Terra Nova super alliance - glimpse of the future

Petro-Canada opens books to cut costs, speed project

William Furlow
Technology Editor

This illustration shows the facilities configuration, indicating the responsibilities of each of the alliance members. [25,387 bytes]

Taking a page from British Petroleum's widely publicized alliance on the Andrew Field in 1993, Petro-Canada carried the concept of alliance to an extreme to assure maximum profitability for the Terra Nova Field off Newfoundland.

The oil industry seems to be swamped in alliances and mergers. As large service companies strive to increase their level of vertical integration, many oil companies may worry that exploration will be the next step. Gary Bruce, Petro-Canada's Director of Offshore Development Operations said his company looks on these changes as an opportunity rather than a threat.

In reviewing options for the development of the Terra Nova Field, located 350 km east-southeast of St. John's, Newfoundland in about 100 meters of water, Petro-Canada hoped to take advantage of the latest subsea and floating production technology, but also some revolutionary alliance innovations.

Terra Nova has estimated recoverable reserves of 300-400 million bbl, which would be economical to produce with or without this unusual alliance. However, Bruce said the decisions Petro-Canada made in the management of the project made it that much more profitable.

Breaking tradition

When deciding to put a project out for bid in the conventional way, the first thing an operator does is staff up to handle what Bruce estimates is a two-meter high stack of paperwork covering every aspect of every bid for every stage of a project. The operator insists on providing design specifications for all aspects of a project and then manages the work done by contractors once bids are accepted.

Bruce said there are massive inefficiencies and redundancies of both staff and research built into all levels of this process. In addition, contractors have no reason to prevent cost increases or delays because they can realize profits. Delays mean contractors make money over a longer period of time.

Bruce said Petro-Canada, and others liked the idea of forming an alliance to develop a field. It gives the contractors an interest in bringing the field onstream on time and reducing redundancies. However, Bruce felt the idea was not carried far enough.

In many cases, an operator will bid out the different contracts for a project, building a mountain of paper work in the process. Then, when the smoke clears, ask that all the contractor firms align themselves to work together for the overall benefit of the project.

Because these contractors were not able to form their own alliance, but rather were pushed together by the owner, there were often problems with incompatibilities and task duplication that made these alliances less efficient than they could be.

"We said, "Let's go out and let the contractors arrange themselves,'" Bruce said.

Using a simple, yet risky, philosophy, Bruce said his company decided it would form an alliance built on trusting the contractor.

Within the perimeters of due diligence, Bruce said Petro-Canada made a conscious decision to turn over control to those most qualified to make decisions. Not only does this cut back on redundancies in such areas as specifications, usually provided by the owner, but also in management. Because Petro-Canada has given the contractors an incentive to produce a quality job on time and under budget, he said there is no need to monitor the contractors, or for that matter, for the contractors to monitor the subcontractors.

"I just cut our staff (compared to a traditional project) by two-thirds," Bruce said. Petro-Canada allowed alliances to form naturally in the market place and then these integrated alliances would bid on the project, understanding that once the target cost per barrel was determined, the contractors would profit on oil brought in under cost and share the expense of cost over-runs. Cost and schedule are monitored on a daily basis not only by the owners, but the contract workers, who also have an interest in keeping these costs down.

Bruce said the fact that many service companies are now almost completely vertically integrated makes it attractive. He said the project received initial bids from seven alliances. Petro-Canada then short-zlisted three on these alliances to do detailed work on their proposals. Meanwhile, Petro-Canada was able to get a preview of how the workers from different companies in each alliance worked together.

"We actually put some of our people in their shops to see how well they worked with each other," he said.

The operator has to be comfortable putting a lot of trust in the contractors and willing to try a new approach. The flip side to this is that an operator must be careful in choosing a contractor for such an integrated alliance. Other than that, Bruce said this approach could be applied to almost any field. "It's just (a question of) whether one is prepared to go with this type approach to get the gain that is there," Bruce said.

Alliance partners

The Terra Nova partners eventually chose an alliance consisting of SBR Offshore, FMC Offshore Canada, Coflexip Stena Offshore Newfoundland, PCL Industrial Contractors, Doris ConPro, and Halliburton Canada. These companies would design, fabricate, assemble, and install the required production facilities and drill the required pre-production subsea wells for the project.

Jerry Logan, Halliburton Energy Services (HES), said the Petro-Canada approach helped the short-listed bidders by forming a traveling team of owners who guided these alliances through the process. Logan likened this phase of the bidding to a design contest that allowed the owners to see each alliance's best efforts.

Logan said Petro-Canada and its partners put this project out for bids at an opportune time, before deepwater exploration took off in 1996 and the boom began. Because industry activity was still slow, Logan said a number of companies were attracted to a project on the cutting edge of technology. In setting up what would prove to be the winning bid, Logan said HES selected alliance partners with specialized expertise.

Each member of the alliance made its best technology people available. The technology of the solutions offered followed a common scenario for frontier areas where there is a lack of infrastructure. Logan said similar solutions could be applied to fields offshore west Africa, Brazil, and in the Far East.

In addition to being attracted by the innovative technology proposed for Terra Nova, Logan said the alliance liked the idea of getting in on the ground floor of what it sees as an evolving market that covers a concentrated area. He said he sees Eastern Canada as a smaller version of the North Sea. Eastern Canada is not as big, but it will feature a lot of subsea developments and should become a technology oriented market.

Logan said that he and others underestimated the amount of work that would be involved in forming and administering such an integrated group. Of course, now that the bidding process is complete, Logan said the companies involved will benefit greatly from what they learned doing the deal.

Still, he pointed out, there are only so many simplifications one can make when a project involves this many companies and governments. Because the alliance formation and bidding process were so complex, Logan said it is essential that any service company interested in bidding should become involved very early in the project. He said there will most likely be future alliances that equal the breadth and complexity of the Terra Nova deal, but it may never become the norm. "It's not a panacea," he added.

Petro-Canada is the operating partner of the Terra Nova development project holding 29% interest. Other owners include Mobil Oil Canada, 23%; Husky Oil, 17.5%; Norsk Hydro Canada, 15%, Murphy Oil, 12%; and Mosbacher Operating, 3.5%.