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Ready for $50 oil, by Apache

Thursday, May 28, 2015

Apache Corporation has a business model which means it can survive with oil at $50 a barrel, said North Sea Projects Group Manager Mark Richardson at Subsea Expo

'Our business model is to get to a point where we can survive at $50 [a barrel oil],' said Mark Richardson, North Sea Projects Group Manager at Apache Corporation (and a former Captain in the British Army), speaking at the plenary session of 'Subsea Expo' in Aberdeen on February 11.

'We continue to see investment opportunity at $40 to $50.'

'You need smaller teams and a better approach,' he said.

The 'things we do in Apache are the right things for a low oil price environment,' he said.

On the basis that there is so much oil being stored, Mr Richardson does not expect the oil price to go up very much. 'The oversupply in the market will take a long time to get through. I can imagine oil price increasing to $70 in next 2-3 years but not beyond it,' he said.

There is a lot of talk about reducing tax on offshore oil and gas companies, but it won't help much because current tax payments are very low. 'Of 160 E&P companies in the North Sea, only 9 are [currently] paying tax,' he said. Instead, 'we need to increase the investment allowances,' he said.

'Some [companies] have significantly higher lifting costs. We need to act and we need to act fast. We need more sense of urgency.'

'We are [also] overpaid. There's significant cuts that need to be made,' he said.

One way to improve business profitability is to try to improve the culture of contractors, and how they work with operators, and the way operators treat other operators has to change, he said.

Companies do not consider each other's needs enough. As an example, consider if one operator has an aging platform it does not care much about, operating at 60 per cent of the time. A second operator wants to do a subsea tieback to that platform. Since it is operating only 60 per cent of the time, the second operator loses 40 per cent of revenue from the tie-back.

Operating model

Mr Richardson said he believed that Apache has a way of operating in the North Sea which is different to other companies. The company's lifting costs for 2014 were just $16.66 a barrel, he said.

Apache, the 3rd largest oil producer in the North Sea, has the highest production efficiency for the past 2 years, at between 90 and 94 per cent, he said. It operates a range of assets, many of which are 'aging'.

Apache ran 168 projects in the North Sea during 2014, and its project management cost was 4.8 per cent of the total budget, compared to an average for the North Sea of 12 per cent. 'With the right collaboration, and if you work closely with the supply chain, you can achieve that,' he said.

Apache has lots of subsea tiebacks and FPSO developments, he said.

Subsea engineering

Subsea engineering can also play its part helping manage costs, in particular by managing engineering complexity.

'We use agricultural engineering in subsea,' he said, a comment which provoked some protesting from other panel members.

'[Subsea] doesn't need bells and whistles [when they] push up the price and reduce reliability,' he said.

In one example, Apache needed a subsea structure to protect a subsea choke valve, and it needed to be installed in December otherwise the whole project would be held up.

The first contractor spent £115k on engineering, planning a structure which trawlers could safely pass overhead, which would cost £485k to build, and be available by the following February.

Apache went to a different contractor who came up with a much simpler design, requiring £30k of engineering and £50k for construction, which would be available on time. 'Why couldn't the first contractor do that?' he asked.

Managing risks

'There's a culture that you have to gold plate things and every single risk must be covered, he said. 'It is so gold plated it is no longer fit for purpose.'

'I blame operators and the way they set the framework,' he said. 'If the framework is wrong, everybody suffers.'

'[working] in an operator, you [only] get sacked for fiddling expenses and importing risk. So you avoid risk by not doing anything. The best answer is, do nothing , defer, delay, and you get promoted.'

But 'The risk still stays with the operator, for accidents.'

Processes

Oil company people often get too tied up in their processes. 'People think that projects are driven by process. It's not. People hide behind process.'

'Projects are support functions, not lead functions. You want checkpoints, not gates.'

'Once you free the people and allow them to come out of a process system, you'll get better results.'

Attitudes

Mr Richardson said that when he came into the oil and gas industry after being in the military, 'I was amazed by the competence and training of oil and gas people.'

But 'We don't leverage on that competence.'

The industry gets too adversarial. 'The lack of collaboration has been mentioned many times,' he said. 'A profit means that both sides can win. People have to be more profit focussed.'

Instead of endless analysis to try to understand the situation perfectly, leaders should get a project moving in the right direction. 'Work on assumptions and make decision and be bold,' he said.

A common scenario is where nobody wants to make a decision, so they pass the decision up the chain of command, until it reaches someone who has a portfolio so large he can make the decision knowing if he gets it wrong it won't affect his job, he said.

This is the wrong person to make the decision. 'He has no skin in the game and no technical ability,' he said. 'We need to get decisions made on the coal face.'

Projects can be run with small teams. For example Apache ran its 'Bacchus' subsea tieback project with just 5 people.

As a leader, 'my job is only to know the important stuff,' he said. 'The best answers win, and the best answers are out there in the market.'

'Apache has been successful in a high oil price environment. But it's the way we can all do business in a low oil price environment.'

Associated Companies
» Apache North Sea Ltd

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