Cripps Sears: Collaborate to accumulate
Costs have long been an issue for North Sea operators. Even before the oil price retreat, there were concerns that escalating costs were jeopardising the region’s long-term viability.
Historically one of the most cost-efficient areas in global oil and gas, the North Sea saw inflation-busting rises in the past decade that took average lifting costs to £17.80 per barrel of oil equivalent in 2014.[i] This shrinks the economic life of high-cost fields, shutting in hundreds of millions of otherwise recoverable barrels, a capacity loss that a “super mature” region can ill afford.
The protracted price slump since summer 2014 has given added impetus to address the cost base. One survey of senior executives found that 88% identified cutting costs as a top priority.[ii] This focus is yielding results: the most recent economic report from Oil & Gas UK found industry efficiencies had driven a 45% drop in the cost of extracting a barrel of oil and gas on the UK continental shelf.[iii] This has been painful however, and the supply chain has seen an average 30% fall in revenues and 120,000 jobs lost.
There is only so much a squeezed supply chain can give, which is why more companies are seeking out new ways of working to ensure resilience to future shocks. There are many ways companies can work together to strip out costs. Small operators, for example, are forming “rig clubs” to reduce drilling costs, while large companies can expedite procurement by sharing data about their extensive stock inventories.
Earlier this year, Shell and Repsol, neighbouring operators in the Central North Sea, collaborated on sourcing valves for an emergency shut down riser on Repsol’s Fulmar Alpha platform. Through a Shell Global Framework Agreement supplier, they were able to source the valves within 48 hours rather than a typical lead time of weeks or even months. The operators reckoned they averted almost US$4 million of lost production at Fulmar Alpha and possibly US$14 million of lost revenues at Shell’s Gannet platform, which exports its oil via Fulmar.[iv]
Oil & Gas UK’s new Efficiency Task Force (ETF) aims to foster more of this kind of collaboration, by promoting best practice and encouraging online spare parts inventories and design standardisation. There are already signs this is working: according to Deloitte’s Collaboration Index, the industry’s score moved from 5.9 to 6.7 out of 10 between summer 2015 and March 2016.[v] This is encouraging, but still leaves plenty of scope for improvement.
This isn’t just an issue for North Sea operators. Companies globally face a battle to stay competitive in a low oil price environment. Many are calling for the industry to learn lessons from the lean manufacturing models adopted by the aerospace and automotive industries by unpicking a historic culture of rivalry that has led to unnecessary complication and costly duplication. It’s widely quoted, for example, that operators use 28 different shades of yellow to paint subsea equipment and the industry’s favoured bespoke engineering solutions mean there are 250 valve stems in existence, each one a one-thousandth of an inch different in size.[vi]
Just as the aerospace and automotive sectors battled lengthy manufacturing processes, high costs and low margins to develop smarter supply chains and standardised manufacturing processes, so the oil and gas industry will need to climb the same learning curve. The good news is that it can be done, and collaboration, already underway, will be the building block for a smarter, leaner and more sustainable future.
[i] Oil & Gas UK
[ii] A New Reality, the outlook for the oil and gas industry 2016, DNV GL, January 2016
[iii] Oil & Gas UK’s Economic Report 2016
[iv] Via ETF website
[v] Oil & Gas UK /Deloitte Operator Collaboration Index (CI) May 2016
[vi] Ian Silke, VP of deepwater projects at Shell, quoted in the FT