Focusing on efficiency

Elaine Maslin

September 1, 2015

High oil prices in a mature basin led to a tight market and cost escalation. With low oil prices, the industry is working hard to rein in spending. Elaine Maslin spoke to Oil & Gas UK CEO Deirdre Michie on some of the initiatives underway.

Michie. Image from Oil & Gas UK.

Taking over the reins of the UK North Sea’s leading industry body at a time when depressed oil prices are exacerbating the already price-pressured sector may seem an unwelcome task to many.

Oil & Gas UK CEO Deirdre Michie appears up for the challenge. Up until 1 May, when she took over from long-standing CEO Malcolm Webb, Michie was working for supermajor Shell, where the graduate in Scots Law had a 30-year career in senior UK and global upstream and downstream management positions.

When she took over, WTI crude was US$55/bbl, half that from just under a year before, after falling from a four-year steady high at around $100. But, even at that high, the North Sea was under pressure – with cost escalation and skills shortages.

Before the price collapse, government and industry had already recognized the situation was unsustainable, not if the UK’s resources were to be “maximized.” Some key recommendations from Sir Ian Wood’s Maximizing Recovery report have already been put in place, including setting up a new regulator (the Oil and Gas Authority) and government support for new seismic.

But, undoubtedly, more needs to be done. “Our focus is on cost efficiency,” Michie says. “The regulator has been set up, Treasury and the fiscal piece is happening and they are committed to working with us.

“Our piece is cost and efficiency, recognizing we have become incredibly inefficient and that costs got out of control,” she says. “Production efficiency had dropped from 80% to 60%, and lifting costs were $30/bbl. That’s not sustainable. Companies where looking at this at $110/bbl, before the [low] oil price, recognizing the cost base was not sustainable and something needed to be done.”

But, she says: “It takes time. You can take out costs relatively overnight, and we have seen that. Where we are seeing more and more sustainable changes coming through is on efficiency.”

In this area, Oil & Gas UK is building a “box of stories,” or good examples, to share with the industry. For example, Nexen studied the Tour de France winning Sky Team’s marginal improvements ethos. The Sky cycling team made gains because they focused on every way possible they could make marginal improvements. By following this ethos, Nexen reduced wrench time in one shift from 8, down to 5.5 hours. “That’s a huge improvement and the fact they got the workforce involved in the process really helped,” Michie says.

French oil major Total is working with its technicians and operators to use visualization technology when they are putting a job in place to look at what they need to do. It helps them create a more efficient process – cutting 10-12% of the time it previously took them to do a particular job, Michie adds. In another example, Centrica Energy held a hackathon – an event bringing together contractors to see what the operator and they could do to generate ideas on how they can work together. Some 70 people attended and generated hundreds of ideas. Centrica is now helping EnQuest run a hackathon with its suppliers. Centrica also has a “save $100 million in 100 days” campaign internally.

One of the questions the industry has to ask itself is how it became so inefficient and unsustainable. It’s a combination of things, Michie says. “We had a hot market with the high oil price driving certain behaviors. It is also a mature basin and things are more complicated and more challenging than a greenfield site,” she says. “The combination of these factors drives behaviors and we have woken up to the fact that this is not a sustainable way to go about. Even with a high oil price, it would still be inefficient.

“Whatever happens, we need a more sustainable efficient model,” she continues. “It’s all about optimizing the engineering, rather than what a commercial barrel is. The industry is very good at engineering, but it is about applying an innovative approach to standardization and thinking about that.”

Oil & Gas UK has a tranche of projects ongoing. It is planning a campaign promoting industry collaboration. “Where aerospace and automotive industries made their breakthrough was when they came together to cooperate,” Michie says. Oil & Gas UK is also running project to benchmark contractor rates and it is looking at how spares utilization can be used through cooperation. This year, Oil & Gas UK released guidelines to both reduce and optimize the number of shutdowns and turnarounds.

A group driven by Oil & Gas UK has also been set up to focus on business process, standardization and behaviors and cultures. “It is about moving forward with early adopters and if we can demonstrate a couple of companies can so this you will get everyone coming with you,” Michie says.

Business processes will focus on the inventory management piece, i.e. spares utilization. “Inventory is sitting around and no one has any idea it’s there. Improving management of this means having the right spares at the right time and reducing wrench time,” Michie says.

Standardization and simplification will focus on a number of areas, such as valves standardization, having standard subsea modules to put in place and replicate, and in wells plugging and abandonment having a standardized approach to improve the efficiency of P&A operations. Oil & Gas UK already recently released new guidelines around well abandonment, including cost estimation guidelines to help improve estimate accuracy.

For cultural behaviors, there is an alignment needed, Michie says. “Moving from competition to cooperation is a challenge – it is a competitive industry. We have a supply chain code of conduct, which needs updating with an ‘efficiency head’ on, rather than a process head. It’s also about shared KPIs (key performance indicators),” she says. Sharing efficiency measures will also be a key theme at the next Pilot Share Fair.

But, it’s also all about how people ask questions and what questions are asked. If operators ask the supply chain the right questions, giving them scope to deliver solutions, rather than just asking them to take out costs, it would be a good start.