Coping with the new normal

June 1, 2016

There’s no disputing the somber mood of this year’s Offshore Technology Conference in Houston, but industry leaders attempted to stay upbeat. Melissa Sustaita reports.

Wael Sawan executive vice president, deepwater, Shell, speaks at the “Coping with Lower Oil Prices: Perspectives from Industry Leaders” panel at OTC. Photo from OTC/Todd Buchanan 2016.

The downturn in oil prices has had far reaching implications throughout the industry. This year’s Offshore Technology Conference (OTC) in Houston forced the industry to share just how they plan to adjust in these difficult times.

One panel entitled “Coping with Lower Oil Prices: Perspectives from Industry Leaders” featured representatives from Shell, Transocean, and GE Oil & Gas to discuss how their companies are adapting.

According to Lars Eirik Nicolaisen, partner at Rystad Energy, we need to be above US$80/bbl to make this industry work going forward, and to feed the ever-growing demand for oil, towards 100 MMb/d. Deepwater is at the end of the marginal cost curve and will struggle, he said during the panel.

“We think that offshore is able to compete with shale in the future,” Nicolaisen said. “We remain optimistic on behalf of the offshore sector.”

However, Wael Sawan, executive vice president, deepwater, Shell, said that Nicolaisen’s view on deepwater is too simplistic, since it can span from anywhere from sub $30/bbl break-evens, to north of $100 break-evens in certain cases.

“The issue with a company like ours is to not simply say that we play in deepwater, but it is in our nature that we play in the lowest end of the cost curve to be sure we stay relevant and prove to be resilient when oil prices do go through the natural cycles that they do go through,” Sawan said.

Shell’s recent mega-merger with BG Group has the company playing in deepwater in several Brazilian projects, in addition to its other big projects, such as Malaysia’s Maliki and the Stones project in the US Gulf of Mexico.

“We believe that competitive growth is a must-have in this business,” he said. “Unfortunately, over the years of excesses with $100/bbl oil, we have not truly built the full potential of this business.”

Shell, just like other oil and gas companies, says it is coping with the low oil prices. Three of its coping strategies, Sawan said, include safety, people, and zero-based maintenance.

With zero-based maintenance, Shell is looking at what the company fundamentally needs in order to be able to conduct its work, which has come to be safety and reliability, in addition to competitive scoping.

“Competitive scoping has changed the mindset of many of our engineers as we’ve looked at our projects and yielded significant savings,” Sawan said. “Our Stones wells are a great example of how some of those savings were achieved, where we actually went to our new conventional business to learn what they do, and we eventually saved US$1 billion in capex.”

At Transocean, the focus is on four aspects; geographic reach, technology, financial flexibility, and management focus, said Merrill A. “Pete” Miller, Jr., Transocean’s director and chairman of the board.

“These four things will help us change to make sure that we’re viable, that we’re doing things for this industry that are going to allow us to be able to fill the voids that you see out there,” he said.

Discussing geographic reach, Miller said that, as a company, you have to be able to provide a customer with the same quality of operations, the same type of personnel, wherever you may be in the world.

“Is it expensive? Certainly. But, it’s a lot more expensive trying to take a rig out of the Gulf of Mexico and moving it to Australia,” he said.

“We think that we’re scratching the surface, but the goal is that we have to be able to drill in this industry at $30/bbl. Are we there yet? Nope. Will we get there? I think, absolutely, yes.”

GE Oil & Gas President and CEO Lorenzo Simonelli said that partnership and collaboration in the industry are critical to accelerate commercial and technological advancement. In that regard, GE and Diamond Offshore recently teamed up on a first-of-its-kind contractual service agreement that transfers full accountability for blowout preventer (BOP) performance to GE Oil & Gas.

“We’ve got to look at our standards. We’ve got to look at our documentation, our requirements. A fit for purpose,” Simonelli said. “That means people have to be willing to accept standardized specs. It means that we move towards modularization.”

“Let’s simplify. Let’s take out the redundancies. Let’s take out inappropriate bureaucracy that we have during processes, and work together towards more clarity of what we’re trying to achieve,” Simonelli said. “I think we’ll get there even faster if we continue to collaborate.”

The “Coping with Lower Oil Prices: Perspectives from Industry Leaders” panel at OTC. Photo from OTC/Todd Buchanan 2016.

‘Safety, productivity, and collaboration are key’

Elsewhere at OTC, Bernard Looney, BP chief executive of upstream, shared his thoughts on the dramatic change the industry has undergone.

“In the past we’ve adjusted, reduced our costs, and tightened our belts,” he said. “Some businesses didn’t make it through and some came back stronger. Let me be clear, at BP, we don’t think that it’s lower forever. The long-term demand picture is strong – very strong.”

Looney said that there are many moving parts and that it is hard to tell where this will all play out.

He suggested that improving productivity might be the best insurance for the future, as global energy demand will continue to grow.

Bernard Looney, BP chief executive of upstream, speaks at OTC. Photo from OTC/Rusty Costanza 2016.

“Our own forecast at BP says that world energy demand will most likely be about a third higher in 2035 than it is today. That’s like adding another US, EU and Japan combined,” Looney said.

Looney also believes that collaboration and being open to new ideas and suggestions from partners will help the industry weather through the low oil price storm.

“Here in the Gulf of Mexico we have been collaborating with our suppliers on costs and it has allowed us to rethink our Mad Dog Phase 2 project,” Looney said. “This was a $20 billion project and we’ve brought it down to under $10 billion, with the expected returns improved despite a lower oil price.”

He said that there is also real value to be had, if the industry opens itself up to learn from, and with, other companies and other sectors.

“In 2015 we saw the potential in training rig teams together ahead of drilling in the field,” Looney said. “So we gathered BP employees and contractors from our Egypt region to train in one of the most advanced drilling simulators in the world – Maersk’s immersive state of the art drilling simulation facilities.”

Looney stressed that the industry cannot afford to be complacent and slip back into old habits, however.

“Waiting for the oil price to rise again is not sufficient – nor is short-term cost cutting. We need to be able to compete, on a global scale, with other energy and transport sectors. It will require innovation and continuous improvement – getting a little better in everything we do, every single day,” he said.

Battles to ensue over Mexico’s new play areas

Competition is fierce for the yearend battle to win the right to explore Mexico’s deepwater acreage, a group of panelists said at OTC.

Mexico’s highly anticipated deepwater bid round, due in December, already has 14 companies lining up to prequalify.

Lourdes Melgar, Mexico’s undersecretary of hydrocarbons, speaks at OTC.  Photo from OTC/Rusty Costanza 2016.

Lourdes Melgar, Mexico’s undersecretary of hydrocarbons, told the crowd that there have been some 30 interested companies, with 14 requesting to pre-qualify for the round that encompasses 10 blocks, four in the Perdido Fold Belt and six in the Salina Del Istmo basin.

According to CNH’s website, as of 13 May, some 31 companies have now shown interest and 16 companies have begun the prequalification process. Those included in the prequalification process are: Atlantic Rim Mexico, BHP Billiton, BP, Chevron, China National Offshore Oil Corp. (CNOOC), Exxon, Hess, Inpex, NBL Mexico, PC Carigali, Pemex, Ophir, Shell, Sierra, Statoil, and Total.

The Gulf of Mexico is mostly divided between Mexican and US territory, with 54% in the Mexican jurisdiction, 44% in the US jurisdiction, and the remaining 2% with Cuba, Mexico’s Hydrocarbons Commission (CNH) president Juan Carlos Zepeda Molina explained.

When looking at the US side, some 80% of the deepwater area is under exploration. On the Mexican side, there is currently zero exploration in deepwater, he said. The disparity is due to the industry not being allowed to invest in Mexico. That is expected to change with the deepwater bid round on 5 December.

CNH released an updated version of the deepwater license contract in May, and will follow with a list of final bidders and the final contract on 24 August.

According to Melgar, Round 2.1, which includes shallow water blocks will be announced in June 2016, along with a call for bids.