Gulf Coast oil support struggles to keep its footing amid uncertain times

 - May 15, 2008, 9:40 AM

Taking the pulse of the offshore oil industry is like grabbing a handful of the viscous mud drillers use for lubrication in the drilling process. What seems like a hard-and-fast situation one minute can dribble through one’s fingers the next. Agility is the secret to success.

When it comes to figuring which U.S.-registered civil helicopters get used for what, offshore oil support is still the biggest dog on the porch. Given the realities of offshore oil drilling, it only makes sense. Few other missions better suit the helicopter’s special talents. In fact, the genesis and explosive growth of the offshore oil industry and the civil helicopter happened so nearly simultaneously and have continued so hand-in-hand ever since that the two technologies are arguably the closest thing to a “chicken and egg” symbiosis in aviation.

While hard-and-fast numbers are difficult to come by, the general rule of thumb has long held that the lion’s share of what are listed as helicopters in air-taxi and utility operations are employed in the offshore oil support mission. Such a guessitmate is needed since FAR applications criteria do not delineate offshore oil support as a regulation-defined mission type.

According to the latest figures from the HAI’s Helicopter Safety Advisory Committee, operators in the Gulf of Mexico region last year flew a total of 546 helicopters–370 singles, 55 light twins, 109 medium twins and 12 heavy twins.

So there are a lot of helicopters flying the offshore oil mission over the Gulf, and for their operators, business, despite all its recent setbacks, is still good. Not great, but good, albeit with the ups and downs that characterize the highly cyclical oil market.

“Results for the nine months ended December 31, 2001, showed improvements in flight hours, revenue and operating income over the comparable period in the prior year,” reported George Small, president and CEO of Offshore Logistics, parent company for 170-ship Gulf Coast operator Air Logistics and as UK-based 108-ship North Sea operator Bristow. “However, activity levels plateaued during the September quarter and began an autumnal decline that by December amounted to a decrease of 4,600 flight hours, or some 13 percent over the September level. This decrease was due in part to seasonal factors, but also because of reduced drilling in the Gulf of Mexico.

“With smaller capital expenditure budgets announced by many of the large independent and major exploration and production companies operating in the Gulf, we don’t expect to see this trend reverse any time soon.”

Not long after Small issued the above statement, oil prices, writhing under the global uncertainties that intensified on that crystalline mooring last September, jumped $9 a barrel, leading to speculation that the banner year predicted for oil development last year would instead take place this year. Pessimists pointed to the fact that last year’s economic downturn (and its concurrent drop in overall oil consumption) resulted in a dramatic 19-percent reduction in drill rig operation.

Oil industry optimists are encouraged by OPEC’s February decision to cut production by 1.5 million barrels per day. That reduction, on top of last year’s voluntary cutbacks, should result in reduced production of some two million barrels per day, prompting an accelerated level of offshore exploration and production expected to begin by this summer as U.S. producers gear up to take advantage of the anticipated rising prices.

“The slump of 2001 was really a twofold phenomenon,” said Era Helicopters executive v-p of marketing Richard Larew. “First there was the effect of the recession, which began to make itself felt around midsummer. Then there was the nationwide airspace lockdown and grounding after September 11. While we were grounded for only a few days, the effect of this work stoppage was severe. After all, what business can sustain a complete elimination of its incoming cash flow for very long?”

Concentrate on the Core Business

Gene Graves oversees Air Logistics’ day-to-day Gulf Coast operations, meaning a fleet of 175 rotorcraft and just over 300 pilots. Despite the ups and downs of the oil market in these hard-to-predict times, he views the current scene through sanguine eyes made that way by 35 years’ experience in the offshore business.

He said: “About 10 years ago you may remember that Offshore Logistics and Air Log were nearly dead, the result of too much diversification and some slow times in offshore business. We were in pretty much the same shape that Canadian Helicopters [now known as CHC and the world’s largest commercial rotorcraft operator] found itself in a few years ago, paying for too many non-core business subsidiaries and slowly going under. They did what we did, got rid of the non-essentials, cut away as much debt as possible, concentrated on what they did best and grew.”

Long a stalwart operator of an almost exclusively Bell fleet (at least in the small, single-turbine end of the market) Air Log caused more than a few jaws to drop recently when it announced the purchase of 10 Eurocopter EC 120s, eight of which have already entered service.

Purchase of the smaller, non-Bell equipment represents a fundamental shift in Air Log’s business, as well as a change in the used helicopter market, prompted as it was by a profound softening of the resale value of 15- to 20-year-old Bell light singles, which up to this point had solidly retained their resale values.

“We just couldn’t get much resale out of our older Bell 206As and Bs and the LongRangers. There just isn’t the market for those older machines that there used to be. So we’ve moved on, in a small way, to try another type,” said Graves.

 “We base the EC 120s offshore, on the rigs themselves, which is different from the old days, and use them to take small one- and two-man teams to inspect production wells scattered throughout a given area. Since those wells are largely automated, these teams land on the platform and make a few inspections and adjustments, and then they’re off to the next well. We do a lot of this well maintenance work under the name of one of our operating subsidiaries, Grasso, as well as under contract for many of the other offshore production management companies. It’s good work with a solid return rate.

“For us, the business is still inshore on the continental shelf,” Graves said.

Show Me the Money

Despite widespread reports of fewer hours flown throughout the Gulf, the financial consequences of those lighter logbooks have been softened somewhat by across-the-board rate increases the major Gulf Coast helicopter operators insisted upon early last year.

After nearly a decade of enforcing the terms of fixed multi-year contracts, oil companies were issued an “urgent request” (if not outright demand) that the rates they paid for offshore helo support be increased some 30 percent. “If we were to say that the helicopter operators all got together and agreed to these increases, that would be illegal; it would be price fixing,” conceded one operator who insisted upon anonymity. “Let’s just say that everyone more or less agreed to the necessity of a more or less equal rate hike for everyone.”

Sources interviewed agreed that it is this rate increase that has allowed the major operators to weather last year’s overall slump.

Deeper, Further

For Era, last year’s Gulf Coast business was good, keeping its fleet of 47 helicopters (all twins) busy. Era basically uses its workhorse BO 105s close in to shore, but finds a growing trend toward deep blue water drilling and development. Its fleet of S-76s, S-61s, Bell 412s and Super Pumas now venture out 150 mi or more to support the new class of blue-water deep-sea oil development platforms, an emerging technology in oil drilling that sinks billions of investment dollars at a shot into the search for oil in suspected deposits as deep as 10,000 ft.

Under the terms of the Deepwater cooperative contract, a consortium of nearly a dozen of the world’s largest oil companies has committed to a multi-billion-dollar, multi-year effort to break into and commercially develop what surveys show to be some of the biggest untapped crude oil deposits detected anywhere on earth.

Typical of the sort of high-stakes investment required to play this game are British Petroleum’s four Deepwater-affiliated drilling projects aimed at the recovery of oil and gas deposits in 4,000 ft of water roughly 200 nm south of New Orleans. The price tag for the four platforms? Just over $8 billion paid out between now and 2008. The largest of these four, the so-called Crazy Horse, has a potential capacity of 1.5 billion barrels, making it the largest single oil field ever discovered in the region.

“Shelf work, what we call offshore support work close in to shore where the water is shallower and flight times shorter, is a volatile business environment, with more on-demand charter and fewer long-term contracts,” explained Era’s Larew. “These Deepwater deals are no less price conscious but they’re also longer-term contracts, the kind you can plan on, because these big deep rigs take a long time to develop. Since a rig in exploration requires far more helicopter support than a rig only in production, we like this deep-sea development and welcome more.                                  

“For the oil companies, this kind of ultra-expensive drilling would seem like an enormous gamble, but since the advent of super- accurate three-dimensional seismic technology the risk is far lower and the potential reward far greater,” Larew explained.

New Blood Is Essential

One thing he wishes he could depend upon is a steady supply of fresh and young yet experienced pilots. “I know it’s an old song, one that professional flight departments have been singing for so long that almost no one is listening,” Larew said. “We’re three to five years away from losing a real core group of pilots who started out with us in the Vietnam days. And I don’t really know where I’m going to get the replacements.

“The military pipeline is drying up, first because the military was training less and discharging more, and now because while training has accelerated, the military is retaining more for the needs of the anti-terrorism war. That stretch has required us to loosen up our requirements. It’s the same old story: no shortage of applicants, just a shortage of high- quality applicants. Someone who came to us with 1,500 hours in his or her logbook and good experience as a PIC would more than qualify with us. What we’re seeing, when we’re lucky, is a 500-hour candidate for a copilot job. Depending on the quality of that time and the general vibes we get from the candidate, we might take them. We’ve taken candidates with less.”

So what’s the answer? Ab initio training? “The high cost of commercial helicopter training seems to demand it,” Larew said. “We’re already doing [ab initio training] in part when we hire someone with far fewer hours than we like to see and then agree to bring them up in hours, pay and responsibility in exchange for a commitment to be with us for a while. We’ll have to see how dire the situation gets, but some sort of quid pro quo arrangement would be the way to go.”

Whatever hiring options Era adopts in the future, those new pilots will be flying big iron and Era has some bigger iron on the way, with a trio of Sikorsky S-92s on order and slated for delivery in 2004. “It’s an amazing aircraft, especially if Sikorsky can bring it in on its predicted numbers, which we’re confident it can,” said Larew.

“We see the S-92 as part of a new strategy toward larger, more capable helicopters serving oil production in deeper, more distant water. The S-92 has got the legs and the muscle. Creative use of big helicopters like that can also cut costs; we’ve seen an increasing willingness for oil companies to share aircraft capacity. Two companies might share a payload, with half going to one company’s rig and half going to the other’s. Both sides win this way.”

And Then There’s PHI...

An epoch ended in the helicopter offshore oil-support business a year ago when Carroll Suggs, wife of  PHI founder Robert Suggs and quite possibly the most outspoken chief executive ever to head an offshore oil support company, sold her family’s majority interest in the company to Louisiana businessman Al Gonsoulin. A Houston resident with 35 years of experience in the oil- and gas-service industry, Gonsoulin took over as chairman of the PHI board in early September.

According to a statement, Suggs sold Gonsoulin 51.975 percent of PHI’s outstanding voting common stock and 28.197 percent of the total outstanding common stock for $30.5 million. With this sale, the Suggs family is fully divested out of PHI.

Operating a fleet of about 280 aircraft (almost exclusively helicopters), PHI provides contract transportation services from bases across the U.S. and in 10 other countries. Founder and one-time president and chairman Robert Suggs virtually created the offshore oil-support business in the days right after World War II, operating early Bell 47s from a barge anchored in the oil-rich Louisiana bayous. Today, 80 percent of PHI’s helicopter-transport business is oil drilling and production support, with the rest taken up by aeromedical transport.

Quiet to the point of being secretive, Gonsoulin’s corporate style couldn’t be more different from that of the ebullient Suggs. Robert Suggs, the grouchy paterfamilias who built an industry. Carroll, a former secretary to the boss whom “Mr. Robert,” as he was colloquially known, married late in life. Dismissed as little more than a trophy wife when she succeeded him in 1990, she quickly set about shaking up what had been regarded as a sleeping giant of a company, content and complacent as the biggest in the industry.

Hit hard by the Persian Gulf War’s effect on the oil market, PHI downsized for the first time in the early 1990s, and it continued to do so throughout the decade. Admittedly, it simultaneously diversified, putting special emphasis on the aeromedical and helicopter repair and support businesses, though PHI continues to make more than the lion’s share of its income from offshore oil.

Like its competitors, PHI has been suffering from something of a slump brought about by the combination of a recession and September 11 aftermath, but the company seems to be bouncing back faster than the others. Being the biggest operator in the Gulf (with a 47-percent market share) gives PHI a certain economic depth few others can challenge. The strength of that position was evidenced March 13, when its Nasdaq-traded common stock hit a 52-week high of $25.25 a share.

Except during the 10-year reign of Carroll Suggs, PHI was a notoriously closed-mouth corporation. Gonsoulin has reinstated that policy, so it would seem, with company officers not returning repeated telephone calls from AIN seeking information. At the same time, for the nine months ended last September 30, publicly filed statements showed that PHI revenues rose 22 percent to $209.2 million. Net income totaled $7.6 million vs a loss of $2.8 million over the same three quarters a year before.

So while PHI may not be catering to the needs of the press, it certainly is keeping its stockholders happy.

The last time PHI stock was this high was last June, when the company signed a three-year deal with Shell Exploration and Production Co. for helicopter support in the Gulf of Mexico, a deal calling for 18 fully dedicated aircraft. Among its many Gulf operations, Shell is operating several of the new mammoth, ultra-deep mega-rigs.