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What collaboration really means

Thursday, August 6, 2015

North Sea development projects often suffer from having too many partners and poor relations with suppliers, said Graham Scotton, formerly CEO of Dana Petroleum

'I am trying to advocate what collaboration really could mean as opposed to just talking,' said Graham Scotton, director of oil and gas consultancy Petromall, speaking at the Finding Petroleum forum in London on March 12, 'Finding Enough Oil and Gas in North West Europe.'

Mr Scotton was acting CEO and COO of Dana Petroleum in Aberdeen from September 2013 to October 2014, and a former general manager of BP Angola, and Deputy Venture Director for BG Group in Kazakhstan.

"The truth is, on the whole, returns from upstream oil and gas developments are seldom what they were sanctioned as being,' he said.

To make it work, "it has to have a spirit of co-operation [where] everybody is in it for one reason, the good of the reserves."

"There [once] was a spirit of making this thing work for the common good.
"Nobody talks about that. It's [all] maximising my profit, my company's position, until we get repeat business or business somewhere else."

"It's a herculean effort, to get the supply side, along with the owners, into a place where they want to do this."

"People say, the competitive nature of the tax and royalty scheme in North Sea has been the right thing to do because competition has got rid of the weak and made everybody else strong," he said. "Maybe that was true when volumes were high.'

But now, "the UK North Sea has got itself into this place of excess," he said. "I don't just mean cost. It is pressure to drill, shoot more seismic. The pressure to find solutions. Schedule pressure in particular."

Mr Scotton first came to Aberdeen with Dana in September 2013, after a career working in other parts of the world.

Aberdeen in September 2013 "felt very different, very confident," he said. "There was a high turnover of staff.

'In my short lifetime there, it flipped."

Mr Scotton said that many people seem to believe that problems can be solved solely with technology. "Technology alone is not the answer on its own. It is often cited as being the answer. I'm not convinced."

Fragmented owners

The North Sea has become very fragmented, with many small blocks and pieces of infrastructure with different owners, all with different business plans. This makes it much harder to make smaller reservoirs viable to develop, he said.

For example, "if a 10m [barrel] discovery is crossed by 3 blocks, how can you get alignment on that [between the different owners] given everybody's finance position, strategy and everything else? That's a chronic problem, I would suggest."

"There are plenty of examples [from the North Sea] of small accumulations that cannot be put through infrastructure for one reason or another," he said.

"In the Gulf of Mexico, as best I know, that doesn't happen. I'm not sure why."

"In Norway, I think it's legislated, that a solution has to be found on the part of infrastructure owners to let accumulations in."

"[In the North Sea] there's something to be done, I think, about infrastructure owners and access."

Mr Scotton cited another example of an unnamed development, with a number of different reservoirs together containing 600m barrels, all within the same block, with injection wells, producing to an FPSO.

The development cost $6bn in 2003, and to do it more recently could cost $15bn.

But if it was being done in the North Sea, there might be many different owners, he said, which would make it very difficult to develop.

All infrastructure ownership issues need to be sorted out before a project is started. "You can't, I believe, hope for the best with an infrastructure owner," he said. "The project can't be sanctioned and left to its own devices."

Minimum field size

It would be an interesting project to 'reverse engineer' a development, so state a minimum economic field size which can be put together in a development with multiple owners, and then look for the reservoirs to fit it.

"That's probably asking too much, owners with different financing, different business plans," he said. "But if it isn't done, it will be more of the same."

"It is certainly not 40m, 50m barrels as minimum economic field size," he said. "I would advocate it has to be larger than that."

"I would like to see Oil and Gas UK come up with a minimum economic field size or minimum integrated development size."

Standardisation

There is a lot of talk about standardisation in the North Sea, although it is not new, he said.

"The Forties field [first oil in 1975] had 4 platforms, all identical," he said. "The whole thing was the same. In Angola, MODEC did 2 FPSOs which were alike."

"It is possible, but you've got to have a clear definition of the fluids subsurface, de-risked, to be able to build standardisation."

If the industry could agree on a standard way to make wells, it could make it easier to make agreements on how to develop fields.

"Can a bunch of engineers, with different licenses, drilling issues, come up with a standard well for the North Sea? It is all relevant to future developments and how to make them work," he said.

Schedule pressure

Scheduling pressure can be a big reason for projects to go wrong, he said.

Reasons for schedule pressure could be that companies have told analysts they will do something by a certain date, they need to do something before licenses expire, they need to generate cashflows to fund something else, or they have to meet a slot they have reserved with a vessel.

"Particularly among smaller companies, this is a real tough bit of pressure," he said. 'You're driven to get stuff out and live with consequences if it's not ready."

This can lead to companies not thinking carefully enough about risk, both geological risk (is the subsurface going to provide what is expected) and in terms of project scope (possible things which can go wrong with the project), such as how the commissioning or hook-up will work.

"You may have a development which gets you over the line [meets the schedule], the board puts a press release out, then reality then hits about the hidden cost," he said. "It's been a real problem."

People often expect North Sea projects to be easy, with "nice, light oil," he said. "But something will always get you."

Following on from this, it is too common for projects to start with a poorly defined scope, without a firm understanding of subsurface definition, and without firm decisions on factors such as well types, facilities, unmanned vs manned, floating or fixed.

"One of the indicators for a concerns for a project is the number of times it's been in the [project definition] cycle," he said. If it's more than three times - it's time to be concerned.

Suppliers

A common problem when things go wrong is to blame contractors. "Analysts say, it's delayed six months, it's all the contractors 'fault."

"It cannot be that it was all the fault of the contractor," Mr Scotton said. "Someone let the contractor in the first place. Was the assessment of the contractor appropriate?"

When it comes to working with contractors, "it is not enough to [just] go out to tender, have a specification agreed to, a contractor says this amount of money," he said. "Because the track record is, it all goes wrong, it is never enough, and something goes wrong for some reason."

If a supplier delivers something late, it can cause big delays. "If they are going to provide a pump, it's no good if its 6 months late - it just isn't any good. In every project I look at, the workflows go off the rails and small problems become huge ones."

Sometimes the mistiming is the oil companies' fault. "There aren't many people with a heavy lift vessel. If you miss your slot, you're hosed."

Often, small companies are not able to keep track on everything they are supported to keep track on. "That's a big ask," he said. "The capability of the organisation to manage everything, time and again, comes out as an issue, as developments go wrong.'

The only solution is to give yourself some breathing space if things go wrong, so find the minimum economic field size, and add a margin to it.

Costs

In times of cost cutting, people always focus on cutting manpower, but that is only about 25 per cent of total OPEX, he said.

They might be better off looking for ways to reduce the amount of money paid to suppliers and contractors.

For example, "shipping company owners with supply vessels and anchor handlers. The accounts show them making super returns,' he said.
'Oil companies don't make those returns."

Another example is chemical companies, which "are making massive returns on their chemical cocktail they sell to you for corrosion, whatever it is. You are beholden to the supply market."

"The industry has been willing to along with this disparity in returns. What returns are going to be acceptable in order to have a job in all of this?"

"Everybody needs to come to the table and be honest about what level of returns are going to be acceptable. What's fair? If everybody is at the end of the spectrum 'unfair' developments won't happen."

"You can leave it to market forces. If it is a perfect market for goods and services, prices will fall. The problem is there's a lag time.'

"What goes with 'letting the market speak,' something we need to be concerned about, is loss of capability."

"The low hanging fruit is to reduce contractors' day rates," he said. "We used to say, our day rate contractors are eating our lunch."

There are other factors keeping costs high.

There is a rule that helicopters should not fly above 6m waves. "That's going to hurt a lot of capital projects," he said.

Watch Mr Scotton's talk on video and download slides at
www.findingpetroleum.com/video/1260.aspx

Associated Companies
» Dana Petroleum

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