Comments in the March "Beyond the Horizon" offered a view of the future from one of the largest oil industry service companies. The article focuses on the current marketing effort to win larger all-in service contracts which preferably should include incentive/penalty payments or production-sharing terms.
Such contracts are a reaction by oil and gas companies during the present worldwide recession and low energy prices to the imperative to cut costs drastically and spread risk as widely as possible. Moving areas of company work, especially if they employ large numbers of staff, into outside service companies offers an immediate saving on staff and overhead costs. It also provides a "one-stop shop" for a particular activity and other advantages referred to in the article.
However, there are also many disadvantages which appear not to have been thought through yet by the oil industry - after all survival today is more important than an optimized structure tomorrow.
The main issue is one of size. Only the largest service companies can provide the range of resources necessary to take on such contracts, thus limiting the client's choice from the start. This limitation stems from the conception of this type of contract, where a contractor is pre-selected at the start of the process, then develops a technical solution which in my experience is invariably linked to the specific abilities already included within the service company - for instance a development project structure being promoted which is directly related to the service company's fabrication ability.
The service market would reshape into several large monopolistic companies, with smaller companies being squeezed out (a regular CRINE complaint). This situation already exists offshore in the pipelay and heavy lift vessel markets with almost no choice of contractor, leading to unpredictable bid values and variable installation periods. With a lack of support from the oil and gas companies, the smaller supply companies will be forced to look elsewhere for work and may not be interested, or even in existence, if diversification attempts fail when economic circumstances improve.
A second issue is viewpoint. When negotiating these contracts, service companies are concerned among other things to maximize their own profit and minimize their own risk. The surest way of achieving these two objectives is to repeat previous work, and hopefully shave off some corners, rather than innovate. Technical innovation is often actually counterproductive, as it can quite easily increase cost and risk if too much of a gamble is taken. Here again, the smaller companies, which are often driven to provide unique solutions to complex problems, miss out as they are unable to obtain a forum to promote their ideas and concepts. It is not surprising, therefore, that solutions are selected for and geared to the contractor's general capabilities rather than to the client's specific needs.
With regard to the point on "generalists", such a person is employed by an oil or gas company to scan and sift the world marketplace for both tried-and-tested and innovative solutions, without favor or pre-conceived ideas, and hence to provide an objective comparison and analysis for the best-value solution to the particular problem. To infer that a "generalist" is myopic misses the point entirely.
Health Warning: When an oil or gas company opts for an all-in solution from an integrated service company, it has at the same time opted to dis-integrate its own organization. Having determined this route, and bearing in mind that other prime interest areas mentioned in the article such as exploration, transportation, refining, and marketing have already been subcontracted on occasion, the oil or gas company will shrink back down towards its roots, that is to being an explorationist only. The opportunities hard-won over the years to add value down the supply chain by retaining certain key areas of expertise and experience, either in-house or hired as required from the best in the marketplace, will have been lost.
Partner & Principal Consultant
Castle Energy Associates (Lewes, East Sussex, England)
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