Low oil prices are triggering much-needed change through a holistic approach.
Change in the oil and gas industry often comes slowly. However, as months of low oil price turn into years, it is necessary now. Oil producers have taken to cutting billions of dollars in expenditure, which has forced providers and contractors to slash rates, and delay and even cancel projects.
The upstream industry in particular needs to fundamentally transform the way it works to survive and thrive. While cost-cutting can be an effective plan in the short-term, the industry needs to take a longer-term focus and change the fundamentals of the way it operates. To compound matters, the days of triple-digit oil prices appear well and truly over, with the World Bank estimating that a barrel of oil will only rise to $60 by 2020.
Regardless of the oil price, the sector needs to rethink established ways of working in order to better handle increasingly complex projects. The high crude price in recent years helped the industry gloss over inefficiencies and enjoy success in the short term. But the recent slump has fully exposed shortcomings, and shone a spotlight on the fact that the offshore industry was on an unsustainable path and in need of guidance to standardize processes to lead it through a turbulent time.
Piecemeal Model
Factors responsible for cost overruns and delays. (Source: EY)
Part of the reason why projects are not completed on time and on budget is the disconnect between operators and contractors. EY’s 2014 report on oil and gas megaprojects showed that 21% of project failures were down to management processes and contracting and procurement strategies; 65% due to people, organization and governance; and 14% of failures due to external factors such as government intervention and environment-related mandates.
The existing model of contracting is piecemeal with specialist designers, contractors and projects managers coming on board one at a time, with no one group that brings the whole project together at the front end to deliver efficiencies and control that should be standard in an ever-evolving offshore sector. Oil companies and contractors therefore need to work together to better understand the drivers and develop the best blueprint to take the project forward into execution with a common purpose. The benefits of a holistic approach mean that all aspects of a project are taken into consideration from the beginning to ensure it can be delivered on time, on budget and with certainty.
An offshore project is only as strong as its weakest link and developments today contain significant complexity owing to competing technical, commercial and risk requirements. This means that altering one small variable can have a ripple effect on an entire operation. Failure to create robust and balanced synergies across a project can result in unintended consequences and uncertainty.
Integrated Asset Approach
Proportions of projects facing cost overruns, schedule delays and average project budget overruns. (Source: EY)
Understanding these components and developing a process for option evaluation and selection is integral to creating maximum return on investment for an offshore project. With this in mind, recently formed consultancy io oil & gas has developed an integrated asset approach (IAA) specifically to tackle complex offshore jobs by being holistic and full field in nature and encompassing the plan, build and operate phases of a project. The approach uses rapid comparison of concept options to form a deep understanding of different project variables and their interdependencies. Rather than individual focus on each sector, this allows the spotlight to be on areas that have a genuinely significant impact on project commerciality, thus maximizing investment returns by balancing reservoir performance and project costs. It improves financial viability, identifies inefficiencies, removes risk, creates value for operators and, as the company says, ‘delivers certainty in an uncertain world.’
The company believes it is crucial to work in partnership with clients to understand their specific needs and identify the innovative solutions necessary to deliver effective outcomes. Most projects are characterized by significant complexity around concept selection, owing to competing technical, commercial and risk requirements, as well as reservoir uncertainty, and altering one small variable can have big implications, potentially affecting an entire project. A system like IAA is crucial as it has been purposely developed to deliver optimum project value by factoring in the impact of trade-offs. By finding the common bonds between, for example, commercial and technical aspects, it is possible to reconcile the differences and begin to understand the high level interconnectedness of the components.
New Thinking
As well as the need for new ways of approaching projects, the industry knows that advancing technology holds the key to enhancing recovery of remaining reserves in this environment – but producing new tools, technologies and equipment and changing the accepted way of doing things can prove challenging. ‘Big Data’ is being touted as one of the secrets to the future of oil and gas, as it allows the uncovering of invisible patterns and connections by linking disparate data sets. As such, there is potential for operators to find efficiencies and improve the performance of components throughout their operations. ‘Big Data’ can also be used for sophisticated reservoir monitoring, allowing companies to optimize field depletion planning and maximize ROI. As more Cloud-based systems come online, management tools and remote working practices will become more commonplace, leading to safety improvements and cost reductions. The status quo is failing too often and new powerful thinking is needed to deliver fresh engineering solutions for the next generation of offshore fields. One of the best things the industry can do when looking to embark on new projects is to start with the end in mind. This type of holistic thinking is going to prove invaluable to the industry and will ensure that projects have built-in contingency plans, guaranteeing that time and money are not wasted.
Start with the end in mind. (Source: io oil & gas)
Though the price downturn has cast a shadow over the industry, it has also created an opportunity to change standard ways of working as well as taking advantage of the improvements technology like Big Data can provide. The industry needs consultancies that can manage the intricacies of each part of a project by blending the right people with broad experience and domain expertise and deep commercial knowledge. Having access to industry and specialist expertise with end-to-end systems thinking and organizational insight will make significant efficiency savings and instill confidence at an uncertain time for the offshore oil and gas industry.
Reference
EY – Spotlight on oil and gas megaprojects. 2014.
