ONS 2016: It’s time for the North Sea to act on standardization

By Chris Freeman, Partner & Director of Field Development, io oil & gas consulting on 8/30/2016

The current pressures faced by offshore oil and gas means that it is essential to make projects economically viable at lower oil prices. This pressure to make improvements is particularly strong in the North Sea, where the threat of decommissioning has led several commentators to believe that the province has less than two years to turn itself around. Indeed, a report published in June by accountants PwC found that fewer than three in five senior oil and gas executives were positive about the future of the North Sea.

One effective solution that is often ignored is the standardization of core products. Improvements in this area are key for the whole industry, but will be most keenly felt in new frontier basins, ultra-deepwater developments and mature basins, such as the North Sea (i.e. areas that have the highest operating costs in the world).

To maximize results, it is critical to move towards a standardized approach for key equipment where ‘one size fits most.’ There is currently considerable room for improvement in this area. Much could be done to improve the operations of IOCs, where international standards are often used, with own additional company standards applied on top. This level of gold plating has been driven by an unnecessary, if understandable, desire for engineering excellence. Such an approach has the psychological benefit of providing a comfort blanket for IOCs, who enjoy knowing that best possible standards have been employed.

However, in today’s environment this is simply not an economically tenable. The oil and gas community must instead approach standardization pragmatically, meaning that operators (often the IOCs) will need to sacrifice preferential engineering ideals for realistic and practical solutions. In reality, there is little difference in what an IOC or an independent operator requires when procuring standard equipment (such as Christmas trees). Therefore there is no reason not to champion standardization.

To achieve this, the value of overlay specifications on international standards should be challenged. Many in the industry may recall examples where operators have over-specified for the job at hand. Whilst there will always be exceptions, overall as an industry we could and should aim for an 80/20 principle where a simplified and standardized solution can be implemented in the majority of cases, whilst not sacrificing robust product development and safe operations. A recent io case study suggested that costs could be reduced by around 40% if international standards rather than company standard could be used.

It is true that change is never easy. This is particularly the case when current practices and ways-of-working have become entrenched. However, there are implementable solutions, as has been demonstrated through subsea contractor standardization initiatives. One example of this is GE’s tree product portfolio, with standard core components readily configurable for shallow and deep applications.

One potential way of achieving the necessary wide-scale change is through the establishment of a joint industry initiative that encompasses all relevant parties (and possibly new ones) to objectively revisit the issue of standardization. Whilst some companies are currently working to address this issue, it is a problem that can only be solved through wider collaboration with providers and end users. Tasking a group to focus on improvements in new frontier developments is something tangible that the industry can sign up to, and can in turn deliver real and measurable results.

However, there are other potential solutions to the problems faced by oil and gas. One that io is working on involves the implementation of contractor consortia possibly involving finance, which would see collective risk shared within counterparties. This would see greater focus on regional-based outcomes than individual asset-based ones. PwC’s survey also found that there has been an absence of traditional providers of capital since the oil price began to decline, which has created a gridlock in funding new projects and deals. Consequently, innovative forms of funding are needed to overcome this, and io has developed a number of these.

The oil and gas industry would also benefit from a dominant leading figure making an active effort to shake up established and inefficient ways of working in the existing regime. In the UK, this role will be taken by the Oil and Gas Authority (OGA), which will be established as an independent regulator by the UK Government as of Oct. 1. After this date, the OGA’s powers will include access to external meetings; data acquisition and retention; dispute resolution; and sanctions. For the oil and gas industry to benefit, the OGA must use these powers to their full potential.

Any real progress will require cultural change throughout the industry. To achieve this, operators will have to approach each project with its end clearly in mind, which is a philosophy we at io employ on all of our projects. Such an approach aligns all parties’ common goals and objectives with the aim of achieving a shared desired outcome. This will allow us to remove the potential pitfalls caused by self-interest. It’s time for the offshore industry to challenge comfort, self-interest, and traditional practices. Instead, we must champion transformation, standardization and vendor expertise. It’s time to stop talking and start taking action.

At io we believe that many of today’s oil and gas developments can be economic at low commodity prices and we are working to enable this.

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