No pain, no gain

Elaine Maslin

February 1, 2017

Costs have been cut in the industry, but has it been enough? Elaine Maslin looks at ongoing initiatives in the UK North Sea.

Photo from iStock.

The past two years of pain for the oil and gas industry is well known, but, there are some signs that the pain is starting to pay off.

While oil was US$30/bbl at the start of 2015, and has seen little movement over $50/bbl since, the prolonged downturn has forced the industry to look for long-term ways to reduce its costs – compared to earlier in the decade, when the rising oil price seemed to cover those rising costs.

In the UK North Sea, an efficiency drive, as well as some new production coming online, has helped an anticipated 45% fall in unit costs from their peak of $29.30/bbl in 2014 to $16/bbl this year. According to Wood Mackenzie’s Global Upstream Cost Survey, operating costs fell 13-19% and capital spending costs fell 16-21%, between 2015-2016, with an overall 17% cost reduction.

Project costs have been reduced, both those reaching final investment decision and those in mid-development. Maersk Oil’s high-pressure, high-temperature Culzean project in the UK North Sea has seen a $500 million cost cut, taking it to a $4 billion project. Premier Oil’s Catcher floating production project in the North Sea is on schedule for startup later this year with a 29% reduced capital budget compared to when it was sanctioned, at $1.6 billion. Last August, Statoil’s CEO Eldar Sætre stated that having had average $70/bbl capex in 2013, some 80% of the firm’s project portfolio now stood at $45/bbl and that was dropping to below $40/bbl.

Unsurprisingly, given the oversupply of rigs, the largest drop in cost has been in rigs and drilling, at 23%. This has helped many projects, as well as operators managing to optimize drainage plans, so that there are fewer wells. The next biggest drop in cost has been in subsea equipment and services, at 21%; next, logistics and support, an area which has seen firms collaborating and sharing services, i.e. helicopter services. Perhaps reassuringly, operations and maintenance saw the lowest drop in costs, at 13%.

But, who is doing the cutting and how sustainable is it? According to Wood Mackenzie’s survey, the perception of how much cost has been taken out differs according to whom you speak: the supply chain thinking it’s about 24%, but operators thinking it to be less. Looking forward, operators also think there are still more savings to be had, at about 7%. But, the supply chain thinks there’s only about 3% more to be had. Indeed, in seismic and logistics, the supply chain thinks costs will now remain flat or even increase in 2017.

“When you talk to people in the supply chain they say, ‘we are hanging on,’” says Andy Tidey, global head of performance improvement, at Wood Mackenzie. “We are hearing that the supply chain is finding it very hard to get operators to work in a different way.”

Contract renegotiations and re-tendering only goes so far and may not be sustainable for the industry longer term, Wood Mackenzie warns. Indeed, the respondents themselves, who said contract renegotiations would continue to be one of the ways to reduce costs, agreed that less than half of the cost reductions made were likely to be sustainable.

Tidey suggests that the industry could benefit from taking a look at how it operates. Every operator has a different set of project management tools to which suppliers must become accustomed. “But, while it is not glamorous, if you had one standard set of documentation, that could realize a big impact,” he says.

Indeed, a range of efficiency-related initiatives are being driven across the industry, including standardization. Oil & Gas UK is behind a number of projects under its Efficiency Task Force (ETF). A lot of the work falls under two headings, business processes and standardization. Under business processes comes maintenance, inventory management, logistics, compression systems and procurement; while, under standardization, subsea technology and valves are the main areas of focus.

Part of this work has led to the ETF Industry Behaviors Charter – a commitment to work effectively, efficiently and co-operatively – for which several players have signed up. Other examples of collective commitment include rising numbers of companies signing up for the Commercial Code of Practice, designed to reduce complexity in legal and commercial practices on the UK Continental Shelf (UKCS).

Tangible projects include an inventory rationalization project, which hopes to create a tool for companies to share a central digital pool of resources allowing them to reduce individual stock holdings and costs associated with storage and maintenance. A pilot program has been run, working with Ampelius Trading, and now lessons learned are being used to take it to a next phase, which is still under development.

Being more lean is also about reducing downtime. Compression system outages – the biggest cause of unplanned maintenance on the UKCS, accounting for least 20 MMboe each year in production losses – has been a key focus. Those operators responsible for the bulk of compression system outages on the UKCS have been working together to identify how to reduce the number and duration of these outages.

An industry survey and root cause analysis was carried out, followed by a workshop in May 2016 to determine what the key issues were. Some 75% of losses were found to be from just four sources: lube and seal systems, fluid conditioning, compressor power and drives, and the compressor unit itself. The main root causes for these issues were found to be operating practices [i.e. lack of or poor] (57%), poor maintenance (14%), stress corrosion cracking (13%), design, modifications and upgrades not to original designs (13%). Up until now, few of these issues – and the solutions to them – were shared. Good practice guidelines were due to be published as OE went to press (January 2017).

Culzean platform jacket sets sail for the UK. Photo from Maersk Oil.

Another work group, formed to look at maintenance and asset integrity to share experiences and learnings, has developed and published a document, “Maintenance Optimization Reviews - Sharing Experience and Learning.”

As it works towards first oil from the UK North Sea Mariner field, operator Statoil is working with other operators in the area – BP, TAQA, EnQuest, Maersk, and Apache – on how to optimize helicopter and freight movements, including looking at potential software development.

As in Norway, the potential for simplifying and standardizing subsea technology is also being reviewed. Some 70 people from 30 different companies, from operators to design consultants and manufacturers, analyzed potential cost savings by carrying out projects to existing industry standards rather than bespoke requirements and found savings of up to 30% were possible.

Good practice guidelines were drawn up and four case studies were worked up, looking at different scenarios (an FPSO [floating production, storage and offloading] riser system, subsea manifold and bundle, and two subsea tiebacks), with 18-28% savings identified. Cost were cut through efficiencies around field layout, umbilical optimization, and standard controls, as well as other areas. The case studies are available via the ETF section on Oil & Gas UK’s website.

Valves have also come under scrutiny. Engineering and procurement of new valves accounts for 10% of operating and capex costs in a typical operating installation, according to Oil & Gas UK. Due to a tendency to over specify and a notorious diversity of specifications, re-use and sharing rates for valves are low. A strawman project was undertaken that found potential for a 30% saving in costs, if valve repairing and sharing could be made more common practice. Work to develop a standard process has started, which is due to be shared across the industry when completed.

But, Wood Mackenzie’s surveys suggests the top three approaches towards cost reduction expected in 2017 are expected to be the same as last year’s: retendering new contracts, renegotiating existing contracts, and deferring or canceling projects, a view shared by operators and the supply chain.

The tendering process itself is under review from another industry efficiency initiative, with a set of guidelines produced and published last year. According to Oil & Gas UK, analysis of previous tenders from four contractors was carried out and identified a potential saving of $30.5 million (£25 million), or 12-15%, on the cost of industry tender response development.

“Despite the messages from the top of many operators and great examples of innovative and collaborative ways of working, the practitioners we surveyed still placed significant emphasis on what are essentially tactical measures,” Tidey says.

Such measures are not long-term, warns Wood Mackenzie. “Achieving sustainable cost reductions requires a concerted focus on the cost agenda and a willingness to make fundamental changes to ways of working, both within a business and with its supply chain,” Tidey says.

So, why is it so hard for companies to make sustainable cost reductions? For the most part, the focus falls on business structures and cultures, Wood Mackenzie says.

“Many businesses lack the detailed financial, operational and headcount data to really understand where to target cost reductions and operational changes needed to deliver results,” the firm says.

“There is a cultural element in the industry. People think about capex and how long to peak production. Opex is over 15 years, but irrelevant. It’s fine if you’re looking at just a project, but not a business,” Tidey says. Indeed, to address cultural challenges in the upstream business, some firms are moving downstream execs across, he says.

Wood Mackenzie says that cost efficiency should be hardwired into performance management, driven from the top and reinforced with clear KPIs (key performance indicators), targets and incentives. Operators should work together across basins more, and not just sharing helicopters or supply vessels. This could be on enhanced/improved oil recovery, drilling rigs and infrastructure for stranded gas.

Procurement and supply chain optimization should also be looked at across the asset life cycle, Wood Mackenzie says. While a lot has been said on this front, more needs to be done, according to the firm. Finally, cost reduction programs should be risk assessed, it adds, so that individual initiatives and the whole program are understood.