The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

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The State of NPT on High Specification Offshore Rigs First Annual Benchmarking Report

Copyright Athens Group 2009

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

Executive Summary
New technology on fifth and sixth-generation offshore rigs enables drilling companies and operators to drill faster and deeper, further offshore, and in harsher environments. Speeding time to oil, these high-specification rigs also help companies meet more stringent environmental and safety regulations, and reduce the number of required rig personnel. But technology, specifically the Drilling Control System (DCS) the heart of rig automation, has brought new reliability and safety challenges. These challenges, coupled with a shortage of software-experienced personnel, high newbuild prices and day rates, and a spike in rig construction that has stretched everyone too thin, has resulted in unacceptably high costs of non-productive time (NPT). Athens Group conducted and published this industry survey to help drilling contractors and operators reduce DCS NPT by: Benchmarking the calculation, costs and causes of downtime and schedule delays on high-specification offshore rigs Identifying what drilling and operating companies believe can and cannot be done to reduce costs in this area Recommending cost-effective strategies to reduce DCS NPT The good news from this survey is that, by focusing on specific and cost-effective strategies, drilling companies and operators will significantly reduce the cost of NPT. Key survey findings and recommendations to help reduce DCS NPT follow. See Schedule A for more information on survey methodology and respondents.

NPT costs drilling contractors from $100 -150+M per year. 20 - 30% of all NPT is DCS related, i.e. Software causes $24 - $45M of NPT annually.

The Cost of NPT

There are significant differences in how drilling contractors calculate NPT, this: - Results in under-reporting the cost of doing nothing to reduce NPT - Hinders benchmarking that would enable companies to improve this metric In the last 12 months, 64% of contractors and operators have endured newbuild sail date delays of 1 - 4+ months, resulting in $11.3 - $45M in lost or deferred revenue NPT costs drilling contractors from $100 -150+M** per year, depending on the components used in the calculation 20 - 30% of all NPT is DCS related, i.e. $24 - 45+M of NPT annually is caused by software The DCS manages 75 - 95% of the movement and operation of the equipment involved in accidents on the drill floor

The Causes of NPT

Greater automation, the relative newness of software on rigs and the spike in the number of newbuilds underlie the top five reported DCS NPT causes: 1. Shipyards lack topsides experience (all: drilling contractors, operators and equipment vendors) 2. Supplier complacency (all) 3. Equipment vendors are overextended (drilling contractors and operators) 4. Rigs are pushed out of the slip too soon (drilling contractors and operators) 5. Drilling equipment became too complicated - too fast (drilling contractors)

Equipment vendors placed greater emphasis on: Not enough competition among vendors Lack of software-experienced personnel

** This was the highest dollar range we included in our survey as a value to select, so NPT may be considerably higher.

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

Opportunities to Reduce NPT

Process improvement and incentives figured prominently in the strategies drilling contractors and operators believe are most likely to have an impact on reducing DCS NPT. Top opportunities include: Improved software quality control processes Earlier implementation of software quality practices and earlier installation of the actual software in the rig newbuild cycle Greater vendor oversight and incentives based on on-time delivery and NPT rate Increased risk assessment and mitigation Better testing of software during Factory Acceptance Testing (FAT) and Commissioning Equipment vendors agreed with the above but placed greater emphasis on: Stronger contracts Better-defined requirements

Organizational Barriers
The ripple effect from the 1980s layoffs, and lack of responsibility for and visibility to NPT hinders progress in this area. The top two barriers reported were: Lack of resources with the right skills and experience No personal responsibility for tracking and improving DCS NPT

The causes of NPT are industry-wide, so the industry as a whole must collaborate and focus on the best opportunities to reduce DCS NPT.

Recommendations
The causes of NPT are industry-wide, so the industry as a whole must collaborate and focus on the best opportunities to reduce NPT. With 93 newbuilds scheduled for delivery from 2009 to 2012, now is the time to take action in the following areas: The calculation of NPT should be standardized. Anonymized results should be available for benchmarking DCS NPT should be tracked and reported separately to enable effective focus on reduction initiatives An executive should be charged with measuring, reporting and reducing DCS NPT More focus must be given to the unique aspects of rig software, in particular: Improved visibility and education on the impact software has on equipment failures and rig safety Stronger contracts and better defined requirements Industry-wide adoption and greater oversight of software quality process and procedures Standardization of equipment interfaces - the weakest link Earlier implementation of software in the rig newbuild cycle The addition of Software Engineering as a discipline, complementing the Electrical, Structural and Mechanical Engineering functions during the newbuild phase The addition of a Control Systems Technician, complimenting the Electrical and Mechanical Technicians during the operational phase Greater vendor oversight and incentives based on NPT Increased risk assessment and mitigation More thorough DCS and DCS interface testing during FAT and Commissioning, planned for and executed by personnel with deep software experience Full survey findings follow.

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

NPT by the Numbers

Significant Calculation Differences Hinder the Ability to Benchmark NPT Only one factor (day rate) is used by all drilling contractors and four factors are used by less than 75% of all responding companies. These differences: Result in under-reporting the cost of doing nothing to reduce NPT Hinder benchmarking that would enable companies to improve this metric

64% of drilling contractors experienced delays ranging from 1 - 4+ months. Based on an average day rate of $383,857 that amounts to $11.3 $45M of lost or deferred revenue.

Opportunity Cost of Not Being Able to Drill Less than half of the respondents include the opportunity cost of not being able to drill in their NPT calculation. Production platforms can pump 20,000 to 250,000 bbl per day. Newbuilds average 21 days of downtime in the first few months. At US $35.00, the price of Nymex Crude on December 24th, 2008, the opportunity cost of 21 days downtime ranges from $14.7M.- $183.7M, depending on the number of bbl per day. Spread Rate Spread rate is roughly double the day rate amount yet only 37% of respondents include this component in their calculation, considerably understating NPT. Sail Date Delays Even though 64% of drilling contractors experienced delays ranging from 1 4+ months (approximately $11.3 - $45M in delayed revenue), 31% of respondents do not include this metric in their calculation. Based solely on the average day rate for deepwater rigs of $383,857 that amounts to $11.3 - $45M of delayed or lost revenue. Sail date delays in the 12 months prior to the survey were as follows: From 1 to 4 weeks - 36% From 1 to 2 months - 32% From 2 to 4 months - 14%

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report According to Coltons January 14, 2009 report of the Worldwide Construction of Offshore Drilling Rigs, 57 highly automated semi-subs and drill ships are scheduled to be delivered in 2009 and 2010. This represents a 228% increase in the number of rigs of this type delivered in the nine-year timeframe between 2000 and 2008. And those rigs were less automated than the newbuilds sitting in the slips today. Of the 93 drill ships and semisubs on order for 2009 2012, the majority ( 84% - 78 rigs) are being built by four companies: Samsung Heavy Industries (31), Daewoo Shipping (24), Keppel FELS (13) and SembCorp Marine (10). In an article published in Oil Online in May of 2008, Lawrence Dickerson, president and COO of Diamond Offshore said he didnt see how all the orders were going to come out on time, no matter who is building, and that he did not see Chinese shipyards as being able to handle some of the rigs on order. He added that based on a recent visit he made, it seemed like shipyards were trying to deal with the technology shortfall with massive amounts of labor. More non-software experienced labor is not the solution to technology quality. Percentage of NPT by Category The percentage of NPT by category varied too widely to make averages meaningful for benchmarking. The rankings below are based on the highest percentage reported. 1. Surface equipment failure* 2. Sub-sea equipment failure 3. Other (unplanned, waiting, unknown) 4. Downhole problems related to the physical environment 5. Rig repairs 6. Weather 7. Downhole equipment failure 8. Personnel 9. Stuck pipe 10. Accident/Incident * The company reporting this as the highest factor tracks only 4 of the 10 categories, skewing the averages. Average Annual Cost of NPT The average annual cost of NPT for drilling contractors who: Include spread rate in the calculation, $150M+** Do not include spread rate in the calculation, ranges $100 $125M Percentage of NPT due to Drilling Control System Problems 50% of respondents said the DCS was responsible for 20 - 30% of total NPT 50% of respondents do not measure this aspect of NPT From a safety perspective, DCS reliability is critical. The most recent Annual International Association of Drilling Contractors (IADC) Accident Statistics Program (ASP) Report showed that, by far, most injuries occurred on the rig floor. The DCS manages 75 - 95% of the movement and operation of the equipment involved in these accidents. Struck by and caught between type accidents accounted for 53% of lost-time injuries and 55.65% of recordable injuries Pipes/collars/tubulars is the equipment category responsible for the most lost-time and recordable incidents Tripping in/out is the operation that involved the most lost-time and recordable injuries 5
** This was the highest dollar range we included in our survey as a value to select, so NPT may be considerably higher.

The DCS manages 75 - 95% of the movement and operation of the equipment that causes the most injuries on the rig

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

The Drilling Control System Defined

The DCS is at the heart of drilling operations and critical to the efficient and safe operation of many rig systems. It has become more complex and more integrated with equipment sourced from multiple vendors. Potential failures cannot be identified by a single vendor, who may not understand the system-wide domino effect of a component failure. Even when multiple components are sourced from the same vendor, they may have been built in different factories and companies and not thoroughly tested from an integration perspective.

Equipment interfaces are the weakest link in terms of reliability and safety due to lack of standards and insufficient testing.

Equipment interfaces are the weakest links in terms of reliability and safety. Here is just one example of a problem that cost a drilling contractor $454,000 US: Riser Falls to the Bottom of the Sea A driller was performing a test while a riser joint was suspended 70 feet in the air (top point of the riser). Ironically he was getting ready to perform a Job Risk Analysis with the rig hands so he put the chair in Standby mode. In doing this, he accidentally touched the wrong button on the touchpad which set the operations from Riser mode to Pipe Handling mode. The setting change caused a pulse to be sent to the equipment every three minutes to make sure that pressure was not building up. The driller walked out onto the drill floor and three minutes later the pulse was sent. The riser unlock command was sent to the equipment. The joint unlocked and fell through the well center and into the ocean. Had the hole been closed or if the joint had not fallen perfectly straight, it would have swiped the rig floor possibly killing the people there and causing major damage to the drillers cabins or other equipment.

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

Causes of DCS NPT and Schedule Delays

Three key industry-wide dynamics underlie 11 identified causes of DCS NPT: More drilling and drilling support functions are being automated and DCS software is integrated throughout all of these functions Software on offshore drilling rigs is still a relatively new phenomena More rigs are under construction today than at any other time in history

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report To drill deeper (7,500+ feet) and further offshore requires larger rigs and more automated drilling, vessel and power management systems. For example, the well control systems on fifth-generation rigs are rated at 15,000 pounds per square inch (PSI) pressure. Unfortunately, the majority of equipment vendors have neither implemented quality software control processes, nor developed the standard interfaces between their own and other vendors equipment necessary for efficient and safe drilling operations. There are only 38 fifth and sixth-generation offshore rigs in operation today and none of them have the same combination and/or version of equipment or software. The move to Builder Furnished Equipment (BFE) policies may enable some standardization. There are a couple of instances where a series of rigs are planned to have the same equipment, but unless the many failure points being found on the first rig in the series are accurately reported and corrected on a timely basis, the subsequent rigs will not benefit from lessons learned. The spike in newbuilds strains the resources of all companies involved. Shipyards have very little experience with topsides, especially for fifth and sixth-generation high-specification rigs. For example, as of January 1, 2009: Sembcor Marine (PPL Shipyard) First fifth-generation rig (Cajun Express) was built in 2005 First sixth-generation rig (Development Driller I) was built in 2005 and was 26 months late Has completed only four others to date Keppel FELS First fifth-generation conversion (Stena Tay) was built in 1999 First sixth-generation (Maersk Developer) was built in 2008 - other rigs in construction but not completed Daewoo One sixth-generation (West Hercules) No fifth generation rigs - other rigs are in construction but not completed Samsung Ten fifth and sixth-generation rigs built in 10 years (1998 - 2008) Here is just one example of the financial impact of this lack of experience: During a three-year build, the shipyard was focused only on the construction of the vessel not the drilling package. Two months after final acceptance, there were still problems with the control systems. Vendor technicians had to remain on board for several more months before the systems reached an acceptable level of reliability and efficiency. The drilling contractor picked up the tab for this effort at a cost approaching $1M US.

There are only 38 fifth and sixth-generation offshore rigs in operation today and none of them have the same combination or version of equipment.

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

Opportunities to Reduce NPT

Process Improvements Figure Prominently in Reduction Strategies You cant see it or touch it, yet software is critical to the efficient and safe operation of drilling control, sub-sea, vessel and power management systems. If the amount of attention given to hardware was given to software, DCS NPT would be significantly reduced. Electrical, Structural and Mechanical Engineers and Technicians are present on rigs throughout construction, acceptance and beyond. Software Engineers and Control Systems Technicians are just as vital to ensuring that the rig is fit for purpose, reliable and safe. The application and oversight of proven software engineering processes and procedures throughout the new build cycle, from contract to operations, standardization of equipment interfaces, and earlier implementation of the software, can all have a significant positive impact on reducing schedule delays and DCS NPT.

The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

Organizational Barriers to Reducing NPT

The Ripple Effect from the 1980s and Lack of Visibility Hinders Progress The 1980s layoffs and ripple effect left the industry with too few software engineers. This ultimately delayed both the automation of drilling rigs and the adoption of software quality processes needed to ensure the reliability and safety of the new technology. Hardware-oriented personnel cannot predict or help prevent DCS NPT. After trying everything they know hardware-wise, if the equipment is still not working, they can only guess that it might be the software. Its an old saw because it is true; what gets tracked and measured gets done. If no one is held accountable for tracking, reporting and improving a metric, it will get worse. Equipment Vendors have told some of our customers that 20% NPT is the norm and acceptable. A 20% failure rate is not accepted in air traffic control or heart bypass surgery. Equipment failure on rigs also costs lives. NPT can, and must, be reduced. Also contrary to perception, the ROI on addressing the problem can be high if you hire a third-party, objective firm focused on the DCS, and with significant experience in software, and methodologies and tools proven on rigs worldwide. It is not uncommon for the cost ratio of these services to NPT savings to exceed 1:100. Equipment vendors have told some of our customers that 20% NPT is the norm and acceptable. Equipment failure on rigs costs lives. NPT can and must be reduced!

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The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

Recommendations
Despite what anyone tells you, DCS NPT can be reduced safely and cost-effectively. The rate of NPT and schedule delays is rising and the causes are industry-wide. The industry as a whole (engineering firms, equipment vendors, shipyards, drilling contractors and operators) must collaborate and focus on the best opportunities to reduce DCS NPT. With 93 newbuilds scheduled in the next four years, now is the time to take action. Recommended Areas of Focus The components to be included and the calculation of NPT should be standardized. Results could then be reported to an industry body who would publish anonymized metrics enabling everyone to benchmark their results and identify areas for improvement. The rate of DCS NPT is high and a failure in any one of its tightly integrated components causes costly failures and accidents elsewhere. This metric must be tracked because lack of visibility reduces the ability to effectively focus reduction initiatives. An executive should be charged with measuring, reporting and reducing DCS NPT. This could be a new role ,e.g. Chief Reliability Officer, or a separate team within the Chief Safety Officers mandate. How software-dependent equipment is designed, developed, installed and tested must be very different from how non-automated equipment is handled. More focus must be given to the unique aspects of rig software, in particular: Improved education on the importance of quality software, including the impact it has on safety and NPT Increased detail on software functionality and performance expectations in contracts and requirements Industry-wide adoption and greater oversight of software quality process and procedure best practices proven successful in other industries, e.g. semi-conductor, and automotive Standardization of equipment interfaces - the weakest link in reliability Earlier implementation of software in the rig newbuild cycle to provide enough time for adequate testing of the software and all integration points prior to the sail date Addition of software engineering as a discipline complementing the electrical engineer, structural engineer and mechanical engineering functions Addition of a control systems technician complimenting the electrical and mechanical technicians during the operational phase Greater vendor oversight and incentives based on NPT Increased risk assessment and mitigation More thorough DCS and DCS interface testing during FAT and Commissioning, planned for and executed by personnel with deep software experience Note: Because much of the DCS NPT we see can be tracked back to weak contracts, Athens Group provides a rig-generic Contractual Software Standards Document to all new customers - at no charge.

How softwaredependent equipment is designed, developed, installed and tested is very different from how non-automated equipment is handled. More focus must be given to the unique aspects of rig software.

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The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

Appendix A Survey Purpose, Methodology and Respondent Characteristics

Why the Study Was Conducted Drilling contractors and operators are frustrated by the increasing rate of schedule delays and equipment failure, and everyones goal is zero safety incidents. Unless something changes, the rate and cost of NPT will only get worse. Therefore companies are looking for the best strategies to address this problem. In response to this need, Athens Group conducted and published this first industry survey focused on DCS NPT to: Benchmark the calculation, costs and causes of downtime and schedule delays on high-specification offshore rigs Identify what drilling and operating companies believe can and cannot be done to reduce costs in this area Recommend cost-effective strategies to reduce NPT Methodology This survey was conducted both online via RigZone subscribers and via one-on-one interviews administered by Athens Group between September 26th and December 20th, 2008. NPT metrics are closely guarded and all respondents were from public companies, so participants were promised anonymity of individual results. Survey Respondent Characteristics Although our survey targeted drilling companies and operators, many equipment vendors responded to the online version of the survey. Vendor responses showed both interesting similarities and differences of opinions so we chose to include their responses in the final report. All statistics in this report identify responses by segment. Operator and equipment vendor responses were not included in any data quantifying NPT costs, or in the number of newbuilds accepted. Segment Breakout Drilling Companies 25.1% Operators 31.2% Equipment Vendors 43.7% Company Size Drilling Companies $424M - $3B Operators $11.4 - $283B Equipment Vendors $4.7 - $9.8B Newbuilds Accepted per Company in Last 12 Months: 1-3

2009 Benchmarking Study

If you would like to participate in the next annual study please contact marketing@athensgroup.com.

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The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

Appendix B Examples From Athens Groups Drilling Technology AssuranceSM Knowledge Base
Lack of Topsides Experience in the Shipyards During a three-year build, the shipyard was focused only on the construction of the vessel not the drilling package. Two months after final acceptance, there were still problems with the control systems. Vendor technicians had to remain on board for several more months before the systems reached an acceptable level of reliability and efficiency. The drilling contractor picked up the tab for this effort at a cost approaching $1M US. Software Standards Not Incorporated in the Design Phase A PLC software RPM limit was set incorrectly, resulting in the catastrophic failure of the Drawworks. Software Bug Causes Riser Joint to Fall to the Bottom of the Sea A riser joint dropped through the well center, sinking to the ocean floor, due to an unanticipated sequence of commands from the driller. The result was potential damage to the subsea infrastructure. Cost of one days downtime while the riser was found and recovered: $454,000. Sensor Malfunction Creates Unscheduled Downtime An incorrectly implemented top-drive motor reacted to a passing electromagnetic sensor by automatically shutting down the drill floor resulting in a total of 15 days downtime. Cost: $6M US. Lack of Requirements Increases Integration and Training Costs Three rigs were supposed to have identical mud handling systems. The driller employed a small vendor and did not define requirements. The vendors programmers designed three different systems from scratch with completely different interfaces, none of which were intuitive to users. Consequently rig crews cannot easily transfer between rigs. Inadequate Alarm Escalation Causes Equipment Failure and Downtime A main bearing in the drawworks gearbox of an offshore rig failed when signals between two motors were crossed in control system configuration, causing the system to incorrectly detect a running signal for a lube pump, and allowing the drawworks to be operated with inadequate gearbox lubrication. A low oil pressure alarm was generated weeks before the failure event, but after an initial acknowledgement by the operator, the alarm was never re-displayed or re-initiated - even though pressure remained critically low. The low oil pressure alarm had not been correctly prioritized to stand out from other less-critical alarms. Cost for downtime and equipment replacement: $2.4M US. Lack of Software Change Management Costs Millions A pipe handler control system was struck by lightning. There was no software backup so the system could not be restored. This resulted in four days of downtime at $3.2M US.

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The State of NPT on High Specification Offshore Rigs: First Annual Benchmarking Report

About Athens Group

20 - 30% of NPT on todays high specification offshore rigs is Drilling Control System (DCS) i.e. software, related. Athens Group helps drilling contractors and operators improve operational performance, reliability and safety by helping to prevent software-related equipment failures. Our unique Drilling Technology Assurance SM (DTA) Services were developed specifically for highly automated and integrated rig and Drilling Control Systems and have been proven to mitigate risk and remediate problems in all phases of the rig lifecycle. Athens Group has more expertise in this specialized area than any other vendor. Our proprietary tools and methods; software, hardware, and network topology expertise; and vendor drilling equipment experience acquired while working on rigs worldwide, are all documented in our DTA Knowledge Base. This combination of knowledge and experience speeds identification of risks and resolution of issues. At current day rates the cost ratio of our services to non-productive time typically exceeds 100:1. Our customers include industry-leading drilling and energy companies such as BP, ExxonMobil, Noble, Diamond Offshore, Stena, BHP Billiton, Apexindo, StatoilHydro, Ensco, Total, Eni Saipem, Jurong Shipyard, Parker Drilling, Ocean Rig, Chevron, ConocoPhillips, Encana, Nexen, Anadarko, Hess, Pride, Maersk, Shell and Transocean. All our customers are referenceable; over 70% have engaged us for multiple rigs. The high rate of schedule delays and NPT is unacceptable! Contact us to discuss how we can help you or visit www.athensgroup.com for more information.

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