From survival to strength
How the oil and gas industry can emerge stronger from its current crisis.
The oil industry’s response to the abrupt fall in prices has been swift; a dramatic scaling back of both operational and capital spend, and a major reduction in headcount.
Lessons learned and then forgotten
But the industry has been here before – and recovered. When oil prices sank to $8 a barrel in the 1980s, the industry’s initial response was much like its current course. But the kneejerk slashing of costs eventually gave way in some regions to a more nuanced approach – and a greater focus on efficiency, project controls, audit and assurance.
By the 1990s this global process of rationalisation was given a name by North Sea operators – Cost Reduction in the New Era (CRINE). By fostering collaboration in platform design and construction, the CRINE initiative didn’t just help the UK industry to steady the ship and limit the pain during an era of ultra-low oil prices, it also laid the foundations for continued efficiency savings even after prices returned to more normal levels.
But the legacy of efficiency began to unravel after oil prices rose sharply in the mid-2000s. Many of the lessons of CRINE were forgotten as the focus moved to speed of extraction.
Global operators sought instead to bring new projects on stream as quickly as possible to capitalize on a boom that by 2008 had driven prices well past $100 a barrel. Such confidence has been swept away by the collapse in oil prices over the past 18 months.
People are part of the picture
While cutting headcount has provided a breathing space, we should be wary of allowing job losses to permanently erode the industry’s capability. There’s a danger those who joined during the boom years of the past decade will find their first bust so unpleasant that they will seek to leave - but the sector must retain this younger generation if it is to effect the deeper reforms which are needed. It is these young professionals who will one day lead the way in overcoming future technical challenges, increasing operating and capital efficiency and attracting new investment.
- 75,000 Job losses across the global oil and gas industry since March 2015
- $220bn Planned investment cancelled
Technology for capability
The industry must bolster its capability by improving project design – and however dire the circumstances, must not shirk from investing in technology.
It’s telling that the most nimble sector of the industry is the newest and most technology-led – the US onshore players who have greatly improved fracking and unlocked previously hard-to-reach reserves. Their agility has allowed them dial back investment much more easily than some offshore players, giving them a substantial competitive advantage.
New ways of working
Currently, those who are committed to overdue existing projects are demanding that every supplier reduce its tender price year on year. But pushing the service sector too hard now risks storing up problems that may haunt the industry once more attractive fundamentals return.
Oil operators who adhere to rigorous project governance, engage in open book contracts well into the detailed design phase - and contract according to value rather than baseline cost – will ultimately forge a more collaborative relationship with their supply chain, achieve better results and enjoy substantially reduced project risk.
A return to the scene of the CRINE?
With oil prices predicted to return to more normal levels from 2017, and the super majors still retaining substantial cash reserves, the current crisis should be seen as an opportunity to reform as much as a threat.
Industry leaders need to ask themselves if now is the time to introduce a global form of CRINE, with greater investment in both people and efficiency in order to reduce the risk of costs ballooning when the oil price recovers. Change is overdue and now is the time to make it - both to weather the current lean years and to deliver maximum benefit from the next boom years