No Margin for Error

By Karen Southwick  |  Posted 07-15-2003 Print Email
No Margin for Error

Doing something stupid in this business isn't just embarrassing—it's expensive. Each oil well around the globe costs tens of millions of dollars to lease. Producing fast, high-quality seismic images can significantly reduce Hess' risk of drilling a "dry hole"—which, in deep water especially, wastes between $12 million and $25 million, says Vic Forsyth, Hess' manager of geophysical and exploration systems. "We could not have been running the same level of technology on a supercomputer because of the cost," he says. "Sure, we could have run the same code on supercomputers but we couldn't afford to buy the machine. Linux clusters allow us to implement the science we need to reduce risk. Linux changes things."

Hess engineers and geophysicists need all the help they can get. The $12 billion independent oil and gas company, small by industry standards, is being buffeted by dwindling, finite resources and ever-growing demand for oil—a devil's bargain facing all oil companies as untapped reserves become harder to find.

But Hess also faces some unique challenges: At $12.19 per barrel, Hess' average cost to find and develop oil wells over the past three years has been nearly twice the $7-per-barrel industry average. Indeed, says oil industry analyst Fadel Gheit, senior vice president of oil and gas research for Fahnestock & Co., Hess' F&D costs are now highest of all 30 rivals in the industry, and have been out of whack for a while. "Hess lacks for a reason," says Gheit, "and the biggest problem Hess has is in exploration. The lifeblood of a typical oil company is its ability to replace reserves at reasonable cost, yet Hess has one of the highest reserve finding and development costs in the industry."

Hess can't create oil, of course; it must discover it—or buy it from someone else. In the past, Hess placed most of its bets on drilling, but wasn't wildly successful at it, prompting executives to shift gears and instead unleash an aggressive acquisition strategy to compensate for what it hadn't been finding underground. In 1995, Hess had either already dug or was in the process of drilling 3,314 wells, compared with 997 today.

But even the new strategy has had its problems. In the third quarter of last year, for example, Hess surprised investors when it announced it would write off $256 million from a drilling deal that went bad. Hess had paid $750 million for what it hoped would amount to 360 Bcfe of reserves from Louisiana independent LLOG Exploration. But Hess later ratcheted down the expectation, to 95 Bcfe, acknowledging it had overestimated the size of the acquisition by 265 Bcfe. According to analyst Mark Flannery at Credit Suisse First Boston, the mistake by "accident-prone" dealmaker Hess "calls into question Hess' judgment in this acquisition." CEO John Hess told investors, "The reserves watered out sooner than we expected." As a result, he said, 2003 production would be 9 percent lower than projected.

Beyond having a middling track record for drilling and acquiring the right wells for the right price, Hess also finds itself locked into a number of unprofitable contracts struck years ago by executives who have since moved on, Forsyth says. "Right now, for example, we have a long-term rig commitment that we're paying for through the balance of this year," he says. "We're not even using the rig because it was a commitment made three years ago by a vice president who's not even here anymore; the commitment is for over hundreds of thousands of dollars a day." The rig is now "off drilling somebody else's well, a company that's subleasing it from us," Forsyth adds. "It doesn't take very many such decisions to way overwhelm anything I could ever save on a Linux cluster." Says analyst Gheit: "Companies make mistakes, but Amerada has made more than its share."

Investors have noticed. The company's stock fell from a high of $82.52 last July to a low of $41.14 a share in March. Hess stock closed at $50.26 on June 25. In the first three months of this year, Hess earned $176 million on revenues of $4.3 billion, compared with $141 million on $3 billion in the same quarter a year ago. But analyst Gheit says Hess, when it comes to cost-cutting, "needs to go from being a D student to being a B student to reassure investors."

Economizing, therefore, was one big reason the company was drawn to Linux clusters in the first place. According to CIO Ross, substituting Linux clusters—now totaling 400 dual-processor PCs running on Red Hat Linux—for its old IBM SP2 supercomputer has saved the company an estimated $14 million in technology costs over the past four years, and that's not even counting the millions saved when the system steers Hess away from a dry well it might otherwise have drilled.

And while Linux clusters increase MIPS, they don't boost manpower. Shifting to Linux has allowed the Geophysical Group to use seven instead of eight programmers and one fewer staffer to handle five or six overlapping exploration projects at once; before, it had to do one at a time. "We're a small competitor in a commodity market," says Jeff Davis, technical lead, global IT infrastructure at Hess. "One of the main ways we differentiate ourselves is cost. If I can spend $100,000 [for a 32-node Linux cluster] instead of $1.5 million, then it's a no-brainer."

Hess is not the only company trying to harness the power of Linux clusters to improve business performance. Clusters are proving well-suited to the high processing demands of other information-intensive tasks like movie studio animation, automobile crash simulations, aerospace design and weather forecasting, and companies from DaimlerChrysler Corp. to Pixar Animation Studios are using them to boost results. And interest is likely to keep rising. Market researcher Gartner predicts that within three years, 20 percent of new server shipments will be installed in clusters. Likewise, researchers at IDC project the high-performance cluster computing market alone will more than triple in sales to $1.6 billion in 2006, up from $494 million in 2001.

Linux Clusters

How does Hess put Linux to work? Forsyth and his crew generate data in much the same way that a bat comes up with a mental image of its cave: by bouncing echoes off surfaces. Hess contracts with third parties to collect this data, in boats crawling across miles of deep waters in the Gulf of Mexico and the North Sea, and off the coasts of West Africa and Southeast Asia. Then the Linux clusters, running complex algorithms developed by Hess' IT and engineering experts, turn those sound waves into 3-D images called depth migrations. These "pretty pictures," as Potter likes to call them, show underwater surfaces, such as salt domes, beneath which oil might lodge.

Potter explains that a single depth migration typically comprises 20 nine-square-mile "blocks" of land and substrata under water. To do one depth migration takes a Linux cluster of 32 nodes about three months from start to finish—i.e., from receiving the sound wave tapes to having an onscreen picture. Then, other experts within Hess use the pictures to figure out which blocks are most likely to contain oil and gas, and how easy it might be to extract, then estimate a logical bidding price for the rights to lease the land. (Oil companies must place bids with the appropriate governments to win the right to drill in offshore locations.) In the Gulf of Mexico, says Forsyth, "we might lease 15 to 20 percent of the blocks we image" and "find oil on roughly a third of the blocks we lease." It costs anywhere from $200,000 to $15 million to lease a block—depending on its location and promise of oil—and the payoff might be zero, or it might be millions of barrels.

Forsyth says various Gulf deposits have yielded up to 2 billion barrels of oil. Once Hess has leased a block in an area deemed to be promising, the company will drill an exploratory well, then expand both the drilling and the number of blocks it leases if oil is found.



 

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