In the early 1970s, Stanford University psychologist Walter Mischel conducted a series of seminal experiments into delayed gratification. Each child was offered a simple choice: one cookie now or two cookies later. Those children who chose the latter mostly went on to enjoy greater future rewards.
The oil and gas industry faces a similar dilemma: with the price of crude refusing to climb above $50 a barrel – at the time of writing – do upstream operators grab one cookie now by slashing CAPEX and exploration and procurement (E&P) budgets? Or do they use the crisis as a once-in-a-generation opportunity to take a long, hard look at business fundamentals, streamline the value chain and innovate their way out of trouble?
Trelleborg‘s offshore operation’s roundtable members, who analysed findings from the company’s Next Level report, are unanimous in their appraisal: there is a missing value link in the offshore industry and those willing to take a measured, long-term view will better weather the current crisis.
"Across the offshore industry, two approaches to financing and project spend are apparent: lifecycle value versus short-term costs," states John Drury, managing director at Trelleborg Offshore UK.
"The roundtable panelists agreed that although it is tempting for organisations to look for larger upfront savings – especially with budgets under scrutiny due to lower oil prices – sustainable marginal gains can in fact reap greater rewards in the long-term and therefore should be favoured.
"One panelist’s example involved a multibillion dollar project in which an operator may be averse to innovative solutions, as they only appear to save $10m. While this may seem a small saving in the overall project spend, cumulative savings of this amount could hugely benefit the overall costs.
"The reduced oil price also appears to be incentivising businesses to communicate more openly through supply chains to establish smarter ways of working. Panelists stated that now is the time for supply chains to collaborate, invest and embrace innovation. Otherwise, decision-makers risk making short-term cost savings on long-term issues, which could reoccur if not properly addressed."
The importance of innovation: key findings from the Trelleborg roundtable
The Trelleborg Next Level Roundtable comprised Drury; independent subsea and pipeline consultant Phil Cooper; 3M global business director oil and gas Deba Sen, and head of Aberdeen Consultancy and ABB Oil and Gas UK Phil Lawson. The four experts met at Offshore Europe 2015 in Aberdeen.
Under discussion was how the oil and gas industry supply chain can become more efficient, the gap between specification and project reality, and overcoming key barriers to innovation and progress.
"Trelleborg surveyed decision-makers to identify ways in which the industry can respond to pressure against a backdrop of slowed market growth," Drury explains. "Responses were analysed for the company’s Next Level report, and formed the basis of the roundtable discussion in September."
The report found that, despite original equipment manufacturers (OEMs) rating product quality, responsiveness and skills above cost as supplier attributes – only 4% cited cost as a primary driver when determining partners – in reality there is a missing value link, as cost savings take priority.
Of the OEMs, operators, contractors and consultants polled, 78% admitted to changing key project specifications for budgetary reasons. With these stats in mind, when does the drive to save money become a false economy, resulting in increased personnel and process risk in upstream projects?
"The effect of the low oil price is splitting the industry into two camps – those who are battening down the hatches to ride out the storm, and those who are actively looking for change – and this is resulting in various approaches to spend," adds Drury. "Some are only looking to make large savings at around 20%-25% and they see a $10m saving on a multibillion dollar project as menial."
"Operators don’t want the supposed risk and aggravation of embracing innovation to do something different, when this cost seems like a drop in the ocean," he says.
This reluctance on the part of some companies to embrace ‘value-add’ innovations is short-sighted, however, as smaller returns now could amount to major efficiencies in the mid to long-term – a neat example of two-cookie thinking.
"What some oil and gas companies are not considering is how many times these ‘small’ $10m amounts are popping up," Drury posits. "Instead, they could actively seek to make marginal changes – the 1% or 2% gains – ensuring that they are sustainable year on year.
"There appears to be more of an appetite for innovation across the oil and gas industry, but it comes in a slightly different form," he continues. "Customers want to innovate to find ways to reduce costs, so are more tempted to lean towards a ‘value-add’ approach."
Small wonders: investing in R&D to minimise costs
The Trelleborg roundtable was conducted just prior to a fresh round of industry belt-tightening, as upstream players employ spending cuts and asset sales as tools to avoid sacrificing their dividends.
Royal Dutch Shell’s pre-tax loss of over $9bn in the third quarter was worse than analysts had feared and included a $2bn writedown of its aborted Carmon Creek project in the Canadian oil sands.
Chevron, the second-largest energy company in the US by revenue, intends to cut up to 10% of its workforce – between 6,000 and 7,000 employees – and reduce costs to offset plunging revenues from oil and gas production. Chevron aims to lower CAPEX by 25% in 2016, to between $25bn and $28bn.
Against this backdrop, technological and supply chain innovations that offer relatively small but still distinct competitive advantages make increasing sense, especially for multinationals, and may have long-term benefits as operators enter inhospitable environments in search of marginal reserves.
"In today’s market, the idea of working to a creative brief in order to meet these financial needs breeds a fear of the unknown and some believe it will increase the level of risk to their projects," notes Drury. "In some instances, this is resulting in a ‘race to be second’ approach to innovation.
"Cost reduction is a daily discussion and so it is the job of the supplier to support customers in making sensible and safe decisions which will keep innovation and cost on a balanced scale for the benefit of the job. Cost cutting of this type makes the industry leaner and more efficient."
One salient example of innovation at play is Shell’s new automated pipe sensing (APS) technology, which combines vision sensor technology inspired by the Xbox One computer console with complex algorithms to automate running the drill string in and out of the wellbore, known as pipe tripping.
"Connecting pipe sections can take anywhere between six and 18 minutes, depending on the specific crew and individual ways of working," Shell VP Jonathan Crane told Oil & Gas Agenda in October.
"Now, a deepwater oil and gas rig costs about $10 a second to operate, so you can see that if you reduce that six to 18-minute time spread – even by a small amount – you rapidly start to improve your cost efficiency as a business.
"It is a painful time right now, but it’s also a time when good engineering pays dividends, and what is interesting is that the pressure of the low oil price has actually spurred creativity in respect of how we do things," he adds. "It’s been refreshing in that it’s challenged practices built up over years."
Step change: towards a leaner, more efficient offshore industry
With analysts predicting that the global price of crude will remain low for a prolonged period, Drury summarises the key findings of the Trelleborg Next Level Roundtable, and considers whether or not industry-wide budget cuts are in danger of stifling long-term innovation in the upstream sector.
"Overwhelmingly, the key message from the roundtable was one of change," he states. "Members stressed that against a backdrop of challenges, the industry should remain optimistic and proactive, and that openness to innovation and clear communication between stakeholders is paramount.
"As Winston Churchill once said, ‘Never let a good crisis go to waste’. This is our opportunity to make changes, not only across the supply chain, but also within individual companies. This time should not stifle but drive innovation to achieve something more economical and sustainable for the future.
"Despite the feeling of crisis, it’s a great opportunity to get various levels talking to each other, up and down the value chain. This is key in order to take advantage of a willingness to submit ideas and to listen and act quickly. There is a chance to make a step-change going forward, irrespective of what happens to the oil price, in order to be a leaner, quicker, more exciting market in the future."