Well control for non-drillers ...

Well control is one of the most important aspects of offshore shallow or deepwater drilling

operations. Improper handling of kicks in well control can result in blowouts with very grave consequences, including the loss of valuable resources such as in recent Deep Horizon Macondo incident losing millions in revenue. Even though the cost of a blowout (as a result of improper/no oil well control) can easily reach millions or billions of dollars, the monetary loss is not as serious as the other damages that can occur: irreparable damage to the environment, waste of valuable resources, ruined equipment, and most importantly, the safety and lives of personnel on the drilling rig.

In order to avert the consequences of blowout, the utmost attention must be given to oil well control. That is why well control procedures should be in place prior to the start of an abnormal situation noticed within the wellbore, and ideally when a new rig position is sited. In other words, this includes the time the new location is picked, all drilling, completion, workover, snubbing and any other drilling-related operations that should be executed with proper oil well control in mind. This type of preparation involves widespread training of personnel, the development of strict operational guidelines and the design of drilling programs — maximizing the probability of successfully regaining hydrostatic control of a well after a significant influx of formation fluid has taken place.

One concern is the increasing number of governmental regulations and restrictions placed on the hydrocarbon industry, partially as a result of recent, much-publicized well-control incidents. For these and other reasons, it is important that drilling personnel understand well-control principles and the procedures to follow to properly control potential blowouts.

The key elements that can be used to control kicks and prevent blowouts are based on the work of a blowout specialist and are briefly presented below:

Quickly shut in the well.

When in doubt, shut down and get help. Kicks occur as frequently while drilling as they do while tripping out of the hole. Many small kicks turn into big blowouts because of improper handling.

Act cautiously to avoid mistakes—take your time to get it right the first time. You may not have another opportunity to do it correctly.

Many well-control procedures have been developed over the years. Some have used systematic approaches, while others are based on logical, but perhaps unsound, principles. The systematic approaches will be presented here.

The drilling mud forms the first line of defence against kicks and blowouts. The second, and last, line of defence is the blow-out preventer stack. This is a collection of large, high-pressure valves which is fitted on the top of the wellhead in a vertical tier and which can be controlled remotely from any of several positions on the drilling unit. Although outwardly the BOP stack on a deep-water floater appears fairly unremarkable, it is an enormously expensive precision tool that can withstand pressures of up to 15,000 psi.

Because of the intricacy of its numerous working parts a dedicated ‘sub-sea engineer’ is employed by the drilling contractor to maintain it and its control system in top condition. Through the middle of the BOP stack is a hole wide enough for large drilling tools to pass up and down during the course of normal operations. The width of the opening is determined to some extent by the stage at which the stack is intended to be first used in the well programme. An 18-3/4” stack is quite a popular size, but this can obviously not be used until wide-diameter bits have drilled 36” and 26” hole.
When a kick or blow-out threatens the rig and the BOP controls are operated, large and powerful devices are closed together to seal off the hole and prevent the passage of well fluids up to the rig. Arrangements have to be made for sealing the hole either when drill pipe is in it, or when it is empty,
and different types of preventer are incorporated in the stack for use in everydifferent situation.The topmost preventer in the stack looks like a large steel pot from the outside and is called the ‘annular preventer’ or, sometimes, the ‘bag preventer’or ‘spherical preventer’. This can seal off the annulus between the preventer housing and any type of tubular that happens to be inside it. It can also seal off the hole completely if there is nothing inside running through the preventer at the time.

With the constant-bottomhole-pressure concept, the total pressures (e.g., mud hydrostatic pressure and casing pressure) at the hole bottom are maintained at a value slightly greater than the formation pressures to prevent further influxes of formation fluids into the wellbore. And, because the pressure is only slightly greater than the formation pressure, the possibility of inducing a fracture and an underground blowout is minimized. This concept can be implemented in three ways:

One-Circulation, or Wait-and-Weight, Method. After the kick is shut in, weight the mud to kill density and then pump out the kick fluid in one circulation using the kill mud. (Another name often applied to this method is “the engineer’s method.”)

Two-Circulation, or Driller’s, Method. After the kick is shut in, the kick fluid is pumped out of the hole before the mud density is increased.

Concurrent Method. Pumping begins immediately after the kick is shut in and pressures are recorded. The mud density is increased as rapidly as possible while pumping the kick fluid out of the well.

If applied properly, each method achieves constant pressure at the hole bottom and will not allow additional influx into the well. Procedural and theoretical differences make one procedure more desirable than the others.

Process suitability partially depends on the ease with which the procedure can be executed. The same principle holds true for well control. If a kick-killing procedure is difficult to comprehend and implement, its reliability diminishes.

The concurrent method is less reliable because of its complexity. To perform this procedure properly, the drillpipe pressure must be reduced according to the mud weight being circulated and its position in the pipe. This implies that the crew will inform the operator when a new mud weight is being pumped, that the rig facilities can maintain this increased mud-weight increment, and that the mud-weight position in the pipe can be determined by counting pump strokes. Many operators have stopped using this complex method entirely.

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Subsea well control

 

Norwegian Cat J rig to be built by Korean yard

Statoil and its license partners in the Gullfaks and Oseberg area fields in the Norwegian North Sea Unit have acquired two new “Category J” jackup drilling rigs.Both sets of licensees will own the rigs, which are designed to work in harsh environments, in water depths of 70-140 m (229-459 ft), and to drill wells up to 10,000 m (32,808 ft). They are based on proven technology, although optimized, Statoil says, to allow for more efficient drilling and completion of subsea wells compared with existing jackups. The primary role will be in drilling and completion of production wells.

Samsung Heavy Industries will build the rigs and KCA Deutag Drilling Norway will operate them, with offshore operations set to start in 2016-2017. The initial operation contract, valued at NOK 900 million ($155 million), is for eight years, extendable by four three-year periods.

Statoil’s strategy is to rejuvenate its rig fleet, secure long-term rig capacity, and reduce drilling costs to improve recovery rates from its Norwegian fields.

Both Gullfaks and Oseberg have long-term drilling programs, and the new rigs will likely operate at these fields for a long period. Costs are expected to be lower as a result of the ownership model, and this is expected to allow more targets to be drilled that would otherwise not be economical.

Partners at Gullfaks are Statoil, Petoro. Partners at Oseberg are Statoil, Petoro, Total E&P, ConocoPhillips

Cat J --- new design rig

A jack-up is a mobile unit that floats during transport but rest on the seabed during drilling and well operations. This is made possible by lifting and lowering the legs of the unit, and the rig is lifted above the sea surface to minimize influence of waves during operations. The specially-designed category J rig is able to operate at water depths from 70 to 150 meters and drill wells down to 10,000 meters. It will be a workhorse primarily for drilling and completion of production wells. It is a tailor-made jack-up rig for operations in harsh environment on both surface and subsea wells in the shallow-water segments on the NCS. 

Why Cat J? 

The key to maintaining today’s production level on the NCS towards 2020 is improved recovery from existing fields and fast and efficient development of new fields. In order to implement these measures it is vital to secure a rig fleet which is adapted to suit the assignments and which can work more efficient. 

To meet these challenges, sustainable cost competitiveness, drilling efficiency and sufficient rig capacity are key factors. Statoil has therefore developed a new mobile offshore drilling unit concept; cat J. This rig will be 

customised for year-round production drilling in shallow-water depths. The goal is that the new rig will perform operations 20% more efficiently than the conventional rigs. This will reduce field development costs 

and the rig fleet will be rejuvenated. 

Technical aspects 

Hull designers, topside suppliers, construction yards and drilling contractors have participated in the development of the cat J rig concept and will continue to develop this in an innovative design process. 

The cat J conceptual design has the following key elements- 

- Very competitive operational cost compared with existing rig fleet 

- More efficient drilling with quadruple derrick 

- Minimum weather downtime due to vessel motion in operation 

- Low diesel consumption cost 

- Lower wellhead fatigue exposure 

- High flexibility for efficient drilling over wellhead platforms and subsea field development 

- Facilitates for early production drilling on new field development projects 

Main features: 

• GustoMSC CJ70-X150-A concept is based on proven technology and equipment from Aker Solutions, National Oilwell Varco or TTS. 

• Ultra harsh environment jack-up 

• Test/service BOP and x-mas tree on cellar deck 

• Facilitates for new fast-track X-mas tree size and system 

• 1.5 derrick - simultaneous drilling and building stands 

• Trip saver function --- possible to hang off blow out preventer (BOP) and riser (250 tonnes) on Texas deck 

• Designed for Statoil’s subsea system on the NCS 

• X-Y skidding cantilever 110 feet reach 

• BOP riser tension systems are designed for both surface and subsea BOP operations 

• High pressure high temperature (HPHT) operations (15k) 

• Up to 150m water depth 

• Class Notation: DNV 1A1 self-elevating unit and drilling unit (N)

Cat J has a double barrier philosophy for preventing falling objects and ensure well control. It is also designed to prevent environmental spills and assure improved working environment. It features a high level of redundancy in material handling, crane coverage and pipe handling as well as power generation and control systems. 

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Will a basic degree direct the path for a good career ?

Extracted from Straits Times May2013

Will having a basic university degree lead you to the route of a good career?

Our PM Mr Lee Hsien Loong, National Development Minister Khaw Boon Wan, Acting Minister for Social and Family Development Chan Chun Sing and Education Minister Heng Swee Keat - recently spoke on similar themes of how academic qualifications are not a sure ticket to success.

Indeed, Asia "is a bit hung up on that piece of paper", Singapore Management University (SMU) president Arnoud De Meyer tells Insight. A degree helps get a better salary, but it is the experience of learning that is more important in today's age, says Professor De Meyer, who has held top posts at Insead and Cambridge University's Judge Business School.

He also discusses last year's announcement of a 3,000-strong increase in student numbers by 2020, noting that not everybody needs to go to university and there are good jobs that do not require a degree.

· What is your take on the recent debate?Having a good degree helps you to find a better job and a higher salary. It also offers you broader options. If you go for a diploma, usually you're quite specialised.

But there are successful people with no degree, such as (late Apple chief executive officer) Steve Jobs and (Facebook CEO) Mark Zuckerberg.

Even when the PM announced last year that 40 per cent of each cohort will go to university by 2020 (up from 27 per cent now), that still means that 60 per cent will not go to university.

If you look at other advanced countries like the Scandinavian countries or Britain, 40 per cent is in the upper limit.

University degrees offer three things as opposed to a diploma.

First, you get your specialisation, your skills you build up.

Second, it is broad base learning. Students have a lot of flexibility. Most universities now provide the students option to take second major, second degree or electives,etc..

The third,  is "learning to learn". What you learn today may be obsolete five years from now. You need to constantly learn new things. That is also what university education provides - a system of learning.

Some other articles typically note that learning how to learn is a process in which we all engage throughout our lives, although often we do not realise that we are, in fact, learning how to learn. Most of the time we concentrate on what we are learning rather than how we are learning it. The process of learning much more explicit by getting you to apply the various ideas and activities to your own current or recent study as a way of increasing your awareness of your own learning. Most learning has to be an active process - and this is particularly true of learning how to learn. 

The ministers emphasised the value of work experience and entrepreneurship. Can't these be obtained both in and out of university?   Mr Khaw said that it is not about the piece of paper you can hang on your wall but about real experience and the components of your education which is more critical.

It is about being able to immediately start working when you get a job. That is why we believe in internships and nowadays it is compulsory for every student to do an internship as well as international exposure and holistic education - these prepare people better for a job in the real world.

That's what universities need to do more in the future - mix conceptual and theoretical learning with practical exposure.

Asia as a whole is a bit hung up on that piece of paper. It's the experience of learning that is more important. A university is both about skills and things like interactions and discussions with each other, the creativity of working day and night on projects, going out, making new friends.

It is also true that we need to become more entrepreneurial, not necessarily setting up a business but in the way we act within the company. Singapore Institute for Innovation and Entrepreneurship has 55 companies created by our students. They are all small and some of them will fail but you will see that some students have that entrepreneurial attitude.

We have to be realistic. It's not necessary that everybody goes. There are really interesting and good jobs that don't require a university degree and they may be a better fit for people with more practical or artistic aptitudes. We all have different capabilities and should recognise that not everybody will have to go to university.

The second point is, we know from the European experience that if you have too many students going to university, you get graduate unemployment. So underlying the messages from the ministers is, be careful, a degree is no guarantee for a job.

Third, be careful in choosing a line of study. Choose a broad area where there will be demand.

Polytechnic graduates are concerned that in sectors where they compete with university graduates for jobs, starting pay and job progression will differ.

At polytechnics, you get very good people with much more practical skills who can hit the ground running. They start working at 19 for women or 21 for the men, and you could argue that they have four more years of earning money than a university graduate.

University graduates also have to pay their tuition fees. Somehow the market recognises the difference in investments that students have made.

· How has the value of a university degree changed in Singapore? Recruiters ask for more than skills from your studies. They are looking for communication skills and global exposure. They expect us to groom students to be more job- ready.

· How can universities ensure both that their education remains accessible while graduates are employable? By making sure our students are employable.

We have to be realistic. Just because I got a degree in economics today doesn't mean it will be valid 10 years later. That's why our young students nowadays have to think about a broad set of capabilities and skills and to keep improving.

I agree with those who believe it to be essential that for example uni lecturers have expertise in their subjects. But such expertise is not limited to certification: if it were, Tony Blair could hardly have taken up a position lecturing in Politics at Harvard when his BA is limited to Jurisprudence. And who would bother listening to Margaret Thatcher droning on about statecraft when her BSc is in Chemistry? And yet many will sit at their feet, because they have qualification way beyond a framed degree.

Thus lecturers should be an expert, but expertise comes in a number of guises. When lecturing ceases to inspire, the learning ceases to engage. When the learning ceases to engage, little or nothing is learned. What unis' and polys' desperately need are outstanding professionals with a sense of vocation: ten of those liberated to draw out students' faculties and intelligences will eclipse a hundred who have been certified and licensed by the institute to impart a centralised curriculum in accordance with government guidelines for the sake of targets and league tables.

Local behemoths facing keen competition from China and Korea yards

Extracts with courtesy of Straits Times 30April 2013

KepCorp and Sembcorp Marine are the behemoths that build around 70 per cent of the world's oil drilling jack-up rigs. Both which employed approximately 75,000 people and contributed 1.6 per cent to economic output in 2011 per estimate figures.

However they are now facing challenges from several competitions. These include the Chinese players and structural changes to the industry. In what could be a replay of the earlier challenges the two companies faced in the 1990s, the key question is whether Keppel and SembMarine can yet again pull a rabbit out of the hat. Their stories are held up as examples of Singapore's success in ship building industry. In the 1960s shipbuilding and shiprepair were identified as key economic sectors as they could quickly create jobs for many workers. The Government took up stakes in shipyards, including two that were renamed Keppel Shipyard and Sembawang Shipyard.

After decades of growth, consolidation and expansion into the rig construction business, these two are today known as Keppel and SembMarine. However, their main activities are no longer in shipbuilding. Both now build rigs used by energy companies to drill for oil at sea. These include jack-up rigs ( for shallow water depth of 400feet ) - which cost around US$200 million (S$247 million) each - as well as the more expensive semi-submersible rigs that operate in deeper waters ( around upto 10,000 feet ). They can be priced at US$400 million to US$500 million each, with high-specification builds costing more than US$800 million. Those that are working for the north seas cost much more due to the harsher environment and many features that required additional cost to cater for.

Leadership challenged :

The lucrative rigmaking industry has increasingly seen competition from both Chinese and South Korean shipmakers in recent years. Like Keppel and SembMarine, Chinese shipmakers have been shifting from building ships to rigs, as the shipping industry continues to slump amid a massive oversupply of vessels.

With cheaper prices and more favourable financing conditions, these Chinese yards have been snapping up contracts from firms looking for lower-specification, lower-cost builds.

To add to the problem, more and more high-value contracts, like ultra-deepwater "semi-submersible" rigs, have also recently been going to Chinese yards, like Cosco and Raffles CIMC.

For instance, drilling rig services provider Frigstad Offshore early this year ordered two US$650 million untra-deepwater rigs from China's CIMC Raffles. Such orders are right up the alley of Singapore's rigmakers. They're one of the newest most advanced designs, meant to work in harsh deep water environments.

CIMC can build these two rigs for Frigstad is the day that CIMC is on a par with Singapore yards. They won't just be taking low-value rig work from Singapore. It is estimated that as of April 22, Chinese yards this year have won US$2.95 billion in jack-up rig contracts. This means they overtook Keppel and SembMarine, which won only US$2.12 billion.

At the same time, South Korean companies such Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering are also muscling in. They specialise in ship-shaped vessels such as drillships.

Keppel and SembMarine have been investing hundreds of millions of dollars in Brazil, especially after the 2007 discovery of likely rich oil reserves in the deep waters off the country's coast. The aim was to win lucrative rigbuilding deals from Brazil's state oil company Petrobras and its unit Sete Brasil.

Brazil has strict "local content" requirements which state that most of the components for oil platforms sold to these firms need to be produced in the country.

Keppel was an early mover, having been in Brazil since 2000. It bought a yard in the country in 2010 in order to focus on offshore support vessels which are used alongside oil rigs. This added to its existing yard which builds rigs.

And SembMarine is building a Brazil yard and has already secured contracts in the country.

All well and good, except that their biggest client in Brazil, Petrobras, has run into financial difficulties. These include spending and investments that have ballooned far more than initially planned, and government caps on how much it can charge domestic customers for oil. As a result, Petrobras shares have plummeted, losing half their value since 2010. Petrobras has also been squeezing the margins of its suppliers.

Also, Brazil is facing high inflation which could put upward pressure on labour costs.

Adapting to challenges:

TO THE credit of Keppel and SembMarine, they have already identified these issues and taken steps to ensure their businesses remain profitable. Mexico is one frontier. It is growing in importance after state oil firm Pemex made a big crude oil discovery in the deep waters of the Gulf of Mexico last August. Both Keppel and SembMarine have won deals from Mexican customers since then, leading market players to cheer their effort to seek out business opportunities in other high-growth markets.

The two companies are also focusing more on some of their specialities outside rigbuilding.

Keppel is co-designing an Arctic jack-up rig to tap the demand for platforms that can withstand the tough conditions there. The company has also signed a deal with Norway's Golar LNG to convert liquefied natural gas (LNG) vessels into Floating LNG vessels. This will give the firm more exposure to the fast-growing LNG market.

SembMarine has been getting more ship repair work, providing more diverse sources of income. "Ship repair is not something new for SembMarine, it's to drive more work," said DMG.

Both shipyards should continue to differentiate themselves, and spend more on research and development, say analysts.

"The key thing for Singapore yards is to find new products that are not in direct competition with these guys," said Mr Saw, referring to its overseas competitors.

Competition also works both ways. Even as Chinese companies eye the customers of Singapore firms, Keppel recently bagged an order from Falcon Energy Group, a company which previously ordered two jack-up rigs from China.

Back in the 1980s and 1990s the environment for the shipyard business was bad after the global recession of the mid-1980s, with cost pressures and external competition. The two companies were told at that time that they were in a sunset industry.

According to CIMB, Korean yards beat Singapore yards hands-down in terms of yard size. Each Korean yard is almost as big as the combined size of KEP’s and SMM’s yards in Singapore, explaining their competitive advantage in the market for large-scale offshore structures (newbuild FPSOs, FLNGs, TLPs) and drillships (hulls as big as 13,000 TEU container ships).

It also noted that very little apprehension was expressed over Singapore yards’ intention to break into the drillship segment as the Koreans’ market share appears to be protected by more advanced technologies and shorter construction time (of 12-15 months vs. >24 months for Singapore yards.

The Koreans were generally curious about Singapore’s capabilities in conversion and the outlook for jack-up rigs – in the event they decide to venture down the value chain. Though we were awed by the Koreans’ yard space, we believe Singapore still has the upper hand incosts, margins, business flexibility and global yard presence.

Firstly, a reliance on cheaper foreign labour is almost non-existent in Korea. The Koreans’ average low-end pay is US$40,000 p.a., triple that of Singapore.

Secondly, profitability remains the top priority of Singapore yards, with operating margins of 12% vs. the Koreans’ 8%. Thirdly, Singapore yards are able to diversify to from rig-building to building semi-sub accommodation and FPSO conversion while the Koreans remain fixated on high-steel content structures (newbuild FPSOs), ship-shape vessels (drillships, LNG carriers) and mass-produced containers in bulk orders.

Finally, Singapore builders leverage their global yard presence, including Brazil, to beef up their capacity.

Although Chinese rig builders have recently made some breakthroughs in rig building, they still are no threat to Singapore yards, CIMB said in a recent report about the offshore sector.

CIMB points out the rigs which are ordered at Chinese yards including Waigaoqiao and Rongsheng are "either heavily financed or have lower specifications" and heavy financing by Chinese yards is the main attraction for companies to build rigs in China.

"We are not overly concerned by the competition posed by the Chinese for Singapore yards. Traditional drillers with stronger cash flows should still find comfort in Singapore and Korean yards, unwilling to take on risks in quality and delivery," CIMB said.

The aged global rig fleet is in need of replacement as consumption for energy increases in emerging economies. Of the world's 500 jack-up rigs, about 300 are over 30 years old.

A new jack-up rig could set back a drilling operator or national oil company by about US$200 million at current prices. And now, their choices are not confined to the top five yards in Singapore or Korea any longer: China yards like Cosco, CIMC Raffles, and Dalian Shipbuilding have entered the picture. Barclays estimates that, Chinese yards have grown their market share of rigs from 5 per cent to about 30 per cent currently.

And it could increase further. Religare Capital surmised that Chinese yards will be capable of rivalling Singapore yards in terms of rig production capacity by 2015. The Barclays projections corroborate that: China yards may capture 10 percentage points more of market share in the next two years. While the perception is that Chinese yards stick to less complex and commoditised jack-up rigs, and are not competing head-on with the likes of Keppel and Sembmarine, that has proven to be increasingly untrue.

State backing has meant Chinese yards often offer discounts between 10-20 per cent off contract prices and extremely attractive payment terms of a one cent downpayment upfront and 99 per cent of the contract value upon delivery.

In contrast, Singapore yards have a milestone payment system or a 20 per cent-80 per cent payment structure.

But CIMB stands by their belief that the Chinese financier-builder model will not deprive Singapore yards of their fair share of order wins. Traditional drillers with stronger cash flows should still find comfort in Singapore and Korean yards, unwilling to take on risks in quality and delivery.

Yet, the aggression shown by Chinese yards has led to a drop-off in operating margins of rig projects, reported Keppel Corp and Sembmarine recently.

Gone were the boom eras of margins that could go as high as 20 per cent. Instead, going forward, management for both companies are keeping to more modest ranges of between 10 and 13 per cent.

For yards in general - whether in Singapore or China - they will see a weakening in pricing power because they're competing against each other for business.

Singapore yards have articulated clearly that their competitiveness hinges on a mixture of productivity gains and innovation.





"We recognise that there is increased competition in the rigbuilding sphere but we are

confident that Keppel Offshore & Marine is able to distance itself through innovation, technology and experience," COO of Keppel Offshore and Marine, Chow Yew Yuen told BT. Keppel has pursued a strategy of "Near Market, Near Customer", setting up overseas yards in markets like the US, Brazil and China to tap on interest from oil and gas regions around the world and to meet local content demands, said Mr Chow.

And Sembmarine will be shifting from its Jurong premises to a new Tuas Integrated Yard end of 2013. The new space is configured to minimise the movement of manpower and materials.

This year, Yangzijiang chairman Ren Yuanlin told BT that one way for Singapore yards to keep their edge over Chinese yards is to partner with them. Know-how is Singapore's strong suit while China has labour, a resource Singapore has sore demand for.

Yangzijiang itself pursued this strategy in 2010 when it bought over Baker Technology's 15 per cent stake in Sembmarine rigbuilding subsidiary PPL Shipyard, sharing board seats with Sembmarine.

Competition has emerged for the two Singapore companies with news that Daewoo Shipbuilding and Marine Engineering, part of South Korea’s Daewoo conglomerate, plans to re-enter the jack-up rig-building market since its last produced them in 1983.

Earlier this month two Chinese shipyards, Shanghai Waigaoqiao and China Rongsheng Heavy Industries, secured orders for three jack-up rigs, two of them for a Luxembourg-based company called Prospector Offshore.

Analysts say that while the emergence of rivals poses a long-term threat, it will take time for Korean shipyards to catch up as they are not yet configured to build jack-ups. DBS Vickers Securities adds: “However, the potential increase in competition from Korea may limit Singapore yards’ ability to raise prices”.

Potential customers for Chinese yards may be attracted by the financing packages they offer, but would have to overcome concerns over lower specifications and patchy delivery records at such yards, some market watchers said. 

The most important asset - Yourself

From the Business Times February, 2013

Your most important asset is - yourself

Unlike stocks and bonds, you have full control over your human capital

WHAT is probably your most important asset? Stocks? Bonds? Real estate? Collectibles? None of the above. It is human capital. Although most of the focus in wealth planning is on financial assets, human capital is the one thing you can bring to the table that can have the most impact on your future. Yet few advisers stop to measure it fully and discuss its impact on your prosperity.

You have a surprising degree of control over your human capital, unlike the financial markets. You can switch jobs, obtain graduate degrees or simply work more as an independent contractor or partner in a professional firm. In contrast, you have no control over what stocks, bonds, commodities, real estate and other assets return every year.

So consider human capital a measurable return on investment - in yourself.

The stodgy economist's definition of human capital is the net present value of lifetime earnings. This is what you will earn based on the skills, experience and talent you contribute to the labour market. For some, this is a fixed quantity, but in a dynamic world where people are increasingly shifting careers, working longer or pursuing "encore" careers, human capital is a moving target.

Yet estimating human capital is a bit like trying to guess your life expectancy. Life throws us a lot of curves and income gauges look easy to calculate as they emerge from a software programme. Nevertheless, you need to do some projections of lifetime earnings, and potential changes in your income stream, to make a realistic, flexible and holistic financial plan.

Zvi Bodie, a professor of finance at Boston University and co-author of Risk Less and Prosper (Wiley, 2012), says it is essential to know your human capital factor because it ties into how much risk you can take in your financial portfolio. Prof Bodie has been a pioneer in applying economic life-cycle theory to human capital decisions.

Some, with a fairly secure income over their career - such as college professors - may take more risk in their portfolios, while others whose income is linked to cyclical industries may not. You can characterise your human capital like a stable bond or an insecure stock. This is one of the first steps in linking your human capital to how much risk you may take in your portfolio.

"I see myself, for example, as a convertible bond," Prof Bodie said. "I'm protected by tenure at a solid university and have the potential to do extra things for income. I have a lot more capacity to take risk in my portfolio than I choose to use. I'm risk-averse, don't like to gamble and don't get a kick out of winning. I hate to lose."

Noting that "human capital is not a major asset for only a tiny fraction of the population", Prof

Bodie said that lifetime earnings and portfolio management should be reframed as a way of insuring a standard of living and not a focus on obtaining the highest returns.

Figuring human capital into a prudent financial plan requires an attention to detail that most financial advisers may not be able to handle. Because most advisers are focused on managing money or picking investments, they may not be able to do the right calculations that are flexible enough to accommodate changes in income.

Paula Hogan, a fee-only certified financial planner based in Milwaukee, has been employing human capital and the life-cycle theory that underpins it into her business model for years. Like most planners, she carefully examines cash flow, expenses, income and her client's portfolio.

"A key insight of life-cycle theory," Ms Hogan said, "is that the consideration of human capital comes first and then portfolio management comes after that: financial capital is tailored to the human capital, not vice versa." Ms Hogan also steps into the realm of "life" planning that merges human capital with various goals and changes in a person's journey. This raises a set of questions that go beyond numbers. "What do you care about?" Ms Hogan said she asks clients. "Do you have a vision of where you want to be?"

Career counselling

If they want to change, the questions become more focused on transition. "How can we make a bridge? What about health insurance? Will you need a new family budget? Do you have family reserves (savings)? Is your spouse on board?"

Sometimes the transitions are modest, as for an executive at the top of his profession whom she counselled. He wanted to "not go at full tilt" and spend more time doing other things. Other, more radical moves, such as a career change, will require more support. Ms Hogan works with career coaches and counsellors such as Jane Schroeder of Brookfield, Wisconsin to manage the vocational piece.

As a master career counsellor and board-certified coach with a background in educational psychology, Ms Schroeder applies standard assessment tools such as the Myers-Briggs personality test and talks with clients on future direction. She delves into their core strengths, competencies, emotional intelligence and "brainstorms on possibilities".

"What allows you to engage your human capital at the highest level?" she asks clients. "When were you at your best? What was happening? What was energising?"

By re-engaging clients with the force that drives their ability to create, manage or earn money in a fulfilling way, Ms Schroeder eases the transition that some need to make.

It is one thing to know if you need to make a change, but is that possible, given your financial situation? Will you have enough cash reserves to see you through a transition? Will a spouse or partner support your household while you make some changes or re-educate yourself?

Before you even make the decision to redeploy your human capital, you will need to run some numbers to see if it is possible. Online planning programmes such as ES Planner (esplanner.com) can give you some general ideas on what is possible given changing income and cash flow.

While these questions may be difficult at first, they may help you forge a satisfying new path. But you will need to take your time and do some detailed planning that may involve a paradigm change. Your personal capital reserve and future earnings should drive your ability to make a change and not your portfolio return. That is a big leap for most, but a rewarding one if you are able to navigate it.