Executive viewpoint

Change in the oil and gas industry often comes slowly, and rarely is there a disruptive shift in technology or thinking that revolutionizes the sector. However, today’s offshore industry is in urgent need of change. While it has come a long way in the last century, past accomplishments overcoming a constant stream of technical and commercial challenges do not guarantee success against what may be our biggest challenge—securing offshore as an integral part of the global energy mix.

Other forms of energy will continue to emerge, but the world still needs oil and gas to meet its increasing demand. Emerging economies have been responsible for the global growth in oil consumption of 1.4 MMbpd in 2013.¹ Global population growth of 3 billion people by 2050² will likely see this continue to rise.³

Increasing costs and complexity. So, if oil and gas are still very much in demand, why is the industry struggling? The reason is that the landscape has changed—major deepwater and LNG projects can cost tens of billions of dollars now. This is a far cry from the 1990s, when projects cost several hundred million dollars; oil was just under $20/bbl and industry benchmarks were completely different. In spite of the industry being far more technically capable, operators say they cannot make projects commercially viable at $60/bbl.

Overspending is commonplace. A staggering two out of three offshore projects are running significantly over budget, or are delayed and cancelled.⁴ Operators are challenged to either directly manage and integrate a vast array of specialist contractors, or to place them under the control of an umbrella project management engineering company. That firm may not have the required technical expertise to effectively control the relationships, contracts and integration issues. Most opt for the former, resulting in fragmented contracting relationships, with too many interfaces, inefficiencies, unknown risks and uncertainties, as regards cost, design, materials and scheduling. This is exacerbated further by market changes in the five to seven years that it takes to bring a project onstream.

THE SOLUTION

Re-set industry norms. To survive and thrive, the offshore industry needs to transform the way it works. Projects need to be made commercially viable project cost-savings of 30% to 40%, and the market needs to be stabilized. The industry needs to re-think established ways of working, to better handle increasing project costs and complexity.

Redesign the operator-contractor relationship. Part of the reason that projects are not completed on time, and on budget, is the disconnect between operators and contractors. Credit Suisse’s findings from the 2013 Offshore Technology Conference showed that 21% of project failures resulted from management processes and contracting and procurement strategies; 65% were due to people, organization and governance; and 14% were due to external factors, such as government intervention and environment-related mandates.⁵

Better planning and project management. Companies are also underestimating the costs of completing projects from the outset, which exacerbates underperformance. For example, the latest EY Survey shows that current, estimated project completion costs were, on average, 59% above the initial estimate.⁶

Act as full-project architects. Operators and contractors need to work together to develop the best blueprint, to take the project into execution with a common purpose. There needs to be a holistic approach to project management, including all aspects of subsurface, subsea and facilities design components. Consultancies must act as full-project architects, rather than just engineers. This will result in consolidated thinking and effective development.

The offshore industry can be compared to a train transportation system. Even with a top-of-the-line locomotive, you need the tracks, ticketing and signaling systems to ensure that the whole infrastructure runs smoothly. If track signaling is two years late, you lose revenue for two years, and your economic model is at a standstill. It is the same in the offshore arena—if a subsea floater is late, you cannot connect the subsea equipment, and nothing flows.

Systems thinking. Additionally, the industry suffers from a lack of systems thinking. We need to review all variables of systems engineering and its influence on the operating strategy and project objectives. Applying this methodology, as early as possible in the conceptual and definition stages, ensures that economic and operational considerations are woven into the project. Systems thinking allows conscious decision-making on contracting strategy.

Reduce complexity. The industry has recognized the need for standardization to drive down costs, but there also needs to be a simplification process, with just one trusted partner managing and coordinating multi-disciplinary projects. This not only saves operators time, but also reduces cost and scheduling risks in the form of design conflicts, materials, delivery and communications.

Powerful thinking is needed to deliver fresh engineering solutions for the next generation of offshore fields. The industry needs consultancies that can effectively manage the intricacies of each part of the project, thereby reducing risk and complexity and ensuring projects are delivered on time and on budget.    

REFERENCES

1. BP’s Statistical Review of World Energy 2014
2. Earth Policy Institute
3. BP Energy Outlook 2035
4. 2013 EY survey
5. 2014 EY Survey
6. 2014 EY Survey