GE Oil Deal Offers New Model to Prevent BP-Like Crude Oil Spills

General Electric Co. is expanding its focus on offshore drilling rig safety with a new business that will take over handling of massive underwater equipment designed to prevent well blowouts and oil spills.

Diamond Offshore Drilling Inc. has agreed to sell back its blowout preventers to GE, which will then rent them to the driller. The arrangement shifts all maintenance and repair tasks to GE, which assumes responsibility for ensuring it works properly in an emergency.

The agreement represents a new business model for the industry, providing a steady income stream for GE, and decreased risk for the driller, the companies said in a joint statement Monday. Diamond Offshore will not be charged when the equipment is out of service, according to the agreement.

“We are changing the game,” Lorenzo Simonelli, chief executive officer at GE Oil & Gas, said in the statement. “With improved control, maintenance and servicing of our equipment, we are putting skin in the game and guaranteeing performance.”

For years the offshore oil industry has grappled with the rising costs to drill an oil well in water more than two miles deep. One of the biggest drains to profit for the well owner and the rig supplier has been the downtime required for maintenance or repairs of underwater safety gear.

Massive Machines

“The downtime associated with deepwater drilling is unacceptable,” Marc Edwards, who ran the largest business unit at Halliburton Co. for four years before becoming CEO of Diamond Offshore in 2014, said Monday in a phone interview. “When I started here, I was shocked.”

Blowout preventers are stacks of valves, pipes and seals that sit atop the well on the sea floor ready to cut off the flow of oil if the company loses control of the well. A defective blowout preventer failed to stop the largest U.S. offshore oil spill in 2010 on a BP Plc well in the Gulf of Mexico, focusing attention on maintenance of the machines.

Oil explorers such as Exxon Mobil Corp. and BP generally pay about $1 million a day for the equipment, services and labor involved in drilling a well – costs that continue to add up even when equipment is out of service. A single incident of equipment failure or routine maintenance can stretch for as long as 20 days, Diamond Offshore said. Since GE won’t charge for downtime on the blowout preventers, Diamond Offshore will be able to pass along some of that savings and help its customers cut costs during a prolonged oil market downturn.

10-Year Agreement

GE Oil & Gas, the original equipment manufacturer, will pay $210 million to buy back eight blowout preventers it originally sold to Diamond Offshore for its newest drillships. The 10-year agreement requires Diamond Offshore to pay for the blowout preventers only when they’re in service, cutting downtime costs during maintenance.

“Subsea reliability is the Achilles heel of deepwater drilling,” Edwards said. The only way to fix the problem was to go back to the equipment supplier “and tell them, ‘Guess what, guys, I’m going to hold you responsible for the performance of the product you manufacture.” What’s more, “‘I’m going to insist that you actually own them too.’”

CEO Level

The concept involved eight months of negotiations that sometimes included direct talks between the CEO’s of each company, Edwards said.

Offshore rig owners have suffered the double whammy from a glut of new drilling vessels hitting the market at the same time that the oil industry plods through the worst crude market downturn in 30 years. The industry has slashed more than $100 billion in spending and cut more than 250,000 jobs globally to cope with oil prices that fell by more than two thirds since the middle of 2014.

The model is expected to be adopted by more rig owners and equipment makers, James West, an analyst at Barclays, said Monday in a phone interview.

“It does change the cost structure for the drillers,” West said. For the equipment makers, the new model means a steadier cash-flow stream rather than relying on large one-time payments to sell the new equipment, he said.

GE is essentially investing to build a long-term revenue stream that it can sell to more customers, Nicholas Heymann, an analyst at William Blair, said in a phone interview.

“GE has been able to figure out how to price the offering to add value to the customer and still leave room for it to be able to make very attractive returns,” Heymann said.