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PDF Limited - Outsourcing the exploration department

Thursday, September 10, 2015

Dr. Mark Enfield, managing director and founder of PDF, speaking at the Finding Petroleum 'Cost Reduction in This Era' event on June 5, discussed how outsourcing oil and gas exploration can work. PDF has been providing an outsourced exploration function to oil and gas exploration companies for 21 years.

With the recent fall in oil price, real pressures are being placed on the exploration industry to reduce costs and gain efficiencies, all in a climate of increasingly hard-to-find reserves and requirement for technical innovation.

While outsourcing is generally considered as being a means to reduce costs, it can be more than that.

Exploration consultancy P.D.F. Limited, based in Oxfordshire, UK, has been providing exploration outsourcing to oil and gas companies for 21 years, both as a traditional consultancy - where individual tasks are outsourced - and as an aligned strategic partnership, the 'Outsourced Exploration Department®', where the full exploration function is outsourced.

Dr Enfield outlined the importance that PDF places on long term relationships, the application of experience to exploration success, the importance of full spectrum capability and the overriding imperative of quality at every step: 'quality must run through everything - quality of thought process, workflows, management and, critically, people'.

PDF have operated discreetly throughout their history and have never divulged their client nor project identities, he said. 'Discretion and confidentiality are our abiding principals and we believe are critical in maintaining longer-term relationships - a key issue in, and requirement for, successful outsourcing'.

PDF have worked with companies of varying scale and type, ranging through from privately held, to smaller-listed and medium-sized independents, to majors, super majors and governments. Dr Enfield summarised some of the success metrics of PDF's track record, showing how the company has helped its clients and strategic partners to grow and achieve exploration success through transformative events such as discoveries, new venture value realisation, money raises and IPOs.

Within the theme of cost reduction, Dr Enfield discussed the recent change brought about by reduced commodity prices and how this has brought uncertainty into the industry and a perceived need for efficiencies. The talk then went on to explore outsourcing's role in meeting the current challenges.

More than traditional consultancy

Dr Enfield set out the standard model for the exploration department, which is to have in-house staff, or to have out-of-house staff working through one of a number of consultancy models.

'There are pros and cons to both in-house staff and out-of-house staff (consultants). Advantages of in-house staff include familiarity, corporate alignment, knowledge retention and certainty of capacity, but with downsides such as higher cost, less flexibility and higher G&A expenditure,' he said.

'With consultants, advantages include, for example, lower cost, greater scalability and the potential for more efficient working through focussed application of specialist skills and knowledge. But disadvantages may include potential loss of knowledge/lack of project continuity and potential difficulties with getting answers that address corporate objectives.'

Dr Enfield argued that by 'fully outsourcing the exploration department in a best practice manner it is possible to leverage the main advantages of both the consulting and in-house models whilst avoiding most of the disadvantages'.

Outsourcing in this way 'achieves the benefits of efficiency and scalability, bringing to bear the necessary specialists when they are needed in a very cost effective and focussed way'.

Making outsourcing work

The structure and governance of an outsourcing relationship are crucial, said Dr Enfield 'If we don't set this up right, it's never going to work'.

He went on to explain that the overall spirit of the outsourcing partnership 'needs to be captured within the agreement, just as much as the finer contractual details'. It is also important to foster a relationship based on mutual trust and respect, 'it is a strategic partnership - the intention is to operate seamlessly in an open and collaborative environment for the success of the E&P company'.

Many companies outside of oil and gas are successfully using the outsourcing model as a key part of their business strategy. Dr Enfield described how 'exemplars of outsourcing excellence', such as Toyota, achieve success by 'only outsourcing to trusted suppliers who have proven an ability to deliver on time, with an overriding preoccupation with quality and who can deliver at a competitive price'.

The company demands that outsourcing suppliers are continuously innovating and generating efficiencies, he said - 'they've got to have some ideas of their own'.

At the same time it is important that the outsourcing provider is willing and able to adapt to the client's procedures and working practices. 'The exploration function should only be outsourced to contractors who can demonstrate all of the above.'

Another part of the key to success is for the company to work 'very closely with their outsourcing partners and to respond to supplier concerns with integrity and mutual respect.'

The relationship is optimised where the day-to-day management of the outsourced exploration department's work is also outsourced to the trusted provider. This equally liberates the client company executives from time-consuming 'micro' management, allowing them to focus on their core business function.

Exploration outsourcing

Dr Enfield likened an exploration company to a ship where the exploration department is the engine room, driving the vessel forwards. In this analogy the direction (and speed) of the ship is the corporate strategy, with the direction set by the captain - the company's executive management and board.

The exploration department are 'more than just 'G&G'', with broader responsibilities including the addition of new assets, business development and the running of the company's asset portfolio - 'they are the engine room for corporate growth'. The outsourced exploration department model provides access to a bigger 'engine', allowing companies to 'punch above their weight' and compete on a much larger playing field than the company's size might otherwise suggest.

Dr Enfield went on to explain that the lifecycle of an outsourced exploration department partnership is not fixed at the outset, but the nature of the relationship is carefully structured over a multi-year cycle to achieve long term stability and to prevent surprises.

Importantly, flexibility is built in because change is recognised as an almost inevitable feature of any company's growth and the beginning, middle and end phases are carefully designed to achieve certainty for both parties throughout the lifecycle - again Dr Enfield emphasised 'no surprises'.

'Outsourcing of the core exploration function is a big decision for companies to make, but is perhaps highly relevant in today's low oil price environment,' Dr Enfield said in conclusion.

'Alignment is a crucial feature of good outsourcing and is gained by the structural setup of the arrangement/strategic partnership.'

'Change is inevitable. It should be expected and anticipated, as a natural part of success, by being addressed in the contract for a 'no surprises' functioning of the relationship.'

'Outsourcing, done well, is value adding and realises cost benefits including reduced corporate G&A (bringing G&A down to less than 10% in best practice outsourcing).'

'Successful outsourcing of the core exploration function requires a supplier of sufficient scale with a full spectrum of capabilities that brings to bear a highly focussed, ready-made exploration team.'

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