THREE INDUSTRY TRENDS CAN HELP OIL PRODUCERS MAKE BETTER USE OF THEIR CAPITAL AT A TIME WHEN PRODUCTIVITY IS ESSENTIAL
LODEWIJK DE GRAAUW, BRIAN MURPHY, BAIN & COMPANY, PERTH, AUSTRALIA
JOHN MCCREERY, BAIN & COMPANY, HOUSTON
REDUCING CAPITAL EXPENDITURE (capex) is a natural response to low oil prices, so it is not surprising that the industry has deferred or cancelled $200 billion worth of planned investments over the past two years.
At the same time, the industry needs to continue to explore and develop resources to meet long-term energy demands, which continue to grow. In fact, since many new reserves are in remote and expensive locations, including ultra-deepwater areas and the Arctic, major oil companies have had to invest more capital just to maintain production levels - running harder to stand still.
In this low-price environment, oil and gas companies must use their capital as efficiently as possible. Fortunately, they have room for improvement, especially in projects at early stages. Three broad trends should help raise the productivity of capital over the coming decades: innovation, standardization, and optionality.
The Transocean Barents is a dual activity dynamically-positioned DP Class 3 semi-submersible designed to operate in harsh environments. Transocean Ltd. photo.
INNOVATION
Rapidly improving technologies are increasing the productivity of capital in several ways. Advanced analytics help producers make better bets about the production potential of reservoirs and wells. Using various technologies to get more out of unconventional sources is another way. And floating liquefied natural gas (FLNG) platforms, which will change the economics of natural gas production as they begin to replace traditional onshore development projects, are yet another example.
STANDARDIZATION
Industries such as automotive and manufacturing have standardized their production processes, but that hasn't happened in oil and gas. Some subsea operators use 28 different shades of yellow to paint their equipment. Standardization helps avoid the urge to gold-plate solutions and makes it easier for companies to collaborate and eliminate wasteful practices.
OPTIONALITY
Most project development relies on decision review gates: Teams review options, then choose one design for front-end engineering before making a final investment decision and moving on to a detailed design.
This approach generally works well, but comes under pressure as innovation cycles accelerate. If a chosen design fails to work out, it can mean long rework cycles-and there is less tolerance for that in a low-price environment.
One solution is keeping more options open in the early stages and pursuing multiple concepts in competition with each other. The less promising options should receive less attention, but project leaders should stay aware of the external environment, shifting resources as it becomes necessary.
Project teams can also learn to make decisions based on imperfect but sufficient information. Too often, they over-invest in defining conceptual designs to reach an outcome that could have been decided more easily. Instead, they can reverse the logic and start with what would be needed for the project to fly. If the cost is off by billions, there's no need to examine smaller details. Instead, they can move on to alternative concepts.
Of course, none of this advocates for looser development, which can result in a train wreck. Project developers still need to make decisions based on value creation, but they may be allowed to proceed with a little less certainty.
These trends are well documented, but industry leaders will have to focus their efforts to ensure that they contribute to capital productivity within their organizations. Five principles can guide executives as they make capital decisions:
- Continue to invest. This is a good time to make progress on R&D and new projects, as sector inflation takes a breather and people and equipment are less in demand.
- Design to cost. Rather than starting with a cost estimate defined by the engineering and design teams, determine what's available for investment, and then decide what can be done within those constraints.
- Collaborate to encourage standardization. Internally, companies should adopt reusable designs, while externally they should collaborate with vendors and contractors to develop standardized solutions.
- Challenge the development process. The traditional stage gate process looks increasingly regimented and slow in an industry with volatile prices, shifting markets and accelerating innovation. More agile and iterative methods may be more effective in supporting design to cost, and some industry leaders are experimenting with shorter time periods, parallel processes and rapid development methodologies such as agile and Scrum.
- Look for opportunities in every step of the process. Don't wait for decision gates to review opportunities to improve capital productivity. Teams should always look for ways to perform more effectively, buy more efficiently, and trim project scope wherever feasible.
Working across all these principles, companies can significantly reduce capex. One major oil company used these techniques to reduce its capital spending on an offshore platform in the Gulf of Mexico by 36%. In another example, a national oil company cut the time necessary for drilling a well by more than 40%, from 146 days to 83 days, by avoiding side efforts and focusing on better planning and execution.
The key for executives is remaining nimble, pairing the engineering and commercial mindsets where they can, focusing the organization on simplicity and standardization, and maintaining a healthy appetite for investment rather than deferment. Few forecasts suggest a strong price recovery anytime soon, so, for the next few years, the need for capital productivity is here to stay.
ABOUT THE AUTHORS
Lodewijk de Graauw and Brian Murphy are partners with Bain & Company in Perth, Australia. John McCreery is a Bain partner in Houston. All three work with Bain's Global Oil & Gas practice, and Murphy leads the practice in the Asia-Pacific region.
