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Adapting to a Changing Environment

The E&P industry is facing many challenges: collaborative thinking is key to improved systems and productivity
This article appeared in Vol. 14, No. 3 - 2017

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The generally accepted understanding in the O&G industry seems to be ‘lower for longer’; the days of US$100 a barrel oil are gone, and waiting for them to return will not move us forward. Hope is not a strategy - we need to think beyond the oil price. Operating in a more challenging environment, collaboration will prove to be key, and there are five vital collaborative elements that need to be addressed in order to adapt to this new situation. 

Figure 1: Since peak oil prices, Capital and Operating cost indices have fallen 27% and 18% Respectively (Source: IHS) Everyone in the industry needs to be aligned on metrics. If we all looked at what our customers measured, we could align with those metrics and help them deliver the things that matter. In the times of peak oil prices, we lost our focus on the end result. Since prices dropped in Q4 2014, capital and operating costs have fallen by 27% and 18% respectively (Figure 1), and although productivity has improved dramatically, we now need to get about 50% more out of the CAPEX and OPEX for each project. The productivity imperative for oil and gas is clear. 

We need more collaboration across the whole supply chain. The current relationship between oil and gas companies and the service industry is not working; as Figure 2 shows, this has been tough for everyone - and it is not sustainable for anyone. We must all learn to trust our collaborators. In 2016 operators spent US$600bn through external suppliers and there is huge potential for productivity gains in this area if everyone is working together. 

Moving forward, there is a need to change the culture within companies; if you think you or your company are better than everyone else, you’re wrong. Understand that you are part of the change and learn to constantly question how to create more value. Only the paranoid survive! 

Figure 2: Total net income, top 60 O&G operators and suppliers. The current financial performance is not sustainable, with operators taking a proportionally much smaller hit on their income than suppliers. (Source: Amec Foster Wheeler) Everyone is aware of the need to be more cost efficient, but this has to be combined with a more agile approach. Delayering, removing duplication and reducing overheads must all be undertaken, without compromising on safety, but look at the issues from all angles, making it a collaborative operation. 

Now is the time to bring in digital, process and commercial innovations. The scaled deployment of new business models, new technologies and value engineering will bring rewards. We can learn a lot from other industries - for example, if our digital delivery mechanisms had moved at the pace that Amazon’s did, we would be in a very different place now. Process innovation means doing more for less - always talked about, but often not really examined closely until we have to, as now. Lower prices have revealed inefficiencies. One company recently realised it could safely and easily replace a US$350,000 titanium valve with a plastic one costing US$25,000, something they did not consider when oil prices were buoyant. There are innovative processes we can consider in the commercial field to increase trust, sharing and partnerships, so that by creating more value through collaboration there is more to share out between the partners. 

The industry is already moving in these directions and there are great things happening - but is it enough? I fear it may not be, because the changes are not momentous enough yet. Nothing has happened which would be equivalent, for example, to the revolution we have seen in the retail industry with the move to online selling, and I believe we need to be changing at that scale. 

We must not waste this crisis. If we review our collaborative working practices we will get something out of it and end up with an improved industry.

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