There was a time when buying a high-quality suit meant having it tailor made. Though that may still be the preference for those with the luxuries of time and money to spare, for most, times have changed. Saville Row has faded; the high street has taken over and we’re accustomed to quality and variety available right off the shelf – even with rentals.
Exactly the same is happening in the global offshore oil and gas sector and it is a trend to be welcomed.
Old days, old ways
In the days of $120/bbl oil, major operators had those luxuries of time and money. Margins were not squeezed, standards were gold-plated and fortunes were spent developing and operating wells using bespoke equipment. If a standard system was sufficient, for example, then well-staffed in-house engineering departments could set to work re-designing a bespoke one or laying out site-specific procurement requirements.
With healthy margins and no sign of the price drop to come, motivating factors such as reducing time to first oil, minimising rig time and reducing CAPEX spend simply were not a concern.
New offshore outlooks
The good times didn’t last forever though, and the well documented price crash in late 2014 saw activity in the sector slow significantly. With prices going as low as sub-$30/bbl, many planned projects were simply not economical. Those who did continue to operate and develop wells were forced to adopt a much tighter operating model with fewer engineers on their staff and a diminished appetite for big CAPEX spends.
However, the need for high engineering standards and quality equipment didn’t evaporate along with margins. The response was to shift to a different operator/supplier relationship more in keeping with the times. This entailed two major shifts.
Shift one: purchase to rental
Firstly, it meant a switch from a CAPEX heavy, purchase-based model to a rental and leasing one, especially for equipment needed for relatively short times or for only certain stages of a project’s lifecycle. For example, during the early production phase it might be useful for an operator to deploy specialised equipment aimed at reducing time to first oil (and therefore revenue), before later installing more permanent assets. Rather than buy the equipment and be left with the cost and logistical task of storing it once the job is done, the assets can simply be returned to the owner. Similar scenarios apply when specialised, short-term equipment is needed to conduct repairs or maintenance.
In this situation, the operator avoids an unnecessary CAPEX spend and any unnecessary ongoing costs relating to owning equipment. It can get exactly what it needs, for as long as it needs and then be free of obligations: a great boon to flexibility. Additionally, the operator benefits from speed. It is much faster to rent appropriate equipment off-the-shelf from an agile supplier than to initiate a full procurement process. Depending on the situation at hand, that can mean reduced time to first oil, less rig time as engineers wait for equipment or shorter downtime for repairs. All translate into a healthier bottom line and, crucially, less risk.
Shift two: growth of vendor expertise
The downturn also led to operators moving to smaller core engineering teams rather than keeping niche specialists. However, those specialists are still crucial to the industry’s safe and profitable functioning.
Instead, there has a been a general shift to vendors investing in stronger engineering teams according to their specialisms. This model has the advantage that each and every operator doesn’t need to duplicate that expertise as it is centralised with the vendor. Nor does the vendor need to continue paying for the particular set of expertise beyond the timeframe it is needed for each project.
In theory – and in practice – this is a more efficient distribution of resources and can lead to better specified projects. However, it depends on vendors being careful to guard their reputation as consultative partners and ensure always to put the customers’ needs first. This means challenging the status quo and not defaulting to standard solutions just because that’s what’s always been done.
This expertise is crucial, too, for making sure the job is done right first time. The fastest delivery in the world is still slow if a supplier misdiagnoses a problem and sends the wrong thing. It’s the combination of thinking and product that provides engineered solutions that give companies the confidence that they’ll do the job first time.
If an operator can come to a vendor and be confident of getting the equipment and expertise it needs on a rental basis, off-the-shelf, then it can go a long way to reducing CAPEX budgets and increasing flexibility.
A changing industry
Operators have continued to protect their margins following the downturn, but it would be a mistake to think that the only reason for the off-the-shelf rental model’s ascendancy. There are other changes in the sector that also call for this more agile approach.
One such trend is the emergence of smaller operators around the world. Though the traditional supermajors aren’t going anywhere, more contained, specialised and nimble competitors are coming to the fore. For example, in the Gulf of Mexico (GOM), many such operators are buying up marginal or near end-of-life wells from their larger peers with a view to increasing production or extending well-life.
These companies are far more suited to a rental model, both for the speed and flexibility it offers and the reduced need for upfront CAPEX spend. The same goes for working with the vendor’s specialist engineers, which they are less likely to hire on a permanent basis.
Alongside the emergence of more small operators, there is also more frontier exploration. East Africa, Australia and the offshore Middle East are all booming. However, without the decades-long history of regions such as the North Sea and GOM, there isn’t the same depth or sophistication of supply chain. Agile vendors who can supply on a rental or purchase basis off-the-shelf, backed by high-quality engineering, are able to step in and account for that gap, offering operators confidence and enabling them to thrive.
Although there will always be projects that require bespoke engineering components and always a place for a purchase model, the fundamentals of the industry have shifted in favour of much more rental and off-the-shelf options.
This shift is worth celebrating: as the oil price climbs again, the sector won’t repeat the mistakes of the last boom-years but will instead be more flexible and, as a result, profitable and resilient.
Christian Berven, Business Development Director, Aquaterra Energy