Achieving maximum value from deepwater projects
Deepwater oil companies have been facing decreasing rates of return from their investments for the past five consecutive years. This time last year when oil prices were around $115/BBL, we saw many oil companies striving for ways to reduce costs to overcome mounting pressure on profit margins. Now, with prices around $60/BBL, this issue has been exacerbated. Indeed, deepwater projects have become extremely difficult to implement, if not completely infeasible.
There are several reasons for the erosion of profit margins and delay in project timelines including:
Decreases in productivity – Due to factors such as the customization of each project for a particular operator and the associated technical requirements, productivity has decreased significantly impacting the time allocated to complete certain tasks and developments.
Geography and mobility – Deepwater projects are increasingly being carried out in new and remote places. Sourcing and identifying local talent in these areas with skills and experience matching required international standards has proved difficult.
Local content requirements – Many of the frontier deepwater regions and even traditional hubs have stringent local content requirements. This adds major stresses to the local supply chain which in turn has led to quality issues, excessive costs and project delays.
Excessive regulatory requirements – Following the Deepwater Horizon incident in 2010 and the growing environmental sensitivity in the industry, regulations surrounding subsea equipment have become highly stringent. For example, equipment provider OneSubsea used to require three pages of documentation 20 years ago, but now requires 80 pages.
Inflation – Service company margins have increased in the last few years although not always in line with inflation.
To overcome these issues, we are seeing a variety of different solutions being discussed across the industry. Notably, at the recent OTC conference we identified the following as potential solutions which we think will have the greatest chance of success:
Industry standardization – Individual customization of technologies and their interfaces across a supply chain by operators has led to repeat development work, providing no real additional value. A standardized approach to deepwater technology deployments and standards should be adopted by the industry. This would help bring lead times down and reduce costs.
Early collaboration at concept stages – It is important for both operating and service companies to work together and make decisions on design issues early within a project to reduce the likelihood of delays.
Cost effective design options using new technology – Effective research and technology development can play a big factor in designing new cost effective solutions. We see this as the area with the highest potential for reducing costs in the long term.
Learning from parallel industries – A number of parallel industries, such as the automotive and aviation sectors, have previously experienced similar issues with supply chain problems and the need to reduce costs. There are lessons to be learnt from these sectors and employing initiatives from those industries has the potential to make the oil and gas sector more sustainable and profitable.
Given the increasing pressures being placed on deepwater projects resulting from low oil prices pervasive in the market, we’re glad to see the industry is responding by discussing how new technologies and the improved allocation of existing assets are viable solutions.