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AkerBP - a new business model for oil and gas

Tuesday, March 13, 2018

AkerBP, the company formed from the merger of BP Norge and DNO, is developing a new business model for oil and gas operations, based on a different type of relationship with suppliers.

AkerBP, a Norwegian oil and gas company formed from the merger of BP Norge (Norway) and DNO, is developing and testing a new business model for oil and gas operations, based on longer term and deeper relationships with suppliers.

The company is called AkerBP because Aker Capital, part of Norwegian holding company Aker Group, owns 40 per cent of the company, through its previous holding in DNO.

The merger is seen by BP senior management, among others, as combining the strengths of both companies, which it sees as BP's 'long experience and technical expertise in the basin,' and DNO's 'streamlined business model'.

Øyvind Eriksen, chairman of Aker BP, explained how the business model works, in a conference session at Offshore Europe event in Aberdeen in September, 'New Business Models to Address Mature Basin Challenges.'

Suppliers typically account for 85 to 90 per cent of an oil company's total costs, Mr Eriksen said. So when there is a need to reduce overall costs, suppliers' costs are a big target. But rather than achieve these cost reductions through negotiation and bullying, as it is usually done, AkerBP tries to find ways to reward suppliers for finding ways to reduce costs.

One approach is to substitute traditional procurement methods with long term supplier alliances. Aker BP agrees contracts for 5 years, with an option for both parties to continue for another 5 years. This gives suppliers a better understanding of how much business they will get over future years, and so enables them to plan their own spending more efficiently. It also facilitates continuous improvement, as companies work together over longer periods and get better at it.

The company is also reducing the number of suppliers it works with, a move which has led to improvements in productivity, as it has in other industries, he said.

The company puts together teams to work on projects including both operator and suppliers, and puts the best person in charge of the project, regardless of whether they are employed by Aker BP or the supplier.

The commercial terms are arranged based on the suppliers' net costs of providing the service, and a fixed margin to the supplier. There is also an incentive program based on the success criteria for the whole project (usually total cost and start date, if it is construction).

Suppliers can get a share in Aker's benefits, if the project does better than expected, and take a share in AkerBP's additional costs, if the project does worse than expected. But the hit to the supplier is capped, because Aker BP does not think it is in its interests to 'see a supplier go belly up.'

As a result of these kinds of arrangements, the drilling efficiency has been more than doubled, the engineering hours have cut in half, and execution time has been cut, he said.

The operator-supplier alliances proved to be easy to design in theory but much harder to make work in practise. 'It boils down to behaviour,' he said.

For the model to work, suppliers need to share their own cost data, so everybody can see the margin the supplier is making. Some companies showed a reluctance to do this, he said.

The big test of a supplier-operate alliance is when you have a problem to resolve, he said. 'You need to be able to admit when you make a mistake.'

It is important for top management to be involved in both the negotiations and operations, he said.


Both operators and suppliers can reduce their costs through sharing data, working together on standards, and setting up common business vehicles, he said.

As an example, the Norwegian banking industry developed common digital tools which many banks would use, and as a result improved productivity by 2.5 times, he said.

'More can be achieved if we start sharing data,' he said. 'Operations, maintenance, supplier qualification and decommissioning. Most of the data can be shared if you want to.'

Oil companies mainly compete by getting access to better acreage. They are not usually competing in terms of how they operate technically. So there should not be so much reluctance to share technical data between operators, or to work on common standards, he said.

Examples of useful standards are the International Association of Oil and Gas producers (OGP) work to standardise technologies such as subsea Christmas trees, and the NORSOK standards for technical specifications in contracts.

Companies might also collaborate better in decommissioning, setting up a special purpose business vehicle to do multiple projects, rather than the current fragmented and operator specific approach.

More sharing of experiences can help all companies to continuously improve, leading to safer operations with better reliability.

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