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Andrew Gould - take advantage of service industry competition

Tuesday, August 7, 2012

The oil and gas service industry competes on technology and price. The question is whether or not operators use this dynamic to their full advantage, said Andrew Gould, a past chairman and CEO of Schlumberger and now chairman of BG Group, speaking at day two of the Energy Summit at the British Business Embassy on 7 August 2012

Operators would benefit from closer working relationships with service companies, and making more of their competitive dynamic, said Andrew Gould, a past chairman and CEO of Schlumberger and now chairman of BG Group.

He was speaking at day two of the Energy Summit at the British Business Embassy on 7 August 2012

'When the invitation [to speak] was issued I was still chairman of Schlumberger. I'm now fully retired and become non executive chairman of BG, which is the first time I have held a job in this country, my country, for 39 years.'

'The organisers suggested I might like to speak about the relationship between operator and service company or contractor and that due to my new role I might be more forthcoming on the subject than I was when I was a purely service hand.'

'So I am going to speak about the relationship, how it is changing. But I am also going to plead that the fundamental nature of the relationship needs to continue to evolve if the industry is to fulfil its mission.'

Surveys

'I'm going to base a lot of what I say on the results of two surveys conducted by Schlumberger's Business Consulting Group,' he said.

'The first is a study of capital projects conducted through 30 industry interviews with senior leaders from the projects community from all types of operator, several discussions with experts and other available public data.'

'The second is a study which is repeated every year on the oil and gas human resources benchmark study, which is conducted with a very large sample of industry players.'

Service company history

'Prior to the oil shocks of 1970s the oil service industry was a North American affair,' he said. 'Outside North America, the operators did a lot of their service work themselves.'

'The activity explosion which followed the price shocks gave the service industry the opportunity for major expansion overseas.'

'Following the oil price collapse many operators cut back on their technology investment and encouraged the service industry to undertake many of the tasks previously formed in house.'

'The next step, started by the two companies which have just spoken [BP and Shell] in the North Sea was to outsource whole sections of the process to the contracting industry to try to streamline costs.'

'All this created a dynamic where the service industry increasingly competed on technology and price. This is still the case today.'

'The question is whether or not operators use this dynamic to their full advantage.'

Operator background

'This is not to say that operators lost all knowledge of technology,' he said.

'They are often the origin of ideas which are then industrialised by the service industry.'

'There are whole sections of the midstream and downstream where they still have specific advantages. They above all have the ability to integrate, to project manage and to manage risk that does not exist in the service industry.'

The operator world has greatly changed as a result of changes in the service companies, he said.

'The largest body of service company customers is by far the independents.'


NOCs

The current situation with service companies has evolved from developments in national oil companies in the 1970s, he said.

'The nationalisations of the majors' positions in the mid 1970s led to national oil companies relying on service industry for technology which they had previously obtained indirectly from operator partners.'

'Secondly, a new generation of national oil company understood that technical skills were essential to their future and actively co-operated, and still do, with the service industry, to obtain it'.

Independents

The ability to purchase technology from service companies 'has enabled the independents to play a fuller role,' he said.

'To my mind, there is no better example of this than the dynamic junior explorers market that exists in London.'

'Geologists and geophysicists can complement their skills with affordable off the shelf technology from the service industry.'

'As a result, they can compete with other classes of operator.'

Growth in big projects

There has been a massive growth in the size of capital projects over the past 10 years, he said.

'The rude awakening the world underwent in the previous decade, on the extent of underinvestment in new supply, due to the previous 15 years of low oil prices, led to an explosion in exploration and production capital expenditure,' he said.

'Between 2000 and 2011 capex grew at compound rate of 14 per cent. This resulted in both inflation and inefficiencies.'

'The huge increase in number of large projects. The number of projects with over $1bn budget has increased from approximately 50 to 200 in 10 years.

'The number of operators managing projects over $1bn has increased from 12 to more than 40 in the same period.'

'[These] 200 projects represent 33 per cent of the total spend leaving a long tail, all of which has to be supplied and staffed.'

Project overruns

Mr Gould presented Schlumberger's analysis of the number of large projects which end up overrunning their original budget by more than 50 per cent.

The analysis does not look analyse the cause of the overrun, and it can include capital cost (budget) overruns, schedule delays, slow ramp up, missed peak production and reserve targets, and operability issues.

'The number of large overruns is increased which is not too surprising given the rapid increase in the number and size of projects,' he said.

'Even more surprising in recent years is the size of the overruns.'

'25 per cent of projects budgeted at less than $5bn have a greater than 50 per cent overrun.'

'35 per cent of projects of over $5bn have a greater than 50 per cent overrun.'

Causes of overruns

The participants of the survey were asked to identify root causes of capital projects issues and give each a relative weight.

The top issue was identified as people and organisation. 'The difficulty of matching skill sets with project challenges and geography combined with an acute industry skill shortage,' he said.

The second cause, 'technical challenges,' may reflect the fact that that new and less skilled operators are taking on more complex projects, he said.

While the third, 'governance', is largely an internal management issue, he said.

The fourth cause, external stakeholders, 'should be no surprise,' he said. 'The roles of government are the key issue, in all the different forms that that might take. The advent of more militant opposition from NGOs and communities is also an issue particularly in large land based projects.'

'To summarise, the complexity in capital projects comes from multiple sources, and the impact of this complexity can only be reduced when companies become aware of gaps in their capabilities to manage the complexity through developing experience and continual improvement,' he said.

How other industries do it

The oil and gas industry would do well to compare how it works with contractors, to how other industries work with contractors.

'[Other industries] have in many cases been much more ready to recognise their subcontractors can develop value adding technology,' he said. 'They recognise their subcontractors are an essential part of the product or product development, and involving them in a closer partnership relationship is an essential competitive advantage.'

'Many developments in the automobile industry come from subcontractors. The ABS breaking system is a prime example. '

'As the world moves to electrification of vehicles it is not the traditional providers of internal combustion engines who will be working on the power packs.'

'Formula 1 provides an ideal testing ground for many advances in automobile technology.'

'The car industry may not appear as a shining example of profitability, but it is one of the best optimisers of supply chain, which was driven by cost concerns.'

Other industries might get their suppliers involved in new projects earlier. 'I once asked Jorma Ollila [former CEO of Nokia, now chairman of Shell] when Nokia got their suppliers involved in designing their mobile phone. His answer was, 'before we started designing the phone.''

'It would be unthinkable for Boeing or Airbus not to involve Rolls Royce or Pratt and Whitney in design of a new aircraft. Cycle times are so long that they would want to know what progress they could expect in engine performance and capability by the time their new aircraft flew. The cycle time for a new aircraft is not dissimilar to that from discovery through final investment decision (FID) to the end of development in the oil and gas industry.'

'Very few operators in my experience consult their contractors or service company on what technology they think will be available in seven years time when they are in the planning stage of their projects.'

'It does happen. There is one national oil company who regularly does this, and as a result can claim the paternity or maternity for a very high value series of geological steering tools.'

'One of my fellow panellists did it once in the Middle East with similar success on his project.'

'However, it is not systematic. A radical change in contracting philosophy will be necessary to achieve similar progress to other industries.'

It requires full recognition that the human resource and knowledge within the contracting industry can really add value.'

In the question and answer session, Mr Gould said that maybe the oil and gas industry could look at how the automobile industry 'tiers' its suppliers, for example labelling certain suppliers "tier 1", indicating that the company should treat them as high priority. "This could be controversial," he said.

Delegate tasks

'The industry should utilise today's technology to delegate tasks to those who are most competent,' he said.

'For example aircraft engine monitoring is now done remotely in full cooperation with a manufacturer. '

'In drilling it is a fact that the major service companies are involved in drilling more wells any year than any one operator. '

'While operators cannot delegate this responsibility entirely to contractors, as they hold the license to operate from the appropriate government, they can subcontract a great deal of the routine supervision of drilling operations to their contractors, thus freeing up scarce personnel for more value adding operations.'

'This will require considerable re-allocation and definition of responsibility and subsequent liabilities.'

'With my tongue slightly in cheek I would point out that every one of the supermajors has used Schlumberger's integrated project management at one time or another despite huge internal opposition from their own people and public doubts over its competence.'

Human resources

'Let me turn to the human resources benchmark [survey] which is revealing and somewhat worrying in the attitude of the industry to the staffing shortage for projects,' he said.

'All categories of operator - NOC, IOC, independent - reported that they were ready to take more risk as a result of tight staffing.'

'Both IOCs and NOCs, in the majority, are ready to delay projects. IOCs and NOCs are more ready to take non operated positions. But only NOCs are ready to abandon projects.'

'These positions are a dramatic endorsement of how the industry is struggling to meet each goal.'

Change procurement model

'One way to help this is through changing the contracting and procurement model the industry currently uses.'

'It would be encouraging to tell you that this situation is being solved. However this is not the case.'

'As of the end of 2011, there was some improvement in entry to the industry at the end of the last decade; there's is still a large rump of what has been referred to as the great crew change which will be leaving the industry in the next 10 years.


Conclusion

'In conclusion the industry needs to aim at major improvements in project execution if it is to provide reliable on-time renewal of hydrocarbon resources and key project complexity is making this far more difficult.'

'At the same time the growth of the service contracting industry has produced a vibrant supply chain that can produce new high value technology.'

'Greater integration of the supply chain into project planning could produce fit for purpose technology as well as project efficiencies and better control over project overruns and ultimate project success.'

'The industry still faces a major human resources issue due to demographic profile. All players need to engage with academia, government and education authorities, to ensure requisite disciplines rare represented on campus throughout the world.'



Associated Companies
» Schlumberger
» BG


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