Uncertainty around the price of oil continues and once again the oil and gas industry must evolve. As companies adapt to the consequences of fluctuating oil prices, they also search for methods to streamline and economise processes.
In the current economic climate, operators know they need to realise their reserves more efficiently than ever before within new budget boundaries. They need to change the way they have traditionally worked.
The biggest slowdown in oil drilling on record is showing signs of reining in the US shale boom. American shale oil output is expected to post the slowest growth in more than four years in April, the country's Energy Information Administration (EIA) said.
There is no denying that the UK oil and gas industry is in the throes of a difficult year. The sudden and unexpected drop in oil prices has resulted in very difficult times for all UK continental shelf (UKCS)-related projects, creating uncertainty for North Sea operators, service companies and all those who work in the supply chain.
We may find ourselves in one of the most challenging eras our industry has encountered but, whilst there are challenges and consequences ahead for many, there is also the opportunity to look at what can be done to control the costs of oil and gas projects at planning and execution stage.
When emerging technologies and key trends are discussed there is a vast array of suggestions made and debated. They range from wearable technology, 3D printing, bio-computers, through to the "internet of things" and many more.
As the UK offshore industry anxiously awaits news from the Treasury regarding changes to the North Sea fiscal regime, let’s look at the historical context of a province where frequent change has been the norm. I write as a result of discussions with industry tax expert Phil Greatrex, MD of CWEnergy. Phil has been kind enough over many years to teach high level petroleum taxation at our annual UK Oil and Gas Law teaching week for CEPMLP of Dundee University. The special regime for North Sea taxation was first introduced in 1975, just as the first big offshore fields were coming on-stream.
Since the days of Henry Ford and the beginning of mass production, the benefits of ‘standardisation’ have been widely promoted and publicised. The automotive industry spear-headed standardisation and, with it, transformed manufacturing practice forever. The rationale for standardisation is as compelling as it is simple – we know full well that variation is more likely to cause errors, increase complexity and therefore impact everything from safety to operating costs. The oil and gas industry has been slower than many to adopt standardisation to the same extent, although some operators have been better than others at embracing the concept. Generally, the industry is still behind the curve. Nowhere is this more evident than offshore when comparing ‘ways of working’ across different shifts where it is not unusual to see a marked change in how things get done with the arrival of a new crew.
What a difference a year makes. Twelve months ago the shale revolution in the US was changing everything, from manufacturing competitiveness to traditional import/export flows and even longstanding geopolitical arrangements this side of the pond, shale exploration was pretty much on each EU country’s agenda, with shale gas often seen as the only way out of Russian dependency. Now we are in the middle of another quantum shift which is transforming everything again. Crude prices have plunged, Russia is in recession, experts are declaring shale investments dead in the water (too soon in my view) and government policies favouring renewables are under new scrutiny, as economics suddenly favour dirtier coal and gas. Whether you blame technology, politics, softening demand or a mix of all three, these ructions are testament to the dynamic nature of energy markets and the huge risks that emerge in a period of profound volatility.
When speaking to different stakeholders in the industry, there is one common theme. Recovery. Everyone is talking about it. Rhetorical questions are constantly posed – when does the oil price recover, when do we see increases in capex again, when will we have equilibrium in the drilling market? Such optimism is admirable, but is it misplaced? As in previous recessions we are also seeing a number of letters of the alphabet being quoted. “Is this a V- or a U-shaped recovery?” Different stakeholders have varying opinions. Earlier in the year there was much more talk around a V-shaped trough on the basis that “oil prices just can’t be this low for too long”.
By and large, the UKCS oil & gas story has been one of success. However, this has not been the case in the waters west of the Scottish mainland and the Hebrides. Rather, it has been one of disappointment and, unlike bustling Shetland, somehow oddly remote from Aberdeen. Scotland’s west coast has always had a slightly arms length relationship with the oil & industry – intimately involved at some levels but never the front line in terms of activity or economic impacts. It was not always expected to remain that way. I remember, almost 40 years ago, attending explanatory meetings in Stornoway and elsewhere at which oil industry executives talked confidently about the industry’s expansion to waters west of the Hebrides. It was not a case of “if?” but “when?” which explains why that expectation has never quite gone away even though it has rarely seemed close to being fulfilled.
UK oil and gas explorers face some very difficult trends that threaten the long term future of the North Sea. Wells are simply not finding enough new resources. These problems set in long before the recent oil price declines and will not be easily resolved if and when oil prices recover. Explorers need to adopt bold new strategies if they are to address the fundamental issue of small discovery volumes. Lack of investment is not the issue. Over five years to 2013, the UK industry spent US$13.9 billion on exploration and appraisal work.
The offshore oil and gas industry is reaching an inflection point. As the oil reserves in shallow waters reach the end of their production lives, operators must take the long view and drill in deeper waters to find new recoverable resources. Doing this economically presents some significant challenges – a feat which will require serious innovation if firms which grew up with the North Sea are to successfully export their skills. Using conventional methods is not an option – it’s simply not feasible to place a production rig above a well in water that’s thousands of metres deep. For that reason, the industry is thinking differently about how it works and how it uses technology.
Scotland has benefited enormously from the huge oil wealth produced by the people of Aberdeen and the north-east. Over 40 years, 42billion barrels have been taken out of the North Sea by an oil industry that worked out of Aberdeen and Peterhead. And over many years in visits to Aberdeenshire to see my parents, or simply to visit the industry, I have seen how the skills developed in the north-east have boosted the British economy and kept the country ticking through thick and thin – and in decade after decade – since oil was first discovered. Over 30 years oil, has averaged around 17% of the Scottish economy. But now in a year when oil prices have fallen 40%, we face what is more than a normal trough in the oil production cycle as some of the industry’s great experts, Sir Ian Wood and Lord Browne, formerly of BP, have recently reminded us. The fall in world oil prices comes at a time when extracting oil from the North Sea is more challenging than ever and has brought us, earlier than we could have expected, near to a tipping point for the industry.
Oil and gas joint industry projects have made a significant contribution to technological progress over many decades, but as an industry we need to be more strategic to maximise UK production in the years ahead. Collaboration is the great buzz word of the moment and was a key theme of the Wood Review. It has been at the heart of what we do at ITF since we launched in 1999, at a time of low oil prices and operating challenges. A focus on collaborative efforts to get technology qualified, trialed and implemented in the field is particularly important for the industry at this time.
The “City Deal” being proposed for Aberdeen apparently consists of spending a massive £2billion on transport, housing and skills development. If such a deal is ever approved then Aberdeen City Council officials claim this will go a long way towards helping revive the oil & gas industry, the health of which is most certainly a cause for concern as would be the health of the entire economy of Aberdeen and Shire should there be a really prolonged downturn in North Sea and international activity. To put it bluntly though, such claims are utter nonsense and should be taken with a large pinch of salt. Investment in infrastructure does not itself impact directly on the economic or industrial prospects of a City or indeed a country. Why? Because infrastructure can only act as a means of attracting private sector or joint private and public sector investment in companies, jobs, technology and so on and so forth.
It is hard to believe that the North Sea oil & gas industry has been a part of the Aberdeen and north-east Scottish economy for half a century. From early tentative beginnings starting with Shell renting yard space in Torry and offices on Market Street it has become the linchpin and more besides for this city-region. Take oil out of the equation and our economy would collapse. There is no obvious sunrise successor, though maritime renewables could be made to work, if the oil & gas supply chain goes after the opportunity and Donald Trump is trumped over the European Offshore Wind Deployment Centre project. But really grabbing that opportunity is something it has been poor at, despite the efforts of Aberdeen Renewable Energy Group and the launching at the turn of the millennium of what became the very successful All-Energy show, but which was last year swiped by Glasgow in a manner that angers me still.
Cast your mind back to your awkward teenage years and your first school disco; that uncomfortable rite of passage with boys on one side and girls on the other. It took insurmountable courage for someone to dig deep, walk across no-man’s land and ask someone to dance to the latest single from Wham. Too often, nobody stepped up to challenge the accepted tradition, despite perhaps wanting to. The situation was left to the bravery of two poor teachers who unashamedly put their best foot forward and eventually encouraged others to do the same. Fast forward to now. Our industry is at the unpredictable mercy of our economic circumstances and our collective efforts. It is standard practice to do anything that will prove our individual worth and value. Take, for example, our safety standards and guidance.
We've all read plenty of stories predicting the future of the oil industry, with endless questions like: What will the oil price be in six months? Will we receive a tax cut as an industry in the imminent budget announcement? When Will OPEC reduce production to reduce the surplus supply of oil and gas? So it may seem strange timing to talk about recruitment and investing in the future with universal cuts - but this is key to securing the industry for generations to come. The most frustrating factor of these unanswered questions is that we have very little control over the outcomes. For many, it is a tough and trying time as leaders have very little choice but to say farewell to long-serving staff in order to reduce their cost base. Having witnessed a dip in the industry before, one thing that always astounds me is how the cycles of recession and talent wars continue.
It's cold out there, it's always cold out there.... It seems like we are getting news of rate cuts and job threats every day at present. Our politicians seem to be on an endless loop exhorting collaboration, listening, unity and focus. Fans of the cult film Groundhog Day will be able to relate to Phil Connors in all of this. In that 1990’s classic our hero was repeating Groundhog Day over and over again. For the record, our much heralded Aberdeen Summit was held on Groundhog Day (2nd February).
Continually increasing costs, a sharp fall in the price of oil, a collapse in exploration and a slump in investment. You could be forgiven for thinking the end is nigh for the UK oil and gas industry. It is true that the main findings of our Activity Survey 2015 don’t make happy reading and risk giving credence to the doomsayers’ views that there is very little left to play for, that our industry is in decline and should be left to do just that.
BP chief executive Bob Dudley recently issued a dire warning, comparing the current oil bust to the one that devastated the oil and gas industry in the 1980s. I’ve made similar comparisons between the current price plunge and the ‘80s. The severity of the price decline during the past six months certainly reinforces the notion that we may be seeing the worst oil slump in 30 years. Other factors, though, occurring on the fringes of the oil market, hint at a different outcome than the 80s, which ended with the US becoming more dependent on cheap oil.
It’s no secret that the oil and gas industry has suffered some volatile times in recent months. The drastic drop in oil price has been, and continues to be a major focus for the world’s media.
By unveiling phase one of its plans for the Brent Delta this week, Shell has certainly propelled decommissioning into the headlines and consciousness of everyone, whether they’re directly involved with oil and gas or otherwise. By its very nature, North Sea decommissioning is a developing business that is new to many, and misinterpreted by even more. It’s important right now to make it clear that it is not about the premature closure of the North Sea oil and gas industry. In reality, decommissioning is a developing sector that is full of opportunity; the opportunity to win business and opportunities to problem-solve through innovation.
No matter where the oil price is going in the next 12-18 months, this must be the time for the industry to look afresh at the way it operates. For the reality is that while we in Aberdeen may hope for a bounce back of the Brent index, the rest of the world benefits from low oil prices: consumers save at the petrol pump, and industries on the balance sheet. All that creates an increase in GDP, spending power and new jobs, so what isn’t there to like about a lower price per barrel? The reaction of some parts of the oil industry to the recent fall in prices has been entirely predictable. Find cost reductions by setting a target or enforce a mandatory cut across the board. Regrettably, as a consequence, we have seen instant head-count reduction, which may seem good sense in the short term, but impacts company loyalty in the long term.