Industry should focus on efficiency rather than price

While hopes for the return of a triple-digit price seem overly optimistic, the industry needs to realize that the price of oil is nothing more than a mental benchmark.

The oil price has hovered around $40/bbl for most of the year. While hopes for the return of a triple-digit price seem overly optimistic, the industry needs to realize that the price of oil is nothing more than a mental benchmark. Even if the oil price increases, the offshore industry must not slip back into old cost-wasting habits as happened repeatedly after previous downturns.

If the industry changes its mindset and strives to execute projects in the $20-$30/bbl range (although even $10-15 is possible), it would make companies less susceptible to the ups and downs of external economic developments. However, even when the oil price was near $100/bbl, few companies were making large profits on a per-barrel basis, because opex had increased unsustainably.

Some producers are innovating and seeking different ways to stay afloat, withdrawing from deepwater projects and instead focusing on oil fields closer to home. A similar, more holistic change in mindset needs to occur industry-wide for projects to be executed in the lower price-per-barrel range, with operators focused on increasing efficiencies rather than on per-barrel cost. So, what are the factors that can reduce labor costs, complications, and ultimately production costs?

First, companies need to focus on risk reduction and look at long-term planning. Identifying the key levers impacting a project in order to deliver the best business case allows for early planning and a deep understanding of all parts of a project. The construction industry has provided a strong example of this, prioritizing structural mitigation - constructing and re-strengthening buildings, often in disaster-prone areas, to handle future disaster situations. That can take the form of building deeper structural foundations in earthquake-prone areas to constructing newbuilds only on elevated land in areas prone to flooding. It is this type of long-term strategic approach that the oil and gas industry should strive for, as starting with the end in mind can help new projects survive and thrive.

Second, the industry should expend more of its energies on human factors and the assistance that technology and automation can provide. As digital oilfield services come increasingly to the fore, technology can monitor wells’ progress to free up valuable time for on-site staff to focus on other key areas, leading to increased cost efficiencies.

Another way to improve efficiency is by simplifying and standardizing quality measures, allowing oil companies instead to concentrate on production and innovation rather than managing unnecessary bureaucracy. There is no need for each company to waste similar levels of resources chasing compliance issues with different metrics and different time scales. This is not to say that national and international measures should not be required and tracked, but that metrics should be standardized across government programs and, wherever possible, automated. Collaboration is key and the industry needs all operators to work together to make sure the appropriate changes are brought about.

Companies could also cut cost and increase efficiency by working more collaboratively with the entire supply chain, engaging it earlier in their projects, and by actively seeking new ideas and solutions from suppliers. The industry can glean best practice from mid-sized US operators which tend to be more flexible, nimble, and innovative.

Another way collaboration can be encouraged is via consortium building, offering the chance of alternative production infrastructure ownership styles that can allow for different financing models. A contractor consortium can remove inefficiencies, lower operators’ capital requirements, and take lifecycle costs into account early on. This could lead to different risk-sharing models for operators and contractors and greater access to innovative sources of funding, with infrastructure costs to be paid back in line with production.

The industry must accept that the oil price is not controllable. If companies focused on risk reduction, human factors, standardization, and working more collaboratively, they would be better placed to withstand the future ups and downs of the global oil economy. Companies should accept the lower oil price as an opportunity to transform the way that they and the industry do business, to find efficiencies and use solid business models to secure a stable future.

Chris Freeman

Partner & Director of Field Development

io oil & gas consulting

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