Subsea Technology Innovation for the Australian Oil and Gas Business

Betsy Donaghey, Senior Vice President, Browse Development, Woodside Energy Ltd, is an engaging speaker who scattered amusing anecdotes between the sober points she made in assessment of the trends and future needs of the oil and gas business in Australia.

[In my usual style, I mix first and third person, quoting and paraphrasing the speaker to preserve the speakers intent and to improve readability. Usually it is clear from the context who's words you are reading; if not, I put editorial remarks in square brackets.]

She graduated from Texas A&M with a Master in Operations Research followed by 25 years experience in the oil and gas industry - having entered the industry at 4 yo ["haha"]. Perth is ideal for the first [subsea technology] conference - to live and work in a place with a growing oil and gas industry, and raise your families live in Perth; if you want to shop on Sundays, go somewhere else [more laughter - inside joke where Perth outlaws Sunday trading, sigh].

We need more reliable equipment, cheaper equipment, greater ease of moving across vendors equipment, greater capacity in operating flexibility. Woodside has the goal to be one of the world's leading producers of LNG by 2015, primarily the NW Shelf. The goal is backed by delivering projects - oil and gas projects, of course Pluto LNG project (Sunrise and Browse).

Karratha Gas Plant, North West Shelf Venture, Western Australia (courtesy of Woodside Energy Ltd).

Lovely - I'm so proud of my company... what is the relevance to this conference? Subsea technology (Cossack Pioneer in 1995 has subsea wells) - 7 projects have offshore components, 6 have subsea components, 50% subsea production, Pluto entirely dependent on subsea wells for production.

Says something for confidence of company and skills and engineers, some at this conference:

• Multiphase pumps with fibre optic controls.
• Depths of more than 500m.
• Choose subsea - safety drivers - move people away from well heads.
• Lower cost, greater flexibility.

We expect to earn greater than $1 billion revenue from business unit entirely dependent on subsea technology. We are positive subsea technology, achievements will continue. Browse and future developments are highly likely to use subsea technology, but not necessarily so, and "dry well" remains an option.

Browse LNG first discovery in 1971 sign-posted development challenges for the field which is more than 400km offshore from Broome, largely in deep water 800m, some shallow (under coral reef), a world-class resource. Progress of technology and strong LNG markets gives a reasonably clear choice between:

1. "Dry tree unit" - reduced well workover and rework cost, use carbon steel pipeline, ease to use and fix.
2. "Subsea wells" - safety, flexibility, location, vertical and deviated wells.

It is possible we will go with dry tree, subsea wells or combination of both. The wider Australian industry required high availability and reliability - important for oil wells, essential for LNG. Need to reduce workover and intervention costs, and among others, improved flow lines and subsea processing. When you discuss improvements, saving - please remember, I want them now. ["hehe"]

Betsy's talk gives me confidence that we are on the right track with ACOSP to fill a gap between academic development and industry deployment. With systems that are currently available for deployment in the oil and gas industry, and even with product development programs, we are seeing retrograde outcomes that ignore standards, prevent interoperability and are contrary to goals of lower-cost, flexible deployments with higher reliability being sought by Betsy and her peers.

The goal of ACOSP is to facilitate and lead an industry technology development program that focuses on selected gaps in capability in order to stimulate industry cooperation and innovation, standards development and adherence, to foster an awareness of risk assessment and mitigation. Some of our local academic and industry players are about obscuring these wider benefits in favour of selfish outcomes but it is important to keep an eye on the wider economic benefits that will accrue to WA with the development of a viable, local subsea technology sector.

The status quo among some local operators, contractors and vendors is contrary to cooperation, the development of beneficial industry and technology clusters however a shift in mindset and approach is sorely needed for the industry to meet the ambitious targets described by Betsy.

Subsea Technical Conference 2009

There is much more to say later but for now, congratulations to everyone involved in the First Annual Subsea Technical Conference (2009) held at the Perth Convention Exhibition Centre (PCEC) from 17-19 February, concurrently with the hugely successful Australian Oil and Gas (AOG) Conference.

The Chair of the Perth branch of the SUT, Martyn Witton, welcomed everyone to First Annual SUT Conference, "Thanks for coming." In his introductory remarks, Martyn noted that subsea production will be the primary method with the percentage of income from subsea coming to 80% - requiring systems, long distance, subsea processing, pressure boosting - new and different technologies.

Reliability needs to be demonstrated; developing people and skills, and applying new technology. SUT spreads technology widely, economic benefit, applying technology, growing need for engineers, largest proportion in south east Asian and Indian subcontinent.

Outside the continental shelf and exclusive economic zones, 3500' depth, systems, local and global networks, specialist technologies, continue to support reliance on hydrocarbons as energy source until replacement comes along, also renewable energy. About being in Perth, generating subsea technology, talk and listen to people, research centres like ACOSP and CMST. Acknowledge the traditional custodians of the land, the elders, past present and future traditions that they hold. Thanks to the organising committee and sponsors.

The SUT is an international body actively promoting the development, dissemination and exchange of ideas, information and technology related to the underwater environment.

Thanks to David Brooks, President of SUT. Welcome to the Hon. Peter Collier, the Minister for Energy, Training for the Premier who is in Japan, and Helen Liddell, British High Commissioner to Australia. The Minister noted the NW Shelf and that more than luck is needed to establish ourselves as hub for the petroleum industry. The deep waters off the coast of WA, requiring subsea development technology to reduce production costs.

Woodside Browse, Chevron LNG, BHP and others are utilising subsea for 40% of Australian production rising to 80%. WA is base for Australian offshore oil and gas industry and will remain central - sometimes hope the east coast will remember that. Noting there are workshops on reliability, commercialisation of technology... officially open the Perth Subsea Technology Conference.

Over the course of the conference it became clear that while there is an incredible capability there are sometimes impenetrable barriers to cooperative development in the exploitation of new technologies that are sorely needed. The barriers are not only based on conservative business assumptions but also the tyranny of distance from another colony whereas some of the American companies operating in WA, for example, merely operate under instruction from afar - uninterested in local innovation.

The global housing bubble?

One paragraph in an article entitled World in Reaction in The Weekend Australian January 31-February 1 2009 by Michael Stutchbury contains a few of the wrong and self-contradictory ideas held about the causes of the global financial crisis in so few words that it presents a good opportunity for me to point them out and to suggest an alternative view.

The article makes rather odd reading because several of the quotes and ideas which are represented to the reader are worthy of fuller and properly-reasoned treatment, especially about the direction of the US in respect of the apparent strengthening of support for the spectre of protectionism. Aside from the dissonance forced upon the reader by the recitation of material, and blithely made claims including that "the old Davos consensus failed to recognise that financial markets are not always self correcting and are prone to bubbles," the words I am particularly troubled by are as follows:

This [the world economy] came undone because the excess Chinese savings pumped up the American housing bubble, facilitated by the new era of financial products. Financial engineering allowed the movement of Chinese peasants from the rice paddies to the city factories to finance home loans for poor Americans. The trouble came when the borrowers couldn't service the debt. The securitised mortgage products had hidden the dud loans. That broke trust in the banking system, an essential element of a market economy.

Let's analyse the fallacies of these statements in three parts:

1. "Chinese savings pumped up the American housing bubble" is obviously untrue. The nexus between the funding of expenditure on imports by Chinese purchased of American bonds and the price of housing is tenuous at best. The US economy is strong because it is a diversified and efficient economy that reaps the most financial benefits of globalisation, both exporting premium goods and services and importing low inflation. The American housing bubble is no different to that in the UK, Spain, Australia or Hong Kong who do not benefit from Chinese savings propping up their economies.
2. "Financial engineering allowed the movement of Chinese peasants from the rice paddies to the city factories to finance home loans for poor Americans" provides a second stanza of the same mantra with "home loans for the poor" in place of "housing bubble [for the rich]." Which is it, or is it somehow both? Low-income, owner-occupied housing is entirely distinct from aspirational middle income owner-occupiers climbing the "ladder of opportunity" and upper income earners purchasing investment properties.(*) I note that predatory lending is abhorrent and has an awful impact on those caught in its net so should be prosecuted vigorously by the authorities.
3. "The trouble came when the borrowers couldn't service the debt. The securitised mortgage products had hidden the dud loans. That broke trust in the banking system, an essential element of a market economy." Okay, I mostly agree with this point; but I'm really not sure about broken trust except for between the banks. I note that the banking system as a whole is secure in the US even as parts have fallen over (likewise in the UK and Europe), in contrast to the Australian banking system which is well-capitalised and profitable. The causes of the breakdown in inter-bank lending and resultant slowdown in commercial and general loans are at the root of the current underlying problems.

(*) Notably from the Australian perspective, the property market in the US bubbled along even in the absence of the financial benefits of negative gearing available to Australian tax payers, posing another conundrum for Australian policy makers seeking to decouple first-home ownership from rent-seekers and those seeking capital gains in the property market.

Credit tightening during the down slope in the economic cycle (i.e. recession) is normal and expected which gives a glimmer of silver lining to the billowing clouds of gloom. The positives are the repricing of asset values to realistic levels (as asset price speculation is dampened), the reduction in the cost of labour and resources (due to the relaxation of production capacity constraints), lower interest rates and disinflation (i.e. a decline in inflation - so long as deflation can be avoided), which together should soften the economic landing and give a platform for sustained growth during the ensuing upswing.

None of this offsets the personal dislocation of those workers, and their families, who have been displaced in the workplace whether by being made redundant, or being asked to reduce working hours or take a cut in income. The goal of targeted economic stimulus should be to minimise the effects and duration of the economic downturn so as to avoid stimulating cost and wage inflation during the return to economic growth. With a little courage, governments, enterprises and individuals can benefit from counter-cyclical investment in a slowing economy and at the same time help to pull up the economy in order to hasten a return to economic growth and full employment.

I am surprised there is so little commentary in the media about the Glass-Steagall Act being repealed (in 1999) and more importantly the repudiation of the reforms that were enshrined in these pieces of legislation in the aftermath of the Great Depression, the most relevant being the effective separation of commercial and investment banking. I do not know if this is a good or a bad thing overall but the erstwhile reason was to rebuild lost trust in a stable banking system.

Many commentators appear to have rediscovered the role of directors in managing financial and non-financial risks, eg. reputational risk, of the companies they manage, albeit largely by delegation of specific responsibilities to a chief executive officer and his nominees. The major part of the remaining, non-delegated role of directors is specifically to consider and approve strategy, as proposed by management, and to oversee risk primarily through the Audit and Risk Committee that is a subcommittee of the board of directors.

It is equally surprising that the Sarbanes-Oxley Act has got little airplay in the context of the current crisis; hastily enacted after the last crisis, it is no surprise that it has made no real difference to the risks prevalent then and now. There is something to be said for avoiding black-letter law for principle-based reporting standards as exemplified by International Financial Reporting Standards as adopted by Australia and on the way on the US. The right regulation is desirable instead of over-regulation in order not to dampen entrepreneurial risk taking and innovation which provide the most benefit to the economy in the long term.

A quick comment on the article as a whole is warranted because while many of the ideas in the article are sound, in my opinion the combination of quotations from respected sources together with 'editorial' remarks is misleading in an insidious way that conveys the selected quotations and the authors conclusions as reliable beyond their merit.

Reporting from Davos, the Russian Prime Minister Vladimir Putin is quoted as one bookend to the sentence, "The epicentre of this crisis is the US, the heart of global financial capitalism," cutely contrasting the pseudo-free society and markets of the main entity of the formerly socialist Soviet Union with their capitalist nemesis. The other bookend is this unattributed quote, "If there are no people in Wal-Mart to buy your product, what is your export strategy?" referring to export-led growth of developing nations as a result of globalisation.

This meandering is partially saved by the wonderful line that, "It's been the greatest poverty reduction program in human history," in reference to the "triumph of global capitalism in absorbing the population masses of China, India and Brazil." Kevin Rudd would do well to remember this in light of his recent disparaging remarks about the last 30 years of global development.

After posing as a fiscal conservative before the last Federal election, if he is not careful Rudd's current foray into fiscal adventurism could set Australia up for a period of prolonged stagnation and low growth instead of heralding another sustained period of growing economic prosperity.