Candida Scott, senior director, IHS CERA, led a discussion at CERA Week in Houston Tuesday that addressed supply chain management. The session, “Ensuring Capacity in the Supply Chain: What’s Different This Time for Service the Industry?” addressed a broad range of subjects, one of which was increasing costs.

Louis Raspino, president and chief operating officer, Pride International Inc., talked about several segments of the drilling contractor industry and how they have been affected by the dramatic drop in day rates precipitated by the recession.

“Shallow-water contractors have been hit quite hard,” he said, explaining that the rig segments with the shorter contract terms were destined to bear the brunt of lower day rates. According to Raspino, the good news is, they’ll be the first to recover when the market picks up. “You’ll see the upturn hit the land rig sector hardest in a positive way.”

Pride is adding training facilities in an attempt to fast-track its people.

The primary reason is that many of the deepwater drilling contracts were already in place – with day rates contracted at a higher level – when the recession hit. In defense of the higher rates, Raspino pointed out operators had an advantage over contractors when rates were lower. “We honored our contracts in the down market,” he said, “so we expect operators to honor the contracts in the up market.”

The big challenge as the market picks up will be staffing, Raspino said, because contractors were forced to make cuts when day rates and rig utilization rates fell. “It’s going to be hard to bring people back to this industry,” he said.

That is the reason Pride is investing in personnel. “We’re putting a lot of money into leadership training,” he said, “because the drilling contractor that wins in terms of personnel is the one who can attract and retain people.”

Retention is a particular challenge in deepwater operations, Raspino said, because of the level of training needed and the enormous demand for people that was brought about by a drilling boom that introduced a large number of floaters into the market place. Speculators that built rigs now coming out of the yards did so on the assumption that they would be able to attract workers. Today, Raspino said, they are trying to “buy talent” from contractors like Pride.

Pride is adding training facilities in an attempt to fast-track its people. “We have to develop our own talent,” he said, noting that recruits need to be trained very rapidly and placed into positions that they are interested in filling. “This is one of the most significant challenges that I lose sleep over every night,” he said.

Tim Probert, president, global business lines and corporate development, Halliburton, agreed with Raspino about the need for more qualified people. “We as an industry cannot afford a degree of attrition that diminishes expertise,” he said.

For service companies like Halliburton, the challenge of retaining expertise is only one of the issues at hand. Another critical issue is “increased service intensity” resulting from what Probert called “the inexorable trend to more complex wells.” Advanced technologies are needed, he said, “Because it isn’t getting any easier to exploit reserves.”

One of the interesting things that has changed in the last year or so to address the need for intense services is “packaging.” According to Probert, for Halliburton more than 30% of services applied are packaged.

One of the sources of increased cost is one-off projects, Probert explained, so “high utility of assets” helps both the provider and the operator. Packaging helps to eliminate flat time in the schedule.

Developing and integrating services are ongoing objectives. “Technology continues to be key,” Probert said, because it will lower costs over time. This is why Halliburton has continued R&D spending through the downturn. In a major departure from the past, he said, “We’ve continued to spend at a fairly high rate.”

For Brad Dickson, vice president and chief marketing officer, Dresser-Rand, the cost of materials is one of the biggest challenges in continuing to supply products to customers. Because materials need to be purchased nine to 10 months ahead of scheduled delivery, it takes some time before savings can be passed along.

Dresser-Rand is trying to hold costs down, Dickson said. “We’ve taken a lot of action to reduce or hold our cost. We learned how to flex our supply chain to meet increased demand.” The problem, he said, is that although the price of steel might drop, price increases in other areas can impact the final product cost.

One approach that seems to be meeting with success, is a changing relationship with suppliers, Dickson said. “We’re taking cost out together on both sides of the value chain.” This “alliance approach” helps both the buyer and vendor in the long run.

Another partial solution has been to expand the vendor list more broadly in Asia. “The whole Asia Pacific region is becoming an increasingly important part of our supply chain,” Dickson said. Although by and large, this is good news, in countries like Vietnam and China, he said, materials are in demand domestically as well.

For Maroun Semaan, group chief operating officer, Petrofac, controlling costs has been a moving target. “Although quite a bit of cost reduction has come from procurement,” he said, that component makes up only 20% of the total cost.

To make significant progress, there has to be a focus on expanding standardization, particularly upstream. “There is plenty of room to standardize,” Semaan said, “and good practices need to be shared.”

Another area for consideration is training. “Many large projects have suffered because of poor quality construction,” he said, noting that training has to be conducted enough in advance of production so local providers are in a position to provide trained workers. “We need to induct more people into the industry,” he said.

Finally, Semaan said, “There is a lot of room for improving client/contractor relationships.” The key to it all, he said, is to plan better together so that both sides win.