Competitive barrels need a commercial mindset: a shift in behaviour in oil and gas
Oil and gas projects are coming off the drawing board and into the field, but they will only be viable if costs are dramatically reduced.
In December last year BP announced that it was to add a second platform to its Mad Dog field in the Gulf of Mexico with the capacity to produce up to 140,000 gross barrels of crude oil a day. The really showstopping part of the announcement was the expected cost of the development: $9bn, 60 percent less than the cost of almost $22bn announced in 2013.
Projects that were viable when oil prices were up at $100 per barrel do not look attractive now, even with the rising price trend we have seen since OPEC announced it was limiting production in November 2016. The industry has to drive costs lower.
Speaking about the second Mad Dog phase in December 2016, Bob Dudley, BP Group Chief Executive, said: “This announcement shows that big deepwater projects can still be economic in a low-price environment in the USA if they are designed in a smart and cost-effective way.”
Though the 60 percent cost reduction achieved on Mad Dog will not be achievable in every case, most oil and gas companies should be looking for reductions of between 30 and 40 percent. But to achieve this step change in costs requires a change in mindset too.
Projects that were viable when oil prices were up at $100 per barrel do not look attractive now, even with the rising price trend we have seen since OPEC announced it was limiting production in November 2016.
Goodbye gold standard
The traditional approach to designing oil and gas facilities for large operators was to always seek the ‘gold standard’. Each development had to be a flagship project, bigger and better than the previous one, fully future-proofed so that additional phases could be brought online with relative ease some years down the line.
In 2017 those ideas are being turned on their heads. Companies are seeking a simpler, bare bones proposition with standardisation taking over from bespoke design. ‘Design one, build many’, which has been the mantra for some small operators, is now becoming the guiding principal for the big players too.
Investments are very much limited to what is absolutely necessary now. We are seeing smaller, faster, incremental projects being lined up for delivery, with no provision made for later phases. Each element of the project is interrogated to assess the risk, cost and value attached to it and only advanced if the value exceeds the cost.
Technology is advancing apace; driving down costs as operations become quicker and more efficient, particularly in drilling where some operators are seeing wells completed in half the time when compared to two years ago. The new mindset looks to delay design of future phases and reassess what technology can do at that point.
After a barren two years, market conditions are also playing a significant role in lowering the cost of projects coming out of the starter blocks now. The costs of steel and labour have both come down, with contractors offering keen prices as they look to fill up their order books again.
This is a double-edged sword however. With many contractors having downsized or even disappeared altogether, resource is more limited and as demand rises, costs of labour will be on the up too.
Companies are seeking a simpler, bare bones proposition with standardisation taking over from bespoke design.
Increasing collaboration in the supply chain
To mitigate rising costs, project managers should look for ways to increase collaboration with their supply chains. Costs can be reduced by adopting a more open and shared approach to risk allocation between parties to give the best outcome for the project.
As well as the challenge of moving to a new development model, oil and gas companies are also facing a potential shortage in internal resource and capability. Like their supply chain, they too were forced to slim down dramatically, leaving leaner and arguably keener teams.
Although we expect these teams to be more efficient, as individuals strive to demonstrate their worth, there is a fear that the industry has lost some important knowledge. Many experienced heads have been lost to retirement. Until these new projects get underway, we won’t know whether the balance is right or whether more capacity will be needed.
In the last two years we have seen an upswing in the use of the Performance Forum, a resource run by Turner & Townsend for the oil and gas industry, which collates and benchmarks data from between 60 and 100 upstream projects a year. Companies such as BP are interrogating the cost of every element in order to deliver projects in the low oil price environment.
We are also starting to see some smarter use of the vast amounts of data captured on projects. This is a trend which needs to go much further.
Lessons learned meetings at the end of projects, which pull out possible improvements for future programmes and phases, are commonplace now. But in this new world, learning lessons when delivery is complete is just too late: data must be mined and analysed as it is collected so that changes and improvements can be made mid-project in order to keep projects on track and if possible deliver even more value. Digitalisation is the new buzzword.
With oil prices expected to remain around the $50 to $60 a barrel mark, the only way for oil and gas companies to reach a financial investment decision is to adopt this stripped back approach to design and specification.
A shift in behaviour
They must challenge their supply chains to think differently, to look for standardisation in both design and construction, and to ask the question: ‘Why do we do things this way?’.
As with any significant change the biggest unknown is the human factor. The successful delivery of projects at this cost level requires people with the experience and knowledge to make informed decisions. But perhaps most challenging of all, it requires people who can change their behaviours and who won’t revert to type as projects get underway.