

Our view this year is based on averageweather, an economic assumption slightlyunder consensus at 1.8 percent GDP growth,and 3 Bcf per day of LNG, he says. Add althat up with our assumptions, and we have a1,053 rig count for U.S. onshore gas, whichis a 25 percent increase above our 800 thisyear. I think thats a positive story to tell.

COATESContinued from Page 1


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6 PESA News NEWS

Presenters for the 2009 Supply Chain Seminar were from left to right: Paul Lord (AMR Research); RichardStoneburner (Petrohawk Energy Corporation); Dean Malouta (Shell); Supply Chain Committee ChairmanBurk Ellison (National Oilwell Varco); and Michael Hoover (Columbia Energy and Natural Resources Fund.)

Count Shell among the optimists in oil andgas at least for the next 40 to 50 years.

Delivering a forecast that ranged from thenear term to extreme long term, DeanMalouta, Shell E&P Americas TechnologyManager, says he sees the world needing aconsistent and extensive supply of oil andgas well through the middle of the century.

Taking into account that long view, hesays that though the industry is clearly in the

midst of a downturn, Shells outlook for theirbusiness has not changed materially.

Our overall strategy is more upstreamand a profitable downstreamthecommodity part of our business is alwaystight, he says. The growth is in upstream.

Re-prioritizing Upstream

Upstream is a business that needs constantreinvention. Malouta illustrated the need forexploration with Shells portfolio.

As you look from 2000 to 2008, our 2000portfolio was coming in at 3.8 million barrelsa day and that portion steadily declined to

about 2.2 million barrels by 2008, he says.Weve had to replace those with assets fromNigeria, other growth, and acquisitions.

Malouta says that Shell has six upstreamprioritiessafety overarches all of themthat changed in order of priority dependingon the times.

I can tell you that cost structure hasmoved steadily up the list as costs continueto riseits no third, he explains. We havea new CEO who used to be our CFO, soeveryone will be looking at cost.

He presented a chart that showed the risingcosts in the oilfield versus Brent Crudeessentially overall industry costs have risen

by 250 percent from 2003 to 2008 and costactually overtook Brent in mid 2006.Its starting to come down, but theres a

steeper decline curve on price versus cost,he says. In the mid 2000s we had offshorerigs in the $200,000 to $300,000 per dayrange, and it went up to $657,000 per day.Getting these on time and on budget iscritical to going back to the shareholder andasking for more money in the future.

The company looks for balance in itsportfolio, which ranges from assets with biginitial production and rapid decline to long-term assets like oil sands and the Western U.S.

As oil crashed to $32 in December 2008on the heels of record highs, many wonderedif $100-plus oil was ever to be repeated.

Not so, says Michael Hoover, SeniorEquity Analyst for Columbia Energy andNatural Resources Fund. In fact, he saysrevisiting $100 oil is virtually guaranteed.

To build his case for $100 oil, Hoover saysone must look at the root cause for a peak of$145 followed by a crash to $32.

In 2005, worldwide demand caught upwith supply at 84 million barrels per day, andwe had 1 million barrels of spare capacity, allwhile oil installations became terrorist tar-gets, he says. So oil prices moved up be-cause demand moved up, particularly inIndia and ChinaChina surpassed Japan asthe worlds second largest consumer of oil.

Meanwhile, Goldman Sachs forecastedthat oil would go as high as $200, based onAmericas appetite for oil, thinking $6 to $7gas would be the demand destruction point.

Goldman didnt realize that at $4 gas,you start to get into recession, and combinedwith the credit mess, led to the worst reces-sion since the Great Depression, he explains.All of those people who bought oil onmargin had to cover those contracts. And asoil started to fall, they had to cover morecontracts, selling out sending prices to $32.

With a price differential of more than $110in only six months, and then slowly creepingup to the $70 range over the past 12 months,

many are left wondering about the price ofoil on a normalized basis. For Hoover, its amatter of balance.

A mid-cycle price should be $70 to $75,he says. It works for OPEC to meet theirobligations to their populace and translates to$2.65 a gallon for us.

As for oil broaching the $100 point again,Hoover maintains its a matter of sparecapacity and possible inflation.

Spare capacity got down to about1 million barrels per day and now is about7.2 million barrels, he explains. Oil hasbecome an asset class for investors as ahedge against the dollar and inflationthereis a fear that the governments stimulus isgoing to come back to haunt us in the formof inflation. We think that around 2012, spare

capacity will get back to 2 million barrels aday and well get back to $100 oil prices.

While spare capacity will shrink, Hooverdoesnt believe that the world has reachedpeak oilbut it is getting tighter.

Eighty percent of the conventional oil iscontrolled by NOCs and most NOCs are notproducing at optimal production, he says.For example, the Cantarell field in Mexicois in steep decline and its not because of theasset, but because of lack of investment andthe people above ground. Its the same inAlgeria, Nigeria, and several others.

Supply Chain Seminar 09Shell: Cost an issuenow, but oil and gashas a sound future

See Shell, Page 7

$100 oil will make a comeback

See Investing, Page 12


7/12

7PESA NewsNEWS

Petrohawk is one of a handful ofcompanies that couldnt exist just a fewyears agoan E&P company thatspecializes in shale gas.

The decision is paying off, says RichardStoneburner, President and COO ofPetrohawk Energy Corporation. Thecompany posted a 71 percent year-over-yearproduction growth from 2008 to 2009, and ispoised for another 30-40 percent annualgrowth next year.

We made a conscious decision to go aftershale, though we still have a few

conventional assets in areas like ElmGrove, says Stoneburner. But we bet thecompany on the Haynesville playwe haveabout 15 Tcf risked resource potential, so itsa huge investment with a huge upside.

Stoneburner delivered an overview ofPetrohawk rounded out with a natural gasforecast.

The Shale Plays

For year ending 2008, Petrohawk had 1.42Tcf of proved reserves with about 56 percentproved developed, about 94 percent ofwhich is natural gas. The company has 26.5Tcf of risked resource potential at 8,000 netdrilling locations, primarily in theFayetteville, Haynesville, and Eagle Fordshales.

Stoneburner says the company also isreleasing non-core assets to maintain highliquidity.

If we have assets that arent doinganything for us in the long term, we willdivest them, he says. It keeps our liquidityhigh and enables us to keep drilling. Wehave divested our Permian Basin assets andhave about $1.2 billion in liquidity, notcounting the Permian sale.

Petrohawks drilling budget is $1 billionand is risked at about 65 percent potential.The bulk of the budget$720 millionisspent in the Haynesville shale.

The company dominates when it comes toresults in the Haynesville, says Stoneburner.Petrohawk holds 325,000 net acres underlease with the average leasehold cost about

$5,000 per acreinexpensive consideringsome $20,000 to $30,000 lease rates duringthe 2008 land rush. In the second half of2009, the estimated well cost was $8.5 to$9.5 million with an average initialproduction of 18.1 Mmcf per day.Stoneburner noted that the tally included all47 wells completed to date, with theexception of two wells with mechanicalissues and three with restricted rates.

In the Eagle Ford shale, whichStoneburner says is similar in nature toHaynesville, the company has 210,000 netacres under lease on 1,700 net riskedlocations. The primary difference is that the

Eagle Ford has shallower pressure.Petrohawks average leasehold cost in theEagle Ford is $400 per acre with an averagewell cost of $4.5 million to $5 million. Theaverage initial production for 11 wells todate is 8.9 Mmcf per day with a gas to oilratio of 6:1 and 10.5 Mmcf per day with agas to oil ratio of 15:1.

Since the drilling pace is not dictated byshort primary terms since the leases containcontinuous drilling clauses, Petrohawk hasbeen working on tests of stimulation theoryin the Eagle Ford.

Technology is a key piece of this, and weinvest more than our competitors because ofthe class of plays weve elected to get into

were in ultra deep water, tight gas, shale gas,and a number of other challenging plays, hesays. The good news is that my technologybudget has continued to climb because ourleadership sees the results of the work we dointernally and with the service companies ascontributing to the bottom line.

Shells growth engine is in the Americas.Malouta says that while some might besurprised by their focus on the Americas, thereason is in the numbers.

Though our global production is about3.2 million barrels a day, our Americasproduces 20 percent of that, but its 30percent of our earnings, he says. We willcontinue to invest in the rest of the world, butour growth is here.

Shell is expanding its deepwater and arcticfrontiers, and has made tight gas and oilsands acquisitions in Canada. Its Aera heavyoil field has 1 billion barrels of oil in place.

The Americas does have its challenges, hesays. In Alaska, a couple of years ago we in-vested over $2 billion in leases and we havenot drilled any wells yetthis is a real issuefor us. A lot of this has to do with our legisla-tive and legal system. Id like to issue a callfor us to better work together and interfacewith our government officials.

Moving Forward

Malouta says that Shells stable outlook onthe future is encapsulated in their formerpresidents three hard truths.

One is that from now through the midpart of the century, the population willincrease and so will demand for energy, hesays. Two is that the easy oil has alreadybeen found, and third is that the public willdemand greener and cleaner solutions toenergy consistently through time.

While public enthusiasm is high for alter-native energies, the reality is that it cannothave an appreciable effect on energy demanduntil at least 2050.

Five years ago, our alternative energyusage was one tenth of one percent of all ourenergy usage, and now its up to about 2 per-cent, he says. Some people think well beat 30 to 40 percent alternative by 2050, but Idont see it. No one solution will work, so weneed to think about alternatives that willmake a real difference, not hype.

Malouta concluded with the statement thatShell is bullish in E&P for the next 40 to 50years.

Were on a bit of a rollercoaster in thenear-term, but theres no alternative solutionto oil and gas being the primary source ofenergy for the foreseeable future.

SHELLContinued from Page 6Petrohawk bet the company on

Haynesville Shales; gas prices,

drilling should improve in 2010

Richard Stoneburner, President and COO ofPetrohawk Energy Corporation See Petrohawk, Page 12


8/12

8 PESA News NEWS

had the designs of their subseaChristmas trees and flowlinesystems and I remember thinkingas an engineer: This stuff isphenomenalI was impressedwith their designs and technologyand how they were really workingin deep water, about 1,800 to2,000 foot-deep completions.

Then as now, Petrobras is at theforefront of technology.

Under Jose Orlandosleadership, Petrobras has madetremendous investments in theGulf of Mexico, says Jones.They have spent their time,money, and knowledge and have alwaysshared their ideas freelythey believe inmoving the technology forward for thebetterment of producing the energy resource.

Last month, Azevedo flew to Singapore tochristen the new FPSO that will arrive in theGulf of Mexico in the first quarter of 2010.The ship will be used to develop the

Chinook and Cascade fields.Its amazing when you think about the

work that they have done to get us to thepoint where we have approvalthe firstapprovalfor an FPSO to operate in theGulf, says Jones.

Azevedo says that he and his executiveteam were truly honored to accept the

award, adding that the companyhas enjoyed long and fruitfulpartnerships with its suppliers.

Petrobras always has an open

door for its suppliers, he says.For us, they deserve the samespecial treatment given to our investors,customers and employees. Without oursuppliers, it would be impossible to achieveour corporate goals.

He added that Petrobras is the largestBrazilian investor in the U.S. and the Gulf ofMexico is of strategic importance for thecompany.

Explorers Award goes to Petrobras

From left to right: Fabrizio Franzio Dinelli, Petrobras Americas Procurement Manager; Ricardo Antonio Abreu Ianda, Petrobras Americas Corporate

Department Manager; Gustavo Adolfo Amaral, Petrobras Americas Senior Vice President, Upstream; Robert Workman, PESA Chairman and National

Oilwell Varcos President of Distribution Services; Charlie Jones, PESA Explorers of Houston Committee Chairman and Forum Oilfield Technologies

President and CEO; Jose Orlando Melo De Azevedo, Petrobras Americas President; Otavio Pessoa Ladvocat Cintra, Petrobras Americas Senior Vice

President, Downstream; Rui Antonio Alves da Fonseca, Petrobras Americas HSE Department Manager; and Michael Ditchfield, Petrobras Americas

Planning Department Manager.

Its amazing tothink about the

work that they havedone to get us to thepoint where wehave approvalthefirst approvalforan FPSO to operatein the Gulf.

Charlie Jones

EXPLORERSContinued from Page 1

Charlie Jones, Chairman of the PESA Explorers of Houston Committee.


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9PESA NewsNEWS

ABOUT THE EXPLORERSAWARD

NAME: Explorers of HoustonAward for Leadership andInnovation.

HISTORY: The ExplorersAward has been PESAspinnacle form of recognitionsince 1999. EachNovember, the Explorersof Houston Committeehonors an exploration andproduction company thathas demonstratedexcellence in technologicalinnovation and leadershipin the industry.

OBELISK:At two feet talland mounted on a lightedbase, the Explorers AwardObelisk is an impressivesight. The piece weighs inat 20 pounds and ismade of optical crystal.

COMPASSES: Given toeach of the recipientcompanys executiveteam and symbolizecharting a new path.

More than 100 people attended the

reception honoring Petrobras America.

Above is Mike Benjamin (Schlumberger)

and Walter James (Sunbelt Steel).

To the left is Rui Antonio Alves da

Fonseca (Petrobras America), Douglas

Polk (Vallourec & Mannesmann USA),

and Roger Lindgren (V&M Star).

Below is Steve Jacobs (RMI) at center

and Gary Halverson (Cameron) at

right.

PESA Chairman Robert

Workman (National Oilwell

Varco) gives the Explorers

Compass to Petrobras

America President Jose

Orlando Melo De Azevedo.

Each of the eight attending

Petrobras America executives

received an Explorers

Compass.

We were the first to discoverand now the first to develop thelower tertiary ultra deep waterreservoir, which is the mostexciting new frontier in the Gulf ofMexico, says Azevedo. As wassaid, I just came from Singapore,where we named the new FPSO

Pioneer because it will be the firstvessel of its kind in the Gulf.

At the moment, Petrobras has 24percent of the total fleet of FPSOs,and the second company has only13 percentthis track record wasinstrumental in receiving approvalfor the vessels in the Gulf ofMexico.

To approve the project with theMMS and other agencies was anongoing, daily process, he says.Now, its amazing how the MMSand Coast Guard are excited towork with us to open this frontier

for the American oil industry.Finally, Azevedo says that thepre-salt discoveries in Brazil willbring further opportunities toincrease the companyspartnerships with its suppliers.

Our CEO is constantly askingsuppliers to come to Brazil andpartner with us so we can do thiscorrectly, he says. Our goal is 4million barrels per day by 2020 andwe are aware that we cannot do thisalone. We have great partnershipswith all of you and would like forthose relationships to continue toprosper.


10/12

10 PESA News NEWS

Top: Jim Geary (Hess Corporation) led Oil 101s introduction to geology andseismic. He discussed the theory behind fossil fuel formation and the tech-niques involved in finding their formations.

Above: Steve Jacobs (RMI-a Division of Decision Strategies, Inc.) gave twopresentations. His first discussed the history of the industry from ancientChinese methods through modern technology turning points. His seconddiscussed new and emerging technologies most likely to make a majorimpact in the industry.

Bottom: David Reid (National Oilwell Varco) discussed the machinery andtechnique involved in drilling a basic land well as well as equipment needsfor offshore wells.


11/12

11PESA NewsNEWS

Oil 101The Emerging Leaders Committee sponsored the

third session of the highly anticipated Oil 101. The

course featured experts from member companies

outlaying the drilling process from geology to end-

of-life reservoir issues. The next session of Oil 101

will be held in winter 2010.

This session was the first to include breakout

sessions, which were broken into three 20-minute

sections. Participants selected the topic of their

choicethere were teneach of which was led by a

subject expert/moderator. Discussion topics

included career progression, rigs, drilling, refining,

well servicing and more.

Speakers for this event were:

Layout of the Industry

Ed Hemphill (GE Drilling)History of the Industry

Steve Jacobs (RMI, a division of Decision Strategies)Economics of the Oilfield

Section cancelled due to speaker illness

Introduction to Geology and Seismic

James Geary (Hess Corporation)Rig Systems and Drilling the Well

David Reid (National Oilwell Varco)

Breakout Session Leaders

Installation of Subsea HardwareMike Ellis (Oceaneering)

Well ServicingPat Bond (Weatherford)

Economics, Finance, and M&ACraig Jones (Cameron)

Challenges of SubseaEd Hemphill (GE Drilling)

CompletionsRicki Jannise (Halliburton)

Moving from Contributor to LeaderDebbie Logan (Halliburton)

Career ProgressionMahesh Puducheri(Halliburton)

Working in the Subsea EnvironmentCharles Royce (Oceaneering)Oil and Gas Equipment & ManufacturingDavid Reid (NOV)

RefiningJulian Migliavacca (Mustang Engineering)

Completions and Flow Equipment

Ricki Jannise (Halliburton)

Well Servicing and Well End-Of-Life

Pat Bond (Weatherford International)

Challenges of Subsea Production

Charlie Jones (Forum Oilfield Technologies, Inc.)Refining & Transportation

Julian Migliavacca (Mustang Engineering) Julian Migliavacca (Mustang Engineering)

Pat Bond (Weatherford) Ricki Jannise (Halliburton)


12/12

JUL AUG SEPT

Singapore 64,542 92,653 71,015Brazil 80,550 68,480 56,399Korea 36,604 56,481 22,653Angola 30,918 34,321 35,187India 15,369 36,413 48,169U.A.E. 34,200 39,869 22,421China 29,223 49,328 16,733Mexico 27,778 31,294 36,064U.K. 31,150 32,731 31,071Saudi Arabia 28,228 33,533 21,029Nigeria 16,116 41,171 13,708Iraq 13,115 1,205 33,600Colombia 13,908 12,253 16,247Norway 12,352 13,026 13,706Eq. Guinea 6,792 5,945 25,195

Subtotal: 440,844 548,702 463,196Al l Other: 338,502 280,580 212,162Total: 779,347 829,282 675,358

PESA NewsPetroleum Equipment Suppliers Association9225 Katy Freeway, Suite 310Houston, TX 77024

First ClassUS Postage Paid

Houston, TXPermit No. 04805

U.S. Oil and Gas FieldEquipment Exports

Top 15 Destinations for Q3 2009(in U.S. $1,000)

Source: U.S. International Trade Commission

12 PESA News NEWS

The company completedtwo wells with 18 stagefracs, using more frac fluid.The result is strong initialproduction rates withshallower pressure andproduction declines. TheDora Martin 1850 #1H hasan initial production of 8.8Mmcf per day and anaverage first-30-daysproduction of 8.1 Mmcf perday. The Henderson-Cenizo 877 #1H has aninitial production of 13.2 Mmcf per daywith an average first-30-days production of10.4 Mmcf per day. These rates are 35 to 75percent higher than the average of the firstseven wells in the Eagle Ford.

Forecast

While he admits that a case can be madefor both a Bull and Bear market next year,Stoneburner says his background as a geol-ogist makes him an optimist.

Its not going to be like this for muchlonger, he says.

In his forecast, Stoneburner citedextensively from a study conducted byinvestment bank Tudor, Pickering, and Holt.The general themes of the report were thatnatural gas will average $7.50 in 2010 and$6.50 for the next 5 years with rig countsstabilizing at 1,500. This level of drillingwill deliver 1 Bcf per day growth over a year.

The study assumed that demand willincrease 1 Bcf per day over 2009 levelswith a 10 percent renewable standard and 2percent GDP growth. It also assumes thatsupply will drop 5 Bcf per day from yearend 2008 to year end 2009, whichStoneburner says the rig count has virtuallyassured this will occur.

He says that the wild cards in the analysisare a lack of good understanding of shaleperformance, the possibility of rig countskyrocketing beyond 1,500, andassumptions in demand growth andrenewable standards.

There is credible evidence that thecurrent downturn in commodity prices andresultant drilling will ease during 2010, hesays. Demand growth appears to be on thecrest of an upswing, with the unknownbeing how strong, or weak, it will be whilesupply is clearly declining and most believeit will continue to do so throughout much, ifnot all, of 2010.

On Energy Investing

Hoover says that one of the questions hesmost often asked is why create an energy

investment fund? The thinking goes that, IfI own a diversified portfolio, Im going toget energy as a side dish.

He counters that energy is diversified intwo respects. One, it tends to run counter tothe S&P 500 because recessions are broughtabout by high energy prices, so an energyportfolio will do well when the market isdown and energy is up.

It also tends to outperform the S&P 500because in certain years you get bigpercentage gains like commodity pricereturns, he says. The trick is to find smalloil and gas firms that can double or tripleproduction and therefore double or triple thestock price.

He further explained that investors shouldlook at energy holdings on anticipatedmarket movement, and move theirinvestments accordingly.

If you think oil prices will fall and wantto be conservative, youd be in utilities andin the major oil companies, because theyhave dividends and buy-back, he says. Ifyou thought oil would rise, youd go forE&P companies and the oil service sector.We manage our portfolio with six energybuckets as they move up and appearovervalued, we trim one bucket and add tothe other.

INVESTINGContinued from Page 6

PETROHAWKContinued from Page 7

National Oilwell Varcos Bud Landrum asks a question followingRichard Stoneburners presentation.

Documents

2009 November PESA News