Oil and gas industry challenged to make the sector fit for purpose

The offshore industry’s leading lights gathered in Aberdeen last week for Oil & Gas UK’s annual conference. Peter McCusker reports.

With a conference theme of the need to focus on the next 40 years ,there was widespread acknowledgement of the need for radical change to achieve this.
Source:     Time:25 Jun 2015
 The offshore industry’s leading lights gathered in Aberdeen last week for Oil & Gas UK’s annual conference. Peter McCusker reports.

With a conference theme of the need to focus on the next 40 years ,there was widespread acknowledgement of the need for radical change to achieve this.

One of the industry’s most senior figures Trevor Garlick, regional president in the North Sea for oil giant BP acknowledged the mistakes of the recent past.

He said: “What went wrong? It was a hot market and with the oil price up at over $100 a barrel there was a lot of competition for scarce skills and resources, leading to supply chain price increases.

“Then there are the issues around efficiency and inefficiencies. We employ a lot of inventive, clever engineers wanting to invent clever solutions to complex problems. We really need to look at ourselves as an industry and try to develop more standard solutions.”

He went on to say that the industry spent too much maintaining ageing assets, with operating expenditure on the United Kingdom Continental Shelf (UKCS) totalling almost £10bn last year while production efficiency fell from 80% to 60%

This theme was taken up by John Pearson, group president, Northern Europe for Amec Foster Wheeler, speaking at the Aberdeen Conference and Exhibition Centre. He pulled no punches: “We are being deluded if we think we can keep going on as we are and it will pass. We need to shape up for the 40 years ahead.

“It’s not about the oil price. It’s about the efficiency. We understand the problems and we can fix them.”

He highlighted how 10 years ago the industry spent £3.3bn recovering 1.1bn new barrels but that now costs almost £18bn.

He added: “We don’t want to waste this crisis. Previous hinge points for transformation in the industry have been wasted and we now have to dig in for the long term and do things differently.”

Opening speaker, Oil & Gas UK’s new chief executive Deirdre Michie, also said the industry had itself to blame for the sharp rise in costs – up by 50% in the three years to June 2014 - but said the industry can now be ‘part of the solution’.

“Over the last 20 years, the price has averaged at $62 per barrel and the forward curve is between $65 and $75. Therefore it is not unreasonable for the North Sea to set out its stall at being sustainable in a $60 world.

“As a target, it’s one that we as a trade association can champion, Government can align with and the regulator can pursue as an enabler, for example, to focus on key infrastructure.”

She called for a new mindset: “To succeed with this approach, we have to be open to change.

“We must avoid doing the same things in the same way and expecting a different outcome. We have had a decade of escalating costs, so we can be sure that our current approach doesn’t work.

“We need to think about this from an investor’s point of view. Given that we compete for investment dollars on a global basis, we must ensure the UK is a commercially attractive and predictable place in which to invest.

“Learning from our mistakes, we know that our focus cannot merely be on ‘cutting costs’, but must more fundamentally address the efficiency of the basin.

“Focusing on efficiency means that, if or when the oil price bounces back, we will be best placed to seize new opportunities. And let’s not forget, efficient management is also safe management – and I know safety remains the top priority for everyone in this room.”

No single palliative will ease the industry’s dyspepsia; rather it will be a combination of factors. They include; greater collaboration between operator and operator, operators and their supply chain, adopting best practices from related industries (see panel), with a lead role in all of this for the new Oil and Gas Authority.

Some recent examples were given to demonstrate how this new approach can work and reap dividends. These include collaboration by 19 oil companies to share helicopter support operations, rather than their previous individual arrangements.

Whilst Total, in collaboration with its workforce, has managed to boost platform manpower efficiency by over 30%, delegates heard.

Mr Garlick continued: “In the last two months we have noticed the difference with the OGA bringing the industry contractor and operator community together.

“Our aim now is to work with the supply chain and build long-term relationships.

“We may have been too ponderous and too slow in the past. We may have added to the complexity and created inertia by having too many interfaces. There is a need for greater collaboration. We should aim to listen and be more innovative.”

He gave the example of a gas supplier to BP which had been constantly asked to cut its costs; he said they eventually responded to the request by saying ‘why don’t you ask us about the better product we can supply you with, at a better price?’

Mr Pearson agreed that in the past there was too little focus on price. He said: “We have just started to work on price. Young engineers never thought about price, but now we have to know the price of everything.

“We have to design for value and take a manufacturers approach to how we do things.”

He quoted examples where efficient analysis of business processes can reduce costs by 70% without comprising safety or integrity and said the industry had to look to the automotive and aerospace industries for best practices.

He said his company employs 13,500 people in the UK and he was working hard to convince his bosses that this is still a good place to invest.

He believes the OGA can be the catalyst to drive the change. “This tripartite approach (the industry, Government and the OGA) is demonstrating a common intent on getting things done that has never been seen before.

“Is it realistic or is it just spin? Well, I have never seen it before. It is massively net positive. We have to do thing differently to get different results.”

Andy Samuel, chief executive of the OGA, which came into being in April, said it is now focused on delivery and developing new behaviours.

He said the cost crisis has focused minds on the challenges of efficiencies, leadership and behaviour.

He said: “I was in Houston recently and the heads of the oil companies are amazed at the level of Government commitment to the North Sea. However it is not just up to the Government through further fiscal measures we have to make efficiency savings and not just ask the Government for more. We still have a lot to do.

“We have to be influencers, to promote investment and help the supply chain flourish. There is a huge prize waiting if we can deliver the maximum overall value from the economic reserves of the UKCS.

“We’re looking ahead to the next 50 years and we need to invest now and steer a path through future bubbles to ensure they’re not detrimental to the industry. I am confident that by working together we will realise the prize that is still out there.”

He said one of his most pressing challenges was to encourage exploration, which is currently at record low levels.

“There are new fields waiting for further cost and efficiency improvements to get to the market and we not doing justice to the data already out there. There has been some shoddy interpretation of some of the data.”

Mr Garlick concluded: “This is a most difficult time and we are all working hard to improve efficiencies and there are numerous examples of where we have already had success. We can do it.

“There are some tough choices to be made, and jobs are being lost, but there are glimmers on the horizon. We have to simplify structures so it’s easier to make decisions, and get after costs.”

Newcastle International AirportNewcastle International Airport
Peter McCusker travelled from Newcastle International Airport to Aberdeen and back courtesy of Eastern Airways, which runs daily services between the two cities

On the day of the conference an influential report encouraged the oil and gas industry to follow the example set by the automotive, aerospace, rail and chemical industries.

Businesses need a “fundamental shift” in the way they operate to successfully compete for international investment in the North Sea and boost recovery after the recent plunge in oil prices, the report by PricewaterhouseCoopers (PwC) and the Oil and Gas Industry Council concluded.

It warns firms against making short-term tactical cuts rather than focusing on longer-term structural changes to achieve the 30% to 40% improvement in efficiency recommended by regulator the Oil and Gas Authority (OGA).

The report highlights seven “tried and tested” steps it says could transform operations of companies in the UKCS in a similar way to leading companies such as Rolls-Royce, Bombardier and Jaguar Land Rover.

These include improving leadership in the industry, encouraging more innovation, boosting collaboration between firms and supporting the development of the OGA.

Gordon Colborn, from PwC in Scotland, said: “There is no one silver bullet that can solve the range of issues currently facing the oil and gas industry - instead there are seven that we believe can transform, modernise and re-energise operations across the UKCS.

“These seven fundamental steps are pragmatic lessons that have been transformational in other major industries and are highly relevant to those firms working in the North Sea.

“The alternative approach is the status quo - acknowledging a short lifespan of the UKCS and acceleration towards decommissioning.

“I believe this industry can have a sustainable future but we need to take a more strategic and integrated view if we are to extend the life of the North Sea for everyone involved and for future generations. It’s time to act.”

Commenting on this new report George Rafferty, chief executive of NOF Energy, said: “The self-assessment of the fundamental changes that need to be made to the industry, which was led by Sir Ian Wood’s report and is supported across the sector, demonstrates the willingness to deliver embedded behavioural change that will create a more sustainable future for operations in the North Sea.

“The oil price drop of course brought the issues facing the market into sharper focus, but operators, contractors and the supply chain community were already making positive steps towards driving efficiency and productivity changes.

“Subsea UK CEO Neil Gordon, speaking at the Subsea North East conference in Newcastle recently, talked about the need to avoid immediate cost-cutting that is synonymous with significant changes to an industry without framing it with within a long-term culture of efficiency.

“The industry recognises this challenge and NOF Energy is working closely with our members and wider network to ensure the supply chain is at the heart of a collaborative process and can meet the objectives through game-changing technologies and services that support the long-term future of the UK oil and gas sector.”
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