Volume 66, Number 3 June 2012 www.pesa.org

PESANewsIn tHE nEwS

PESa Elects Officersat annual Meeting

ChairmanChris Cragg

Oil States International, Inc.

Vice ChairmanCharlie Jones

Forum Energy Technologies

1st Vice PresidentPaul Coppinger

Weir SPM

Immediate Past ChairmanJohn Gremp

FMC Technologies, Inc.

TreasurerJames RenfroeGE Oil & Gas

SecretaryPaul Butero

Baker Hughes Inc.

Gulf Coast District-TexasJoe Winkler

Gulf Coast District-LouisianaGary Halverson

Cameron Surface Systems

Mid-Continent DistrictJohan Pfeiffer

FMC Technologies, Inc.

Explorers of HoustonRobert Workman

National Oilwell Varco

MembershipCharles Currie, Schlumberger

Emerging Leaders LiaisonGalen CobbHalliburton

Energy EducatorsPat Bond, Light Tower Rentals

annual EnergyEducators SportingClays tournamentNov. 2, 201211:30 a.m. to 5:00 p.m.American Shooting Center,Houston

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

EvEnt CalEndar

Arab Spring, U.S. shale to affect geopolitics for generations

Annual Meeting 2012

Editor’s Note: This essay wascompiled from Amy MyersJaffe’s keynote presentation atthe 2012 PESA Annual Meeting.

We are at a transformativetime, both geopolitically andtechnically. The entire fabric ofthe Middle East has changed,and technology has broughthuge advances with shale plays.

Historical Guide

My view of oil prices is thatthe problem is above ground,not underground—it’s geopolitical, and I’ve been saying that for twenty years.The price started going up whenunrest began in Egypt; when itspread to Libya, it went higher;and price is up now because of

the possibility that Israel couldattack Iran.

We do need reform of the futures market, but it’s irrationalto think that traders shouldn’tassume a war premium. Whenthe initial unrest happened during the Arab Spring, manythought it was an exaggerationfor oil prices to rise. That showsa lack of understanding of modern Middle Eastern history.Just because Gaddafi is gone,it’s not the end of the story.

When I talk about the ArabSpring I like to remind peoplewhat happened in the 1950s and1960s. Gamal Abdel Nasser deposed the king in 1952 duringthe first Egyptian revolution. In1956, he had a war with Britain,France, and Israel over the nationalization of the Suez Canal.That was the first modern-styleenergy crisis and it was as largeas the disruption in the 1970s.

When Nasser first came in, hewas not an Arab Nationalist

Many in the industry considerChesapeake Energy’s businessstrategy to be complex.

Not at all, as Jeff Fisher, Senior Vice President of Production, told PESA membersat the Mid-Continent Meeting.

“I would agree that the sizeof our operation is complex—with 160 rigs we have grownimmensely—but our businessstrategy is fundamentally prettysimple,” he says. “We’re an organic growth company—leasing, drilling, and finding away to finance these huge assets. Frankly, some of the assets that we acquired werebigger than the balance sheet,

so we had to build joint ventures to help move them forward.”

The strategy has earned aleadership position for U.S.E&P companies, as Chesapeakeis the largest gross producer ofnatural gas in the U.S., thenumber one driller of horizontalwells, and a top-15 producer ofU.S. liquids. He added that thecompany is leading in the capture of world-class unconventional resources withacquisitions in five of the country’s most prolific playsover the past four years.

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

Chesapeake’s plan is simple: lease,drill, find finance for huge properties

n See Jaffe, Page 3

n See Fisher, Page 14 Jeff Fisher, Chesapeake Energy

PESA ChairmanChris Cragg, Oil States International

PESA Vice ChairmanCharlie Jones,

Forum Energy Technologies

PESA 1st Vice PresidentPaul Coppinger, Weir SPM

PESA PresidentSherry A. Stephens

PESA Vice PresidentMichael Perini

PESA Director of CommunicationsChris Evans

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

PESA News is published by:Petroleum Equipment SuppliersAssociation1240 Blalock, Suite 110Houston, Texas 77055Phone: (713) 932-0168Fax: (713) 932-0497© 2012, PESA

2 PESA News Editorial

Our story must be told, we need your helpThis is an exciting time for

our industry. The 2012 PESAAnnual Meeting focused on thenew world in which we operate.Both domestically and internationally, there are opportunities today that are trulytransformational in nature.

As an industry, we historicallydo a good job of addressing operational challenges. Ourmember companies are innovators and solutionproviders—we operate in placesfar and wide; we meet the needsof our customers; we know howto get things done. However,there are areas that need improvement, and this is whereI’d like our efforts at PESA directed in the upcoming year.

We must do a better job oftelling our story. We all knowthat our industry has a public relations problem. We must tellhow our industry has a positiveimpact on the lives of people.

First, our story is jobs. Thenearly 200 companies that comprise PESA employ over400,000 men and women. During the Annual Meeting, Iasked by a show of hands howmany executives in the roomplanned to grow their workforcein 2012. Nearly everyone raisedtheir hands. That’s our story.And these are not just anyjobs—these are great jobs. Idon’t believe there is an industryout there where a high schoolgraduate can earn a better living.If you’re willing to work hardand if you’re willing to stayclean, you can provide well foryourself and your family, andmore importantly, you can takepride in what you do.

Secondly, our story is aboutscience and technology. Fromgeoscience developments towell construction, our industry ison the cutting edge of developingsolutions. It’s been said that wedon’t have a shortage of petroleum

resources in the world—it’s justa matter of time until we find,produce and develop more. Forexample, improving the ultimaterecoverable reserves by just 1percent or 2 percent in majorproducing fields would be amajor game changer. The abilityto drill a well in thousands offeet of water, and hit a specifictarget 17,000 feet below theseabed is an engineering marvel.The ability to drill a horizontalleg almost two miles long, thousands of feet below the surface is incredible. We have tohighlight our technologicalachievements and educate officials and the public alike.

Finally, our story is one of stability and security. While theoil and gas business will alwaysbe cyclical in nature, we arecloser than ever to stability inthis new operating environment.Long-term crude pricing shouldeasily support development ofmany of the world’s largest oiland gas projects. The natural gasstory in the U.S. is now one ofabundance, rather than scarcity.And the U.S. has the potential to significantly lessen our crudeimports from less-than-friendlynations. This stability story willhelp attract the best and

brightest to our industry, theemerging leaders of tomorrow.

So what does this mean forPESA? We need to be proactivein education and community activities and attracting youngpeople to our business. We musteducate our elected officials atthe city, state, and federal levels.We must educate friends, families and foes alike as towhat our industry means.

But we can only makeprogress with your involvement.We’ve done a great job of expanding membership last yearand we need to continue that.You can encourage other companies to join PESA. You canmake the investment to get involved in PESA at the committeelevel. And you can expand theinvolvement in your company—we’ll often have only one or tworepresentatives from each company involved—have yourwhole company take advantageof the opportunities at PESA.

I’m looking forward to a greatyear as PESA Chairman, and Iappreciate the opportunity towork with the outstanding groupof people that is our membership.

—Chris CraggOil States International, Inc.

PESA Chairman

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

I can never tell if PESA’s annual meeting is a culminationof a productive and successfulyear or if it is a preview of whatto expect for the next 12 months.Either way, we are indebted toPESA’s leadership for their dedication, involvement, andtheir ongoing push to makePESA even more valuable.

I want to thank ImmediatePast Chairman John Gremp forhis determination that PESA become more involved in what’sgoing on in Washington, D.C.Last year’s Washington Fly-Inwas an excellent way to begin,and the 2012 Fly-In providedeven greater opportunities formembers to meet with Congress-men and their staffs, governmentagency representatives, and theoil and gas associations we workwith during the year.

The general consensus wasthat while we are more involvedthan in the past, we still have along way to go in telling the industry’s story in Washington. PESA Chairman Chris Cragg,shares Mr. Gremp’s enthusiasmfor becoming more involved inthe political arena.

Thanks also to Chris Craggfor a great annual meeting. Ihope you will have time to readour newsletter’s summaries ofall the informative presentationsincluded in the two-day program.Mr. Cragg has put in place animpressive line-up of district andcommittee chairmen who willmeet in July to plan activities forthe coming year. A list of PESACommittee Chairmen will besent to members in June, and wehope you will volunteer for thecommittees which interest you.

Best wishes for a great summer.

—Sherry StephensPESA President

PESA a productof a dedicatedmembership

Socialist—he was just a guy who thoughtthe British needed to be kicked out and theking was corrupt. Over time he developed anideology that spread like wildfire in the Middle East, but it didn’t start for two years.By the time the Suez crisis hit, he wasn’t asocialist—that came about because of a conflict with the U.S. and Western powersover the Suez Canal. When he realized theposition he was in, he turned to the USSR toback him with arms.

When you’re watching the Middle East onCNN today, think about Egypt in the1950s—the Suez crisis was four years afterhe took power. And Gaddafi, who tookpower on that same historical wave of Arabnationalism and socialism, didn’t come until1969, almost 20 years later.

Some of the things that drove the latestrevolution in Egypt occur in nearly every oilproducing state in the Middle East: a bulgingyouth who are largely unemployed, a government that doesn’t have a good planfor creating jobs, people feel that their personal freedoms are inhibited, and peoplethink that the system isn’t run fairly.

Reform in the Middle East is going to be along-term trend, and it’s going to be unstable. In the West, our hope and beliefthat having the right to vote and a somewhatmore free press will make a country morestable—that’s not 100 percent accurate.

In Kuwait, they’re democratic, they vote,and they have a somewhat free press. ThePrime Minister of Kuwait made some unpopular decisions in December, and thepublic was so angry that people stormed hishouse. As a result, the Prime Minister had tobe removed by the Emir—this is in a country where the Emir had already givenaway a year’s worth of free steak and sugaras well as a $2,500 bonus for being Kuwaiti.

the Iran Conflict

The Iranian conflict is also very complexand follows the Sunni-Shia divide. ImagineSaudi Arabia, a Sunni state and a regionalpower that strongly believes that a so-calledShia crescent of countries that are electivewith Shia governments cannot be allowed.That’s how they view Iraq. King Abdullahwill not speak to Nouri al-Maliki and viceversa. They also believe, perhaps with somemerit, that Maliki is an Iranian puppet.

The focus of the future of the Middle Eastis Syria. It’s a Sunni dominated society, runby a small minority that has a close alliancewith Iran. If the Iranians lose Syria, they losea lot of their military and strategic power.Saudi Arabia knows that, as does Qatar andother Gulf states, and they’re backing theopposition in Syria to the hilt. Iran, in turn,has gone to the Russians and Chinese.

There’s also the risk that the Iranians

could create for the Saudis. There are 3 million Shia practitioners living in theeastern province where 95 percent of SaudiArabia’s oil is produced. If even a third ofthe Shias decide they aren’t going to work atGhawar, that field isn’t going to produce.That’s a huge risk for the oil market.

The good news is that Saudi Arabia is abetter oil ally than they’ve been in the past—they have built floating storage in Rotterdam,Japan, and China and there is a fleet oftankers sitting outside the Strait of Hormuz,and they have a pipeline across their countryif the Strait is cut off. They have preparedfor oil production to be cut, and that’s reasonenough for the oil market to have a premium.

Meanwhile, imagine you’re part of the Israeli public, and you regularly hear that themissiles that bombed you in 2006 camefrom Iran, and now they’re trying to test anuclear warhead. Depending on what happens with these peace talks, I don’t thinkwe can rule out a war.

Every side has their own dynamic, and it’sbigger than any U.S. interest or world economy issue. If you’re in Azerbaijan andhave been under the yoke of the Mullahssince 1979, and you have an opportunity tohave the lines of the Middle East redrawnand have self-determination, it’s a powerfulimage. It’s messy in the Middle East, and itwill be for a while.

Shale revolution

In our old world, the resource wasn’twhere the lights were on, so we had to investin a lot of tankers for LNG and oil. Now wehave a tanker glut, and it’s because we haveshale where the lights are on.

This is going to be transformational interms of geopolitics, industry infrastructure,and the industry’s need to respond to stakeholders—it’s no longer just federalgovernments run by an unelected person, it’sgoing to be regular people from Pennsylvania.If your trucks are going through town andpast an elementary school, is that a problem

or not? Those are the issues that will comeup here, in Europe, and in China.

In the Baker Institute we did a study forthe Department of Energy on the geopoliticsof shale. The implications are huge—shalemeans we won’t be as reliant on the MiddleEast, and Russia’s business in Europe goesdown to 10 percent of the European market.The DOE’s initial response was that we hadthe resource too high. When we started thismodeling, we started with 200 Tcf ofshale—we’re now up to 650 Tcf in ourmodel. In any case, all these changes happenin the 200 to 300 Tcf range.

Further, we also underestimated theamount of liquids—at first we thought therewas North Dakota and that was it. Then theindustry moved to the Eagle Ford, and nowwe’re told that production could be 500,000to 1 million barrels of production in thatplay. There are a lot of others, and the latestthing is that Occidental is returning to theMonterrey Basin. They say there are threelevels of shale that could provide oil andcould triple California’s oil production.

Shale has its issues. Something comingdown the pike is the venting or flaring ofmethane, which is a far more pollutinggreenhouse gas than CO2, during shale production—we’re three to six months fromthat being a national issue. There are severaluniversities doing methane vent studies andI think it will be on the front page of the NewYork Times very shortly. It’s the next thingfor which the industry will need a response.

We should learn from Macondo not totake any incident lightly. The public needs tobe informed and it has to be transparent. Ifnot, someone else will highjack the actualinformation and tell the public somethingmore frightening. Earthquakes from shaleare a good example—you might say there’sno way it can happen, or that regulatingClass 2 wells is the responsibility of theEPA. The lesson of Macondo is that ifthere’s one guy out there who won’t put hisinjection well in the right place, the wholeindustry can all stop drilling in that state.

3PESA Newsannual MEEting - day 1

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

JaFFEContinued from Page 1

4 PESA News annual MEEting - day 1

New

Real

ityNavigating the challenges at homeAnalyst, U.S. energy execs discuss the resurgence of American oil and gas

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 rebalanceThe peak highs of oil prices

and deep lows of natural gasprices are coming to a close asthe markets begin to rebalancethemselves.

Marshall Adkins, ManagingDirector of Energy Research forRaymond James & Associates,gave a brief forecast for rigcounts, natural gas, and oil.

“Natural gas prices will belower for longer, but we’re nearbottom,” says Adkins. “But thesurprising thing at the momentis the pace at which U.S. oilproduction is reversing itself—it now means we’re in a range-bound world for oil pricesbetween $60 and $100.”

rig Count

The industry is in the midstof a meaningful shift awayfrom dry gas wells. In January2010, one-third of all rigs weredry gas. By the end of nextyear, it will be less than 10 percent, says Adkins.

“For this year, we have thedry gas rig count falling by 150rigs, which happened a littlefaster than we thought,” hesays. “But the oil rig count willoutpace the decline in gasrigs—the oil rig count will goup by about 200, mostly in theEagle Ford, Bakken, and Permian, for an overall increase

of 8 percent this year.”E&P cash flows will be up

significantly this year at 36 percent. But Adkins doesn’tthink that all of those gains willbe placed back into more rigs.

“We think they’re going topay down debt and improvetheir balance sheet. Next year,we think oil prices will pullback, and gas prices will remainlow, and those E&P cash flowswill slow down.”

natural Gas

Raymond James has beenbearish on gas since 2007.From here, however, Adkinssays it’s going up.

“It doesn’t scream higher because we’re hugely oversup-plied this year, but it starts tocorrect itself and we are in a $4to $5 gas world for the nextdecade. We forecast $2.50 thisyear and $3.25 for 2013.”

Marshall Adkins, Raymond James & Associates n See adkins, Page 7

5PESA Newsannual MEEting - day 1

EOG expects to take 1.6 billion barrels ofoil from the Eagle Ford shale over the next25 to 30 years. But their CEO is far fromhappy.

The company holds more than 500,000acres in the play. That position, which islargest in the play, is estimated to hold 29billion barrels of oil.

“Using current technology, we expect toproduce about 6 percent of that oil—about1.6 billion barrels—which itself is a hugenumber and, we think, the largest discoverynet to one company since Prudhoe Bay in1968,” says Mark Papa, Chairman and CEOof EOG Resources. “But what that alsomeans is that we’re going to leave 27 billionbarrels of oil in place under our acreage.That’s pathetic.”

Huge Incentive

While the Eagle Ford is expected to yieldonly a 6 percent recovery factor, it’s thesame for both of the other major liquids-richplays in the country. The Bakken shale has a10 percent recovery factor, and the PermianBasin area is about 5 percent.

Making better wells and earning better recovery factors is EOG’s mission for thenear future, says Papa. They are makingprogress.

“In 2009, when we first got our resultsfrom the Eagle Ford, our best wells pro-duced 1,000 barrels a day—if we take thatsame rock today, the best wells are 4,000barrels a day,” he says. “The better wellsyou get, the better your recovery factor isgoing to be. Remember our prize is not a100,000 incremental barrels, we’re trying toget an incremental 1 to 2 billion barrels.Multiply that by $100 a barrel, and you’llsee why this is a huge deal for us.”

Papa shared some of the basic techniquesused to improve EOG’s well production,

which he says are not Eagle Ford specific—they’re applicable in all horizontal drillingplays. The first technique is more precise location of the laterals.

“The Eagle Ford pay zone is 150 feetthick. When we started out, our directionaldrilling guidance was to stay somewhere inthat zone, and go 4,000 feet,” he says.“Now we know there’s a specific 20-footinterval, and if you keep the lateral there,you get much better wells than any other 20foot section.”

Everything having to do with fracking isgoing bigger in the chase for better wells—longer laterals, cemented laterals as opposedto external packers, more proppant, andmore frac stages. EOG has also gone big inmicro seismic, a technology of which Papasays the company is the largest user in theworld.

“Usually on a frac job, you just hope it’sdoing what you want down hole,” he says.“With micro seismic, you can measure inreal time what is happening down hole. Youcan speed up or slow down pump rates anda lot of things on the spur of the moment toget the optimum frac.”

areas for Service Growth

The shale oil plays represent a huge opportunity for growth in the service andsupply sector, says Papa. He said that thesector’s executives should follow the technical trends in the plays, as they oftenlead to new business opportunities. The firstarea is artificial lift.

“In our Eagle Ford play alone, we estimate that we’ll drill 3,500 wells. All ofthem will have to have beam pumps, gaslift, or down hole hydraulic lift, and all haveto be optimized for horizontal wells,” he says.

As an oil and gas basin, The Gulf ofMexico re-invents itself every fewdecades.

While always a testbed for offshore technology, the Gulf has evolved from ashallow shelf production area to a world-class deepwater play, says David Welch,President and CEO of Stone Energy. Heshowed field size distribution curves for allwells drilled in the Gulf.

“We started drilling on the conventionalshelf back in the late 1940s and 1950s,”explains Welch. “If you were to explore onthe shelf today, you might find somethingthat’s an average of 15 Bcf or less—youcan’t afford to take exploration risks for 15Bcf if your exploration wells are going tohit one out of every three or four times.”

The first re-invention of the Gulf was inthe 1990s, in which deep gas fields beganto come online.

“The average size of the deep gas fieldsis about 100 Bcf,” he says. “Today, youcould take a little exploration risk if it hasliquids in it, which a lot of these naturalgas fields in the Gulf do.”

The current Holy Grail in the Gulf ofMexico is deepwater. The mean field sizedistribution for deepwater wells is 90 million barrels, so Welch says operatorscan afford to take a risk for the prospect ofa successful discovery.

“Our company has a very interestingthing now with the Parmer discovery, inwhich we’re a 50/50 partner with Apache.Our discovery well has 500 feet of oil payin it,” he says. “We’re getting ready to

Mark Papa, EOG Resources

Chasing incremental barrels by the billions

Offshore industrymoving to deeper,older formations

David Welch, Stone Energy

n See welch, Page 6

n See Papa, Page 6

spud the appraisal well thismonth or next month, and depending on what we findwith this appraisal well, we willeither have an interesting small,non-commercial thing; or wecould have something thatequals the current reserves ofour company. We’re kind oflike treasure hunters out thereand it’s an exciting business tobe in.”

The other reason operatorswant to go deeper into the Gulfis well rates, says Welch. Wellsrange from 1,000 to 4,000 barrels per day on the shelf,while well rates in deepwatercan be as high as 30,000 barrelsper day or more.

Is It Safe?

Every operator’s worry afterthe Macondo disaster waswhether the industry would beable to drill and produce thedeepwater Gulf safely, saysWelch.

“On the shelf, the industryhas drilled about 46,000 wellsand about 4,000 wells in deepwater,” says Welch. “Manydon't realize this, but about 25percent of the time you have awell control situation whereyou have to use the blowoutpreventers. So, on average, wehad over 1,000 well controlevents in deepwater, and almost7,000 on the shelf. Out of those,we had a catastrophic blowoutfour times on the shelf and oncein deepwater—obviously,

Macondo was catastrophic.”Welch says that an analysis

of all Gulf of Mexico wellsprior to Macondo showed a statistical probability of one catastrophic well failure every28 years. Since Macondo, theindustry has added numerousprotocols to prevent a similaraccident such as third-partyBOP certifications, dual cementsteel barriers, and more. Withthose measures in place, the statistical probability of a wellfailure is once every 112 years.

“That’s just with what’s beendone so far—there’s an industrytaskforce going on that we thinkwill reduce the probability ofhaving another Macondo-typeincident significantly more,” hesays. “And if we did have one,we have intervention capabilitiesthat did not exist at the time of

Macondo—the Helix and theMWCC well control systems—and it would be controlledwithin 10 to 21 days, as opposed to the 87 days of Macondo, reducing the spillsize by four fifths.”

On the containment side,Welch says that industry hasgreatly increased its capacity—between Clean Gulf andMSRCC, the Gulf producersnow have access to 360,000barrels of oil per day containment capacity. Macondowas 40,000 per day.

In addition, Stone Energy isamong the originators of whatwas originally called theblowout risk assessment taskforce. The group is a collection of 12 companies thatare systematically mapping outthe construction of a deepwater

“That’s just EOG in one play—every one ofthe wells that constitutes the oil growth inthis country will need artificial lift.”

Chemicals are another area for burgeoninggrowth.

“If ‘X’ was the number of chemicals usedfor an average gas well, then it’s ‘4X’ forour oil wells,” says Papa. “We need paraffinremovers, corrosion inhibitors and the like,and you’ll see a burgeoning growth as thisoil boom continues.”

The greatest potential opportunity forgrowth is secondary recovery of the shaleplays. Papa says that he doesn’t think secondary recovery is on the radar for anyother E&P companies or many service companies. With infield drilling, betterfracs, and better location of laterals, thecompany could potentially double its recovery factors to 12 percent. Not goodenough, he says.

“Every oil field around the world that hasgone through primary recovery, is goingthrough some sort of secondary recovery—even Ghawar,” says Papa. “The concept is ifyou’re able to achieve 10 percent in primaryrecovery, then under secondary recoveryyou should be able to get another 50 to 100percent of incremental oil. Displacementhas worked in conventional rocks all aroundthe world. Now we’re dealing with unconventional rocks, but who’s to say thatsecondary recovery won’t be just as successful—the economic incentive is there.”

rigs & Prices

Papa says that EOG’s view on NorthAmerican natural gas is consistent with the

rest of the industry—there’s not a lot ofhope at least until2015.

“Whether the pricegoes to $1 or $4, it’sstill uneconomic as faras we’re concerned,”he says. “It’s likelyyou won’t see us making any dry gasinvestments in thenext 2 to 3 years.”

For oil, Papa expects the shaleboom to continue,which will help reduce imports of foreign oil. The increase in production,however, will not affect pricing. Thecompany’s businessplan calls for a rangebetween $90 and $110 WTI.

Papa’s view on rig count takes a somewhatdifferent tack. He cited a growing concernwithin the industry that natural gas liquids(NGL) prices, like natural gas prices beforeit, would de-couple from crude oil and crashdue to higher production volumes. Historically, the group of ethane, propane,and butane have traded between 40 and 60 percent of crude oil. Last year, the averagewas about 55 percent.

“We’ve done a fair amount of work, andwe believe the product prices of these com-modities will continue to be linked to crudeoil and continue to stay in that 40 to 60 percent range,” he says. “That’s important,because it tells us that rich gas drilling islikely to continue, because the liquids portionwill provide the substantial economics.”

The reason for the linkage is supply anddemand for chemical feedstocks, particularlyethylene. To create ethylene, chemical producers in the U.S. can use ethane, a farcheaper alternative to naphtha, a refiningderivative. Dow Chemical, Shell Chemical,and others have announced the constructionor expansion of ethylene plant crackers thatwill be built in the U.S.

“That gives us some belief that we’re notgoing to be subsumed with so many naturalgas liquids that the price will be permanently depressed and pushed like drygas,” he says. “Put all those assumptions together, and we’re bearish on North American gas, reasonably bullish on globaloil, and bullish on North American NGLs.What that tells me is that the aggregate rigcount is likely to continue to be strong overthe next 2 to 3 years.”

6 PESA News annual MEEting - day 1

PaPaContinued from Page 5

wElCHContinued from Page 5

Following all three panelist’s presentations, PESA members had an openquestion and answer session, which was moderated by Steve Jacobs.

Huge new wells are driving the oversupply—of the 10 largest shale playstoday, eight of them are at least 500 percentmore productive than the industry’s wellsfive years ago. In addition, many rigs aredrilling in areas that have liquid and dry gas components, causing a surge in gas supplyfrom non-dry gas wells.

“In 2012 through 2014, we expect 2 to2.5 Bcf of growth from the non-dry gasareas,” 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 veryfew dry gas rigs running because of associated gas from oil wells and liquidsrich plays.”

When natural gas prices crashed in January, the market was oversupplied by2.5 Bcf per day. Adkins says that the market did what it was supposed to do—itcreated change in the system and a lot ofswitching away from coal.

“As of January, we had about 5 Bcf a dayof switching, and we think it’s highertoday,” he says. “That’s why we thinkwe’re at the bottom at $2—it will begin tobounce up later this year. In 2014 and beyond, it will be a balanced natural gasmarket, which says it’s a $4.50 commodity.”

Oil

The amount of oil supply coming onlineis staggering, says Adkins. The industry ison course to reverse four-plus decades ofoil production decline in just five years. Intwo to three years, the U.S. will be the

largest oil producer in the world.“In raw crude we’re going from 5.5

million barrels per day of production to 9.5million barrels in 2015,” he says. “We’re up500,000 barrels per day this year, part ofthat is because offshore has declined by200,000 barrels per day. Next year, we’reforecasting 1.2 million barrels of growth inU.S. oil supply, assuming that offshorebreaks even. If anything, with the level ofactivity in the Gulf, it could be higher.”

While the obvious impact is less dependence on imported oil, the underlyingimpact is that oil prices will come down.But, Adkins says, in a sense, that’s bullishfor natural gas.

“If you bring the price of oil down andslow the amount of liquids drilling, thenyou slow gas supply growth and the system rebalances a little faster,” he says. “We’rein a range bound world, between $60 and$100 long term, though it could easily gohigher short term.”

OPEC excess capacity has acted as themarket balancingmechanism for years.Traditionally, whenOPEC excess capacity dips below1.5 million to 2 million barrels,prices surge. Rightnow, Adkins believesthat OPEC’s true excess capacity isless than 1 millionbarrels per day,mostly in Saudi Arabia—a very bullish market indicator.

“The problem is,starting in the third

or fourth quarter of this year, I think Saudihas to start cutting production,” he says.“They need to cut 1.5 million barrels in2013 to begin to balance the market, buteven then it doesn’t balance because petroleum inventories will be at unheard-oflevels. This cannot happen. Prices willcome down to where Saudi will cut production further, or we will slow drillingin the U.S. sometime in 2013. The oil market is extremely tight today, but if oilprices stay anywhere near where they are, itgets out of hand and prices will fall.”

Adkins believes that the U.S. oil boom isa bigger story than just industry success.

“The winners in this oil boom are infrastructure builders, refining, and servicecompanies,” he says. “The bigger winnersare U.S. manufacturers, our trade deficit,and the U.S. dollar. This is a huge story forour country and I think we will hit energy independence before the end of this decade,assuming prices remain high enough to continue drilling.”

7PESA Newsannual MEEting - day 1

adKInSContinued from Page 4

well. For each step—there willbe thousands of permutations—the group is looking to illustratehow smaller failures can lead toa catastrophic blowout.

“They’ll put together abowtie diagram that shows allthe planning steps that you cantake in each block to ensureyou’re not going to have ablowout, and then the operational steps and barriers,”he says. “This work is underway, and should be complete sometime later thisyear. That’s how we justify toourselves that we can do thissafely.”

Keeping It alive

New technologies keep theGulf alive and will help it growin the future, says Welch. A

unique feature of the Gulf is theLouann Salt formation. Whensalt is hot, it’s lighter than rockso it rises in the formation.When it reaches rock of thesame or greater density, itspreads out in all directions. Ithas no set depth, thickness,form, top or bottom.

“When you try to put a seismic wave through the salt, itmay be going through a mountain of salt or it may gothrough a thin strip of salt, but itcertainly disrupts the acousticwaves that are used as the basisof seismic,” says Welch. “Youthink you’re getting a picture ofone thing, but you’re really getting a picture of somethingelse. These wells might be $150million to drill, so you need aclear picture.”

The industry came forward

with wide azimuth seismic totry to “see around” the salt.However, the next generation isalready moving forward—coilazimuth seismic. Rather thanshooting seismic in a grid pattern as with wide azimuth,coil azimuth has seismic boatssail in a closing circular pattern.The yield is a more accuratemap of the subsurface.

“In the deepwater Gulf, wehave 3D wide azimuth coverage over a wide area andwe’re starting to see some really good images,” he says.“The deepwater Gulf is a crucible for technology development and these subsaltwells are becoming routine,though they’re not cavalierlydrilled.”

The next frontier of drillingin the Gulf is older, and likely

deeper formations, says Welch.Early conventional productionin the Gulf hails from sourcerock that is 3 million years old.Deeper shelf and early deepwater plays are fromsource rock in the Miocene age,about 15 million years ago. TheWilcox fields are from the Paleocene period, about 60 million years ago. And the BPTiber prospect—a 3 billion barrel prospect—is estimated tobe late Cretaceous, or about 100million years old.

“If you look at the geology ofthe Gulf, you can see how different levels of source rockdeposition have created manyopportunities for us,” he says.“We’re not at the bottom of ityet, given the technology thatenables us to drill very deepwells.”

Paul Coppinger (Weir SPM) listens to Adkins’ forecast.

That shale oil and gas hasbeen a revolution for the industryis beyond question. But now, theeffects of increased productionare trickling through the widereconomy.

For the steel industry, theincreased availability, stability,and affordability of natural gashas brought the greatest changes

seen in more than 40 years, saysJohn Surma, Chairman and CEOof U.S. Steel Corporation.

Like many manufacturers,U.S. Steel has slowly switchedfrom coal as a primary powersource, to natural gas. The costsavings have been huge—thecompany saves between $15 and$16 per ton of finished steel.Compounded over 20 milliontons of product per year, thecompany has reduced its spendby more than $300 million.

“Reducing our costs by $15per ton doesn’t happen veryoften. Usually, we kick andscratch for a year to come upwith 50 cents a ton,” says Surma.

the Process

U.S. Steel is the eighth largeststeel producer in the world, andthe largest tubular manufacturerin the U.S. Nearly all of their facilities are based in the U.S.,but half of their production isexported.

“Our tubular business had agood year this year and lastyear—we’re specializing in thedemand for heat-treated OCTGcasing in North America for allthe shale activities,” says Surma.“Late last year, we commissioneda new heat treating and finishingfacility just west of Cleveland,which will help serve demandfor shale developments. We developed that project 3 to 4years ago and we commissionedit just in time for the Utica shale.”

Their bottom line has beensaved by the cost savingsbrought about by natural gas,which is a direct reflection of theenergy intensive steel-makingprocess.

U.S. Steel is a fully integratedcompany and operates an ironore mine in Minnesota. The rockis detonated to rubble and transported to one of the company’s raw steel facilities.There, the ore is smelted.

8 PESA News annual MEEting - day 2

Glob

al Sh

ale?

Navigating the challenges abroadSuccess of U.S. shale may not be repeatable overseas, but other oil projects soar

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

John Surma, U.S. Steel Corporation n See Surma, Page 10

Like any other oilfield service company,Oil States International, Inc. follows its customers around the globe.

Increased costs and geopolitical risks areleading many major oil companies andNOCs to seek safer havens of opportunity,says Cindy Taylor, President & CEO, OilStates International, Inc.

“While we enjoy spending money in theU.S. and creating jobs in our home country,we follow our customers and their invest-ments,” she says. “But now geopolitical riskis leading them, and therefore leading us, toareas like the Canadian oil sands, Australia,and deepwater projects.”

Of the Goldman Sachs’ Top 330 oil andgas projects to change the world, more thanhalf fall into those three categories. They are,however, expensive. Analysts have estimatedthat it will cost $1.2 trillion over the nextfive years to develop those 330 projects.

“A take away from the report is that 90percent of these large projects are economicat $80 per barrel. In all likelihood, they domove forward,” says Taylor.

Oil Sands

Canada is the largest supplier of crude oilto the U.S. and holds the third-largest oil reserves in the world, 97 percent of whichare in the oil sands.

“Our customers have found that very attractive because it’s accessible, there is lowgeological risk, and good political stability,”says Taylor. “Reserves are estimated at 170billion barrels, and spending is escalatingsignificantly and is expected to reach $125billion by 2015.”

Currently, there are four major miningprojects and 16 in-situ projects; 27 more in-situ projects should start and have firstproduction by 2015; and then 94 more in-situ projects and 19 mining projects are on

the drawing board beyond 2015. Conse-quently, Oil States’ business in the oil sandshas grown at a compound annual growth rateof 30 percent over the past six years.

For all the great opportunities, there aremany challenges. Of the 330 major oil investment opportunities, these are the moremarginal because of their all-in cost, saysTaylor. From 2003 to 2007, oil sands companies saw a 140-percent cost inflation—a typical single family home inFort McMurray that was $250,000 8 yearsago, is $750,000 today.

“The other thing that is evident in thisbasin is that production growth has exceededinfrastructure development, which is leadingto 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, andthere are a number of aboriginal groups thathave consultation rights and a significant influence over the developments in the region—and the elephant in the room remains environmental concerns around theoil sands in general.”

The Keystone XL pipeline is intended toerase the production bottleneck.

“This is the most strategic oil pipeline initiative in decades. It’s favorable to theU.S. but it has met tremendous opposition,”says Taylor. “If approved, it will link a stableand growing supply of Canadian crude oil production to our refineries in the U.S., making us less reliant upon Middle Easternand Venezuelan oil, which would improveour energy security in the long term.”

While the outcome is still unknown, TransCanada will move forward with thesouthern leg of the route connecting Cushing, Oklahoma to the Gulf Coast. Thenorthern tier is still questionable.

9PESA Newsannual MEEting - day 2

Cindy Taylor, Oil States International, Inc.

Geopolitics move producers to safer havens

International shaledevelopment notas easy as hoped

Lew Watts, Regester Larkin Americas

n See watts, Page 10

n See taylor, Page 11

The world wants shale. Unconventionaloil and gas changed the American landscape,bringing an abundance of new hydrocarbonsupply and jobs.

Shale formations are scattered throughoutthe globe, and many are estimated to holdvast reserves of oil and gas. Naturally, thecountries that hold these shales want toreplicate the American process at home. Butincreasingly, they’re finding it’s not that simple, says Lew Watts, Chairman ofRegester Larkin Americas.

Unique Shale?

The idea of global shale is tantalizing. TheEIA estimates that technically recoverableglobal shale reserves are vast: 1,069 Tcf inNorth America, 1,225 Tcf in South America,1,042 Tcf in Africa, and 1,404 Tcf in Asia.

“It’s a game changer because it providesthe prospect of increased energy independence,” says Watts. In traditionallyconsuming countries like Poland, it reducesthe power of monopolies, and who wouldhave thought that onshore U.K. would havesignificant volumes of gas?”

Even NOCs are taking notice. Some, likePetronas, are interested in the business aspect of developing the resource. Others,like the Chinese, are somewhat interested inthe resource, but really want access to thetechnology for their domestic resources,says Watts. Other are looking to replace declining conventional production like Indonesia and Oman.

“And then there are companies like

It takes 1,000 pounds of coke to reduce 1.4tons of iron ore to pure iron, which can thenbe refined to steel.

“We use lots of energy to make our product, a lot of which comes from coal—about 10 million tons per year—but increasingly we’re using more natural gas,”he says. “Over time, we’ve found that wecan reduce the amount of coke we need byinjecting natural gas. We can’t eliminatecoke because we need carbon for reductivepurposes, but the ability to use affordablenatural gas to bump out very expensive cokeis an extraordinary development.”

Surma used the company’s facility in Slovakia as a counterpoint.

“Currently, it takes about 5 million Btus ofnatural gas to make a ton of steel from startto finish. Here, if gas is $3, it will cost us$15 to make a ton of steel. In Slovakia,we’re at the end of the pipe from Gazprom,and gas costs $12, so it costs $60 per ton ofsteel versus $15 here,” he says.

Enabled by the cost savings, Surma saysthe company’s leadership is looking to expand one of the raw steel facilities—a $1 billion project that will add many newjobs. The company, however, is not stoppingthere. Natural gas is leading them to explorenew technology.

“We’re also looking at alternative iron andsteel making technologies such as gas-based,direct-reduced iron,” he says. “All the environmental worries, all the capital that’srequired, would be eliminated. We’re lookingto use natural gas as a reductant in a tunnel furnace to make direct-reduced iron at abouthalf of our costs now.”

Policy & taxes

Most of U.S. Steel’s facilities are in theU.S., but half of their production is exported.

“In North America, business was prettydifficult for us. Our sector got hit particularly hard in the recession and we’vebeen clawing our way back little by little,”says Surma. “Most of our markets thesedays are moving along reasonably well in2012, and we expect some growth led by automotive, energy and machinery—the bigexception is construction.”

In Europe, U.S. Steel doesn’t own a rawmaterial source. The company purchasescarbon and ferrous materials primarily fromRussia and the Ukraine, and prices are influenced greatly by what happens in China.

“We have virtually no control over ourcost structure there,” he says. “The Europeandebt crisis has been hard on us. We operateda plant in Serbia that did fairly well for atime, 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 it’s 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 taxregimes, favorable manufacturing policies,and of course we’re very much aware of theshale potential in Poland.”

The greatest single issue the companyfaces is environmental policy. However,since 1990, the steel industry has reducedemissions per ton of steel by 30 percent.

“We reduced our emissions not becausesomeone told us to, but because conservation makes good business sense—there’s fewer Btus going up the stack.”

In Europe, however, reduced emissionshas become policy—one that Surma saysdoesn’t work.

“We operate in Slovakia, and the EU haswhat amounts to a cap-and-trade system. Ithas been foolish, ruinous, and has donenothing but drive industry away from Europe,” he says. “It’s also done nothing toreduce emissions, unlike what we’ve done inthe U.S. because it made good businesssense. We’re concerned about overreach bythe EPA, and they have no real legislativemandate to do so. We’re in a very difficultplace right now, and we hope we’ll find theright solution in Washington.”

Finally, tax reform is another majorissue—U.S. Steel enjoys many of the sametax benefits as oil and gas.

“According to an analysis of one majoraccounting firm, rescinding depletion allowances and other manufacturing deductions will take $48 billion from manufacturing,” says Surma. “The analysisshows financial services and retail get thebenefit, and I’m not so sure that’s where thiscountry wants to be. I was at a benefit with aSenator, and I told him that he’s going totake money away from people like us whomake things, and give it to Wall Street andWalMart. I asked if he wanted to run on thatplatform, to which he answered he’d have torethink it.”

ADNOC and Aramco, who wantto understand the threat,” saysWatts. “They’re worried aboutthe effects. Some people say it’seasy, others say it’s difficult, solet’s see how difficult it is and understand what we have.”

But not all shales are alike.The U.S. shale may proveunique, or nearly so, for its ability to be developed.

“In China, they recently reduced their shale estimates to886 Tcf from 1275 Tcf,” he says.“That’s a sign that once people

start to look at these plays, it’snot as easy as they thought.”

International

According to Watts, there areseven prerequisites for economicshale gas: geology, rights to hydrocarbons, correct regulatoryframework, good fiscal terms,political will, social acceptance,and service sector capacity.

For example, the U.S. hasvery good geology; landownersown the hydrocarbon, so rightsare simple; the regulatory frameis nearly complete; there’s nowpolitical will with even PresidentObama accepting natural gas;

there’s social acceptance in mostareas where the resource lies;and plenty of service capabilityis available.

“We also have very good fiscal terms. Contrast that withresource rent models like in Indonesia where the governmenttake is 93 percent—it’s justenough to make a profit,” hesays. “If that were active here,we wouldn’t have shale gas oroil. We have a benign fiscal system which allows us to produce oil and gas that wouldbe uneconomic otherwise. It’s amajor thing to think about whenyou start talking about international shale.”

Outside the U.S., it’s not clearsailing, he says. Nearly everyshale basin in the world hasmajor obstacles.

“In the U.K., 200 Tcf of natural gas sits below Blackpool,” he says. “There arebig questions with geology,though Quadrilla is working onit. As for fiscal terms, good luck.They need to get from a 60 percent government take, whichis the norm in the North Sea, tohaving fiscal terms that willallow it to be developed.”

After the U.S. and Canada,Poland was the number-oneshale prospect in terms of attrac-tiveness two years ago. Many

10 PESA News annual MEEting - day 2

SUrMaContinued from Page 8

wattSContinued from Page 9

Mike Kowalski (Sunbelt Steel) listens to Surma.

australia

Oil States has a strong position in Australia by the acquisition of a company inDecember 2010. Taylor says they were attracted by the investment potential—Australia is the number-one or number-twoproducer and exporter of a number of keycommodities 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 coalseam gas developments that will feed LNGinvestments in the Gladstone region.

“Our customers have a high degree ofconfidence in the long-term pricing andthat’s enabling them to make the infrastructureinvestments necessary to increase production,”

she says. “There were 94 major developmentprojects ongoing in 2011 with a combinedcapex of $173 billion, and that was up 31percent from fourth quarter 2010.”

It’s projected that iron ore infrastructurecapacity will have a compound annualgrowth rate of 13-14 percent by 2015, andcoal volumes are expected to increase by 60percent in the same timeline. If the currentgrowth rate continues, Australia will exceedQatar as the largest exporter of LNG by theend of the decade.

“For service companies like ours, this creates tremendous opportunities and greatadvantages, and it will also present similarchallenges to the oil sands,” says Taylor.“Australia’s population is about 40 percentsmaller than California, and 90 percent ofthe people live on the coastline. Nearly all ofthe mining or LNG projects are either inlandor in coastal regions where there is no population. It’s challenging the infrastructure:supply chains are strained, labor shortages

are everywhere, and there are inflationarypressures—very common themes to whatwe see in the Canadian oil sands.”

deepwater

Deepwater has been an industry focus fordecades, and now production is escalatingsignificantly thanks to discoveries in Brazil,West Africa, Southeast Asia, and the U.S.Gulf of Mexico. However, the productiongrowth and increasing discoveries lead tosimilar bottlenecks as the Canadian oil sandsand Australian resources—logjams in infrastructure, people, and supply chains.

Taylor says that as many analysts havepredicted, among the winners in deepwaterproduction are service companies. There willbe 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 we’re service companies—challenges create op-portunities,” she says. “We’re increasinglygetting to more technically challenging areasin deeper waters. Studies project a 39 percent annual growth for projects inwater deeper than 1,500 meters.”

Deepwater drilling rig expansion is stillmoving forward—there are 64 drilling rigsunder construction, and 20 percent are contracted with Petrobras. A report fromQuest Offshore forecasts for 120 FPSOs,more than 20 TLPs and Spars, and 25 floating LNG facilities.

“Massive supply chain expansion will berequired,” says Taylor. “I think of the daunting investments ahead in Brazil andother areas, compared with the infrastructureand supply chains that are in place today,and it’s very clear that material investmentsand expansions have to be made. Energytransportation systems are maxed out—weneed to make investments in rails, ports, andpipelines to efficiently transport the productthat we produce. As I look across the globe Isee a very bright future.”

11PESA Newsannual MEEting - day 2

taylOrContinued from Page 9

companies have moved to thecountry. There were 109 concessions granted from 2007to 2011 with 13 exploration wellscompleted by February 2012and 14 more wells this year.

“We’re still awaiting the first declaration of commerciality,which is significant, and geologyis a huge question mark,” hesays. “There’s a line when rocksare ductile or brittle. I use theterm that we’re not fracking,we’re shattering rock. If the rockis ductile, it won’t shatter. A lotof Polish shales are right on theborder of ductile versus brittle,and there’s very few announcements about it.”

In Argentina, Watts says thejury is still out on geology, but itdoes appear interesting for oilshale. The Vaca Meurta field issimilar to the Eagle Ford.

“If I were to rank Poland andArgentina on geology, I’d go Argentina first,” he says. “Butno way do they have the correctregulatory framework. The bigissue is third-party access topipelines—you can find all thegas you want, but if you don’thave a way to get it out, thenyou’re held to ransom by YPF.And good luck with fiscal termsas well.”

Shell made a big bet in SouthAfrica and has a lot of pending

rights in the shale fields. Butthere is a moratorium on fracking.First, Watts says, nobody reallyknows about the geology, butmore importantly, there is zerosocial acceptance.

“The shale plays are right inthe middle of the main farmingarea, which are dominated bythe Afrikaners that have huge political clout, and no water,” hesays. “There is a saying theyhave: ‘around here, the raincomes on legs.’ They say thatyou cannot do this.”

In China, he says that thestory is not straightforward. InOctober 2011, the governmentsaid they would produce 80 Bcm

by 2020. In February 2012, foreign analysts announced thatChina will be able to produceabout 23 Bcm. In March, thegovernment removed all information on the October 2011target, and the new target is 6.5Bcm in 2015.

“This is an example of whathappens when people start tolook at shale—the optimismquickly goes away,” says Watts.“With geology, there are somany basins there, they’ve gotto have something similar to theU.S. They also lack the correctregulatory framework—there’sno third party access topipelines, period.”

Cindy Taylor

12 PESA News annual MEEting - golf & tEnnis

The Benz and Poellot-designed

Gainey Ranch Golf Club—a

perennial PESA member

favorite—served as the high-

desert backdrop for the 2012

Annual Meeting Golf

Tournament.

Golf Champs

First Place (Score: 118)Mike Kowalski (Sunbelt Steel),

Russ Laas (Hart Energy), Jerry

Lastovica (Flexitallic), and John

Kulasa (NedCorp).

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).

Third Place (Score: 121)Lewis Cadwallader (Schlumberger),

Ron Callaway (Greene, Tweed &

Co.), Greg Cain (Wilson), and Ray

Brown (PPHB, LP).

Longest Drive (Men’s)Russ Laas

(Hart Energy)

Longest Drive(Women’s)Cindy Taylor

(Oil States International, Inc.)

Closest-to-the-pin(Men’s)

Lewis Cadwallader

(Schlumberger)

Closest-to-the-pin(Women’s)Bonnie Wright

(Wife of Jim, Cameron)

tennis tournamentLeft: The participants of the 2012 tennistournament.

Below: The final match pitted EdwinCook (husband of Kate Brader, RegesterLarkin) and Linda Newman (wife ofDan, Norris Production Solutions) vs.Susan Winkler (wife of Joe Winkler) andKevin McEvoy (Oceaneering). Cook andNewman won the tournament.

Golf tournamentFirst Place

Second Place

Third Place

Thank youto our sports tournamentsponsors:

13PESA Newsannual MEEting - friday night

n See Cunningham, Page 14

Thank you to our Annual Meeting sponsors

Friday night—This year’s Friday-night celebrationcontinued last year’s precedent ofshunning tuxes and ties in favor of amore casual atmosphere.

Among the couples attending were,from left to right: Paul and BelindaCoppinger (Weir SPM); Russell andBeverly Ginn (Sunbelt Steel); Dougand Marie Polk (Vallourec & Mannesmann); John and CindyGremp (FMC Technologies, Inc.); andRobert Workman and Karen Moore(National Oilwell Varco).

Comedian Chris Bliss was the entertainment for the night, wrappingup with a spectacular juggling act.

14 PESA News nEws

Positions

In keeping with Chesapeake’s“simple” business plan, thecompany’s resource plans forthe future are where they’ve always been—in the onshorelower 48, or “high and dry,”says Fisher.

Chesapeake has leading positions in 12 of the top 15 unconventional liquids-richplays in the U.S. They are #1 inthe Anadarko Basin (includingGranite Wash, Cleveland,Tonkawa and Mississippi Limeplays), #1 in the Utica Shale, #2in the Eagle Ford Shale, #3 inthe Niobrara Shale in the Powder River and DJ BasinsTop, #5 in the Permian Basin(including Avalon, Bone Spring,Wolfcamp and Wolfberry plays),and Top 10 in the WillistonBasin. They also have leadingpositions in 4 of the Top 5 unconventional natural gasshale plays in the U.S. They are#1 in the Marcellus Shale, #1 inthe Haynesville Shale, #1 in theBossier Shale, and #2 in theBarnett Shale.

“To gauge the quality of theseplays, look at our operatingpartners from the internationalarena—BP, Statoil, CNOOC,and so on,” says Fisher. “Thesecompanies chose to come to theU.S. for unconventional production knowledge. Thistechnology will go worldwidein time.”

The company is redirectingthe capital savings to liquidsrich plays. Liquids were 10 percent of Chesapeake’s capexin 2009, and will be 85 percentin 2012. Liquids production isexpected to be about 30 percentof total production and 60 percent of revenues in 2013.

“Yes, we’re part of the problem of low gas prices rightnow, and we recognize that,” hequipped. “We’re moving ourrigs off of dry gas plays—about50 have been moved from the2011 average—and we’re immediately curtailing 8 percentof gross operated production, or0.5 bcf per day, which may increase to 1 bcf per day if conditions warrant.”

Fisher says company

executives are most excitedabout three key plays: the EagleFord, Granite Wash, and Utica.Chesapeake started in EagleFord a little bit late, with leasing beginning in August2009. They have since captureda top-2 position in the industrywith 460,000 net acres running32 rigs. Oil production is nowat 30,000 bbl per day.

“The Eagle Ford is a big operation, and one of the mostattractive returns in our portfolio.”

Western Oklahoma is a corearea for the company, and theGranite Wash play is very active. Fisher says the play is ahigh-yield, high condensateplay, and though the companyis running 15 rigs, it’s just getting started in terms of

productivity. A long list of opportunities awaits, he says.

“We’re very excited aboutour new discovery in Ohio, theliquids rich Utica shale,” hesays. “We’re really just gettingstarted here. This play is likethe Eagle Ford in that is has allthree phases: oil, wet gas, anddry gas windows, but economically, it’s superior.”

Chesapeake began leasing inmid-2010 and has 1.25 millionnet acres of leasehold, by farthe largest position in the industry. The leasehold represents about 40 percent ofthe potentially drillable acres inthe Utica.

a new world

Fisher says that Chesapeake’s

leadership position brings withit a spotlight on the company.

“Our industry created an opportunity for our nation thatwasn’t expected—a chance tobe self sufficient in terms of energy,” he says. “That hasbrought a lot of scrutiny on ourcompany and the industry. Wehad to recommit ourselves interms of EHS performance. Werely on everyone to raise thebar. Safety is about behaviorand employees taking responsibility.”

Following the DeepwaterHorizon tragedy, the need forfurther increased safety is evenmore important.

“We all must up the gamenow more than ever. For us, itis the recognition and belief that99 percent of all incidents arepreventable,” he says. “We willshare openly and relentlesslywith our contractors, partners,and other key stakeholders tobuild the safest possible operation.”

The environmental aspect ofoil and gas production is alsorapidly changing the industry.There are more regulations andmore scrutiny.

“We’ve done a tremendousamount of work to ‘green up’our operations,” says Fisher.“We challenge everyone here toraise the bar for environmentallyfriendly production. We havethe right product—natural gasis the obviously cleaner fuel—but we still have to earn the license of acceptance from thepublic. The good news is thatwe can do it, but we have toshow it.”

Chesapeake started their in-house drilling and oilfieldservice companies small, butbottlenecks in the industry ledthe businesses to grow.

“We saw the opportunity thatas the industry continued togrow, we could vertically integrate our company—notonly in the drilling business, butpressure pumps, water hauling,oil hauling, and so on,” he says.“It’s designed to de-bottleneckthe industry and give us the resources we need as we moveinto new plays like Ohio, whereno infrastructure exists. Thesedo not provide the majority ofbusiness for us, and we are stilldependent on the service andsupply sector’s support.”

FISHErContinued from Page 1

Jeff Fisher, Chesapeake Energy

15PESA NewsnEws

Editor’s note: This essay was compiledfrom John Gremp’s presentation for the Executive Address Series, in which he discussed his perspective as a new andfirst-time CEO.

It’s a little different when you take on therole of CEO for the first time.

FMC Technologies, Inc. is a lot like otherPESA companies—we’re leaders in technology and in the markets we serve. Inthe 10 years that we’ve been FMC Technologies, our revenues have grownfour times, our profits have grown seventimes, our stock price has grown 10 times,and we earn one of the highest multiples inthe industry. In short, I became the CEO ofa very successful company.

For my first Board meeting, I was sittingoutside the Board room and they voted formy approval as CEO. I walked in to applause. There was a pause, and I realizedI was supposed to say something, but I hadn’t prepared any remarks. I said, “It’s aprivilege for me to be CEO of this greatcompany, and it’s my intention to make thisgreat company even better.” We finishedthe board meeting and I realized that I hadno idea how to lead a great company, letalone make it better. My leadership teamand I have spent the past year figuring outwhat it means to lead a great company andmake it better.

Change or Fade away

As it turns out, most great companiesdon’t stay great. Of the 500 Fortune 500companies in 1955, only 71 exist today. JimCollins, a professor at Stanford, studiedthese companies and what happened to

their greatness. It wasn’t so much what theindustry or the outside world did to them, itwas what they did to themselves. Theywere reluctant to change because the business model that made them successfulblinded them from making the changesthey needed to make.

So my management team and I realizedthat in order to continue to be a good company, we needed to challenge ourselveswhen things were going well. We’re still inthe early days of this, but I want to sharewith you, as a new CEO, how we think andhow the leadership team thinks about thefuture of our company.

We found that a clear strategy is helpfulin not only telling you what you want to do,but what you don’t want to do—it tells the direction of the company, gives a vision ofwhat the company will look like in 10years, and what we need to do to make thatvision happen.

Finally, once the strategy is established,it’s critical that the entire organization isaligned around that strategy. One of thecharacteristics of our company, as well asother PESA member companies, is growth.But our management team decided that itwasn’t good enough just to be bigger, wewanted to be a better company, and there’sa difference.

To be a better company, the managementteam decided that we needed a culturalchange, not that there was a problem withour culture—it has, in fact, contributed toour success. But we define better as delivering a higher level of quality ineverything we do in a way, frankly, that theindustry has yet to demonstrate. It’s ambitious, the idea of changing the behaviors of 14,000 people around the

world, not all of whom speak the same language as the corporate office in Houston. It won’t be easy—it will take along time—it will require strong leadershipfrom the top, but once achieved, we’ll be adifferent company—our leadership teamcan envision 10 years from now having aculture of being better, not just bigger.

Every employee deserves to know the direction of the company, and they deserveto hear it from the top. But that’s not theonly constituent of a company, and thismight sound obvious now, but in our casethe Board needed a clear direction from us.They needed to understand our strategy andbuy into the vision about what our company could look like 10 years fromnow. I’m not sure I completely grasped theimpact of that until after one of our Boardmeetings. One of our members came up tome and said, “You know, John, that’s thefirst time that we’ve really understood thestrategy of the company.” In subsequentmeetings the Board seems to be morealigned and in sync with all the decisionswe make as a management team.

Personal Experience

FMC is the only company I’ve everworked for. I’ve been there 37 years, so Ithought I knew the company and its culturepretty well. I had the opportunity to run allof our businesses for four years as COO,and I served as President for one year before becoming CEO. I wasn’t complacent, but I thought, “I’ve run all thebusinesses, so how different could this beas CEO?”

It’s very different and I didn’t understandthat until I was in the role. There’s analoneness that comes with the role. Severalyears ago, Andrew Gould, the former CEOof Schlumberger, did an interview in whichhe was asked what it’s like. He said,“Frankly, it’s quite lonely, you’re on yourown.” It doesn’t mean that you’re lonely, asin you’re not engaged with a lot of people,but for me, for the first time in my 37-yearcareer, I didn’t have a boss. Yes, I have aBoard, but the Board reminds me, “We’renot running the company, John, you are.We’re advising you and support you, butyou’re it.”

As Andrew said, the buck really doesstop with you. The decisions you make arebigger, and that’s natural, but I didn’t graspit until the Chairman of Spencer Stewarttold me, “The reason the decisions are sobig is because the easy ones are all madebelow you—it’s only the big ones that getto your desk.”

Finally, one thing I did expect but didn’trealize how pronounced it would be, is

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

n See Gremp, Page 16

There is no magic formula to becoming a CEO

16 PESA News nEws

communication. A CEO is always sendinga message. The microphone is always on,and it’s magnified and amplified for goodor bad. As I said, it’s the CEO’s job to communicate the direction of the companyto all constituents—in that sense, the communication and the amplification of articulating the strategy is critical andworks well. But the microphone is neveroff.

Career Paths

Before I was CEO, it seemed nobodycared about my lessons learned. But onceyou’re CEO, everyone wants to know ifthere’s some sort of secret to getting there.There aren’t any secrets, and a lot of mylessons learned are common sense, but theywill help you in your career.

The first is to be open-minded about yourcareer path. When I was in graduate school,I studied finance, and I envisioned a careerin finance. I hoped one day to be a controller within one of the divisions ofFMC. That happened a little earlier in mycareer than I had thought, and I didn’t havea plan beyond that.

One day the operations manager at thedivision at which I worked asked if I hadever considered a job in operations andworking in the shop. I told him I’d onlybeen in the shop twice, and once was bymistake. I told him I’d never thought aboutit, and he told me that they had a positionopen as materials manager. I told him that I

didn’t even know what that was, and morethan that, why did he think I’d be any goodat it? He convinced me it was something Ishould try. I did it, it was new to me, and Ienjoyed it and found a new career path.

A couple of years later, our company wasgrowing our defense business. Joe Netherland called me up and said, “Wehave a position open in San Jose, we’regrowing fast, and we’d love for you to interview for two positions—one is an assistant materials manager, and another asassistant purchasing manager.” I did, andJoe asked me what I thought. I said I lovedmaterials management, so sign me up. I goback to my division, and Joe calls me andsays, “John, we really loved your ideas, andwe’d love to offer you the position of assistant purchasing manager.” I thought,okay, I’m not really interested in that, buthe convinced me to come out to San Joseagain.

Joe told me, “We really have two purchasing managing jobs open—one isbuilding our purchasing systems and planning, the other one is heavy procurement.” So I finally agreed to do thesystems and planning job because it wassimilar to materials management. He cameback and offered me the other job. I wasfrustrated, but I agreed.

The lesson for me throughout all of thosecareers moves, was that I didn’t really understand what I needed at the time. I wasgoing where I was comfortable. But learning how to negotiate large forgingsand $100 million aluminum plate contractswith Alcoa was exactly what I needed.Being on the shop floor was the experience

I needed. Fortunately for me, there werepeople above me helping me with my career and guiding me into roles that Iwouldn’t have naturally moved to—in fact,I resisted them. Be open minded, and thelearning experience you have could contribute to your career in significantways.

The second tip is that when you thinkabout your performance, I like people tothink about not only what they accomplished over the past year, but whatthey learned. Accomplishments are great,but what you learn can actually be moreimportant in terms of your career. Thinkback to what you can do today that youcouldn’t do a year ago. Focus on your skillsand what you learned, and your career willbe fine.

When I think about all the roles I’velearned—all the technical and functionalaspects of the jobs—the one thing that younever completely learn is the ability to be aleader. Every job is different or larger, buteven as the CEO and Chairman of our company, I’m still learning about leadership. You’ll always learn about howto be a better leader—that will never stop,even when you become a CEO.

Finally, I strongly urge you to take advantage of PESA. I remember over 30years ago going to my first PESA meeting—the networking, the opportunityto understand this industry, and the abilityto build relationships was probably one ofthe best things that ever happened to me.The Emerging Leaders Committee is mak-ing that happen for all the young leaders inour industry and I appreciate it very much.

GrEMPContinued from Page 15

Oil 101The Emerging Leaders Committee

sponsored the seventh session of the

highly regarded Oil 101. The course

featured experts from member com-

panies outlaying the drilling process

from geology to end-of-life reservoir

issues. Speakers for this event were:

Keynote AddressB.P. Huddleston (Huddleston & Co., Inc.)

History of the IndustrySteve 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) Attendance for the event was 260.

Miguel Hernandez (FMC Technologies, Inc.)

Collin Gerry (Raymond James & Associates)

17PESA NewsnEws

Though 125 years old,Marathon is emerging from itsfirst year as a newly independentE&P company.

Year one for Marathon OilCorporation was a good one,says David E. Roberts, Jr., Executive Vice President andCOO. With over 200 percent inreserve replacement—all in liquids-rich plays—and 150percent growth anticipated for2012, the company is a competitor he told PESA members at the 2012 GulfCoast-Texas meeting.

“The story of Marathon beingable to compete with the independents moving forwardis that we can grow the business—we’ve moved from arealm of being compared withmajors where they typicallypromise zero to 3 percentgrowth and deliver none, tobeing compared with assetgroups that think 5 percent isloafing along,” says Roberts.“The wedge that will feed ourgrowth matches our skills in theunconventional—we’re aimingfor 200,000 barrels per daygrowth, and it will be 80 percent liquids and we’ll spend$3 billion a year to get there.”

do or die

Marathon’s success or failurewill largely depend on its success in the three large basinsin the U.S. in which the company will compete. WhileRoberts says that the companyis pleased with their holdings inthe Bakken and AnadarkoWoodford, the Eagle Ford is themost important.

“Our move into the EagleFord is our stamp as to whatkind of company we’re going tobe and how we’re going to beperceived,” he says. “Since November, we’ve stood up 16drilling rigs, we have three fraccrews, with a fourth coming inJune—it will give us the capability to add 20 new wellsand completions a month on acontinuous basis, with about2,500 wells planned over thenext 10 years. This will be, overall the things we’ve done in the125-year history of our company,the largest single capital exposure we’ve taken on.”

Roberts says that Marathon’sEagle Ford holdings will growto a 100,000 barrels per day inthe next five years—by anystandard, it’s a world class oilfield.

“We’ve got a lot to do interms of drilling costs and completion costs—an $8 millionwell in the Eagle Ford doesn’tsound like much compared to a$150 million well in the Gulf ofMexico, but when you turn2,000 of them, it’s $16 billion,”he says. “Focusing on that willbe critically important to us.”

double-Edged Sword

Roberts says that while theopportunities are great, so arethe challenges. In his 30-yearcareer, never has he seen agreater opportunity for the U.S.business, but he also can’t re-member a more difficult time.

“Our license to operate isunder attack by those who either don’t understand or outright oppose hydrocarbonproduction,” he says. “We focuson issues like fracturing, andpeople don’t understand theprocess—you can say untilyou’re blue in the face thatwe’ve drilled millions of fractured wells with no ill results, you can say we’ve beendoing this for 50 years, but untilwe cross the level of understanding of what peopleneed to know in terms of whatwe do, we’ll continue to struggle.”

The key to maintaining the

industry’s license to operate iscontinuing to earn the public’strust on a day-to-day basis,which means adhering to thehighest standards.

“Unfortunately, we’re all castin the same light as the worstoperator. So, the focus does nothave to be against the regulators,it has to be against the worst actors in each basin,” saysRoberts. “It’s tough in southTexas right now—these arepeople that have never seenanything like what’s going onright now. We get letters frompeople who see constant trucktraffic, dust in every direction,and as a native Texan, the heart-breaking thing is all thelitter. It’s just not right, and it’snot sustainable. We have to getbetter, we have to take care ofour neighbors, and we have topolice ourselves.”

Additionally, he says that inorder to gain and maintain thepublic’s trust, transparency isthe only way to move forwardas an industry.

“We’re participating in FracFocus, and all the wellsthat Marathon drills are listed inthere along with every chemicalthat we put in the ground,” hesays. “We recognize that itcould be a problem, because it’sa searchable database and people are going to be able touse it against the industry oneday. The price of transparencyis high. But if we don’t do this,then people think we havesomething to hide, and we don’t.”

Roberts says that the industry,and fracturing in particular,should be regulated. But, theregulation should stay at thestate arena with strong officialswho are locally minded.

“The worst thing that canhappen to this industry is for usto become a federally regulatedindustry—that’s disaster foranyone, irrespective to the chatter coming out of Washington,” he says. “Drillingrates have gone down on publiclands in the past four years,while they’ve risen astronomically on privatelands—that’s something wecan’t have happen. It all goesback to adhering to the highest operating standards, and it goesdown to each operator and supplier, and the number-onepriority is to protect our employees, contractors, and thecommunity we live in.”

Finally, Roberts says that theoperator and supplier relationshipmust change. He finds it amazing that as in industry thatdefines itself by constantlyadopting new technologies, thedynamics of a relationship areso difficult to change.

“We talk today about whohas the power in the relationship—to me, those are outdatedconcepts,” he says. “We are acollective industry. Each of ushave ceded certain responsibilitiesand capabilities over the last 20to 25 years, so we find ourselvesmore dependent on each otherthan ever.”

Today, he says Marathon’sbiggest challenge is finding reliable suppliers—people thatcan do the job safely and in theaggressive schedule that thecompany sets.

“We’re looking for new waysto relate to people who canbring us that reliability, and I’mwilling to pay more for it,” hesays. “We no longer have thecapability, if we ever did, to dothis ourselves. A vertically integrated Marathon is gone, soit will be relationships thatallow us to move into newareas, do different things, anddefine how we do our businessin the future. We want peoplewho are willing to integratetheir businesses into ours to reduce cycle times.”

Marathon execs bet company’s future on three oil plays

David E. Roberts, Jr., Marathon Oil Corporation

18 PESA News nEws

Deepwater is growing; no slowdown in sightDeepwater is increasingly becoming more

attractive to producers around the globe.As less-than-positive geopolitics dominate

many land-locked reservoirs and dozens ofnew deepwater discoveries are made, offshoredrilling 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, Williamssays that deepwater production is rapidly expanding and will continue to do so for theimmediate future. For example, in 2000, 2percent of global oil and gas productioncame from deepwater. Today, it’s 7 percentand deepwater is forecast to comprise 10percent of global production by 2020.

“Sustainable crude oil prices, excellent exploration success, and geographic expansionare the major drivers of deepwater activity,”he says. “The prospects for deepwater activity remain excellent through 2014.”

So far, 130 billion barrels of oil equivalenthave been discovered in the world’s deepwater basins. But the challenges are immense, says Williams.

“Our engineering challenges are secondonly to the space program—we use advanced technology, manage massiveweights and sub-surface pressures, and thereis a critical need for experienced personnel.”

Major Growth

Noble is among the largest offshoredrilling contractors in the world with 79 rigs.While the company is performing well in thecurrent market—the company boasts a largecontract backlog and increased cash flow inrecent years—Williams says that a majorfleet transformation is underway.

“Our customers are opting for the besthigh-spec rigs in both jack-ups and ultradeepwater floating rigs,” he says. “Theywant the latest generation of drilling rigs,equipped with the maximum capabilityavailable. This is improving activity and dayrates across all regions and segments, mostnotably in ultra deepwater.”

Noble’s rig utilization numbers bear outthat statement. Utilization of standard jack-ups is about 70 percent and standarddeepwater rigs are utilized at about 80 percent. Meanwhile, the company’s high-spec jack-ups have a utilization of more than95 percent, while the latest ultradeep rigs arenear 100 percent.

Operators are reassessing their globaldeepwater programs in light of sustainedhigher-than-expected crude prices, saysWilliams. As prices have remained at $90-plus levels, exploration and productionspending is on the rise. From 1999 to 2011,E&P spending increased by 12.9 percent, butforecasts now call for international E&P

spending to double 2009’s levels by 2015.Adding to sustained high crude oil prices,

skyrocketing E&P spending, and customerdemand for the newest rigs, shipbuildingeconomics are now very attractive, he says.The result will be massive new additions toworldwide drilling capacity through 2015.

“Before 2008, the total average new-buildrate of drillships, semi-submersibles, andjack-ups was about 10 per year,” he says.“Over the next three years alone, 148 newrigs will come online—this is driven by successful exploration and a desire to replace the aging jack-up fleet.”

Noble has more than $5 billion in capitalcommitments to date, with three drillshipsdelivered in 2011. They are adding five premium new-build drillships and six premium jack-ups in the next two years.

The company’s building program willdrive strong earnings and cash flow growthover the next three years, says Williams.Globally, spot day rates are setting newhighs and contract terms are lengthening—excluding the 26-rig “Build in Brazil” 15-year program, the average contract length is3 years with an average day rate of$537,000.

While deepwater production is expanding,the geography of deepwater is doing thesame. The so-called Golden Triangle—Gulfof Mexico, South America, and WestAfrica—comprised 77 percent of all deepwater discoveries from 2006 to 2008.Today it’s down to 54 percent due to emerging opportunities in eastern Africa,Australia, the Far East and more.

“Customer demand is building acrossmost regions including the U.S. Gulf ofMexico, Brazil, Africa, and Far East—most

industry capacity is committed for this year,”he says. “Drilling success remains high withthe expansion into frontier locations likeTanzania, Kenya, and New Zealand.”

U.S. Gulf

While worldwide rig utilization remains atabout 90 percent, the U.S. Gulf of Mexicowas a consistent hotbed of activity until theMacondo disaster. Before the spill, floatingrig utilization was nearly 100 percent, fellpast 90 percent, but has rebounded 97 percent. Jack-ups utilization fell from 80 percent to 70 percent, but has rebounded to92 percent.

“Shallow water activity has been slowedby low gas prices and the North Americashale plays—there’s high idle capacity,” hesays. “But the Gulf of Mexico is an impres-sive hydrocarbon region, especially in deepwater.”

Of all deepwater discoveries from 2006 to2011, nearly one-fourth of the 181 were inthe Gulf of Mexico—Noble had five of those.

The rebound in rig utilization in the Gulfis a direct result of the well permittingprocess recovering, says Williams. From2010 to 2011, only 7 permits were issued inwaters greater than 1,500 feet—in the firstfour months of 2012, 11 permits have beenissued.

“The day rate environment is supportedby tight supply and demand dynamics, sustainable crude oil prices, and excellentexploration success,” he says. “Look for acontinuation of shallow and deepwater capacity additions as aged equipment is replaced and shipyard economics remain attractive.”

David Williams, Noble Corporation

19PESA NewsnEws

tournament Champs

Adam Peakes (Tudor, Pickering,Holt & Co.), Gary Stratulate (AxonEnergy Products), David Cunningham(Tudor, Pickering, Holt & Co.), andJim Hogan (Baker Hughes).

Second Place

Rusty Knight (Forum Energy Technologies), Steve Twellman(Forum Energy Technologies), MikeChamberlain (MRC), and JoeBarnes (MRC).

third Place

Mike Monteferante (Halliburton),Don Greenlee (Oil States Industries),Mike Vinzant (Halliburton), andChad Woodward (Halliburton).

longest driveAnthony Hooper (Baker Hughes)

Straightest driveMatt Holifield

(Consolidated Pressure Control)

Closest-to-the-PinBill Crabbe

(National Oilwell Varco)

Closest-to-the-Pin in twoRandy Miles (Patterson-UTI)

Explorers Golf 2012Weather was virtually perfect for PESA’s Explorersof Houston Annual Golf Tournament, held March 1at Redstone Golf Club. The event was chaired andorganized by Committee Chairman Robert Workman(National Oilwell Varco).

Above: Scott DuBois (Premier Pipe) takes his thirdshot, a chip, from a long Par 5.

Right: G.S. Tan. (Keppel Amfels) discusses strategyfor 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 veryclose to the hole on a short Par 4.

PESA NewsPetroleum Equipment Suppliers Association1240 Blalock, Suite 110Houston, TX 77055

First ClassUS Postage Paid

Houston, TXPermit No. 04805

JAN FEB MARMexico 25,134 46,977 106,705 Angola 17,672 17,408 66,107 Singapore 71,866 51,869 56,638 Brazil 48,172 53,760 42,858 Russia 22,452 28,089 35,552 Venezuela 19,158 36,676 32,790 U.K. 34,638 17,979 32,577 U.A.E. 21,104 39,176 25,158 Saudi Arabia 54,058 25,054 24,867 China 21,835 18,730 24,395 Australia 16,151 12,191 22,080 Korea 22,966 6,736 18,940 Colombia 16,205 18,568 18,724 Malaysia 4,132 5,390 17,740 Egypt 8,894 15,588 17,736

Subtotal: 404,437 394,189 542,869 All Other: 241,155 260,972 222,660 Total 645,592 655,161 765,529

U.S. Oil and Gas FieldEquipment Exports

Top 15 Destinations for Q1 2012(in U.S. $1,000)

Source: U.S. International Trade Commission

20 PESA News nEws

Brazil is booming, and manyPESA member companies are incountry with more to follow.

For this year’s Legal Seminar,Alexandre Chequer, a Partnerwith Mayer Brown, LLP, discussed doing business withPetrobras, and Aguinaldo Cruz,Local Content Manager withCameron, reviewed local contentissues and related challenges.

The country has 12.8 billionbarrels in proved reserves, whichis expected to triple after the pre-salt discoveries, and 417 billion cubic meters of naturalgas. Brazil expects to invest$500 billion on energy projectsover the next 20 years, and 62percent of the pre-salt area andmost of the sedimentary basinsare still unexplored.

Companies that operate inBrazil work with Petrobras, asthey operate 93 percent of thecountry’s fields. By 2020, thecountry will need 53 deepwaterdrilling rigs, 504 supply vessels,and 84 production platforms.Their growth targets are thelargest in the world with 2.7 million barrels per day in 2009,increasing to 3.9 million in 2014,and 5.4 million in 2020—all areconfirmed discoveries.

Chequer says that all contractors

are subject to a bid process, asdirect contracts only occur whena supplier owns proprietary technology, or is among only afew companies that have accessto a desired technology.

To work with Petrobras, acompany must register as a supplier, which certifies that thecompany has been approved bythe Petrobras’ legal, technical, financial, and tax qualificationrequirements. However, Chequersays there are recurrent issueswith registration including thecomplexity of the registration itself, difficulty in identifying thecorrect categories for a company,and it can be difficult to obtain

clarifications from Petrobras.“Even if your company has

experience with Petrobras in theGulf of Mexico, but not inBrazil, you have to prove thatyou are able to build local capability to work for Petrobrasin Brazil,” he says.

Local content is here to stay,especially in Brazil, says Cruz. Infact, it’s spelled out in the Oil andGas Industry National Mobiliza-tion Program’s motto: Everythingthat can be done in Brazil mustand will be done in Brazil. Localcontent requirements are designed to allow for the creationof jobs in the country, strengthenthe Brazilian economy, promote

research and development in thecountry, and create a managerialskill set.

“Doing business in Brazil is agood opportunity and three factors support it: the geology;growing production; and whilethe regulation is complex, it iswell-managed,” says Cruz.

Local content rules were expanded in 2010 by the Brazilian government and nowrange between 55 to 65 percent.The local content obligation isnow included in concessionagreements, transfer of rightscontracts, and production sharingcontracts, which are passed fromthe ANP (Brazil’s NationalAgency of Petroleum), to oilcompanies, and finally to suppliers.

Local content of goods is calculated excluding the value ofimported parts. Local content ofservices is calculated by takinginto account salaries and additional taxes of Brazilian citizens—foreigners with Brazilian permanent visas are notfactored into local content calculations. All machinery, electrical, transportation, andservices are subject to local content rules and penalties applywhen the measure is not achieved.

Brazil is an attractive investment for service industry

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