Oil Industry Adapts, Increases Efficiency

Confidence in the oil and gas industry—closely mirroring the oil prices themselves—has stopped falling, but remains relatively low. But while cost cutting measures are still in place, close to 40 percent of the industry sees spending going up for digitalization in 2017, according to a survey from DNV GL.

Now that oil prices seem to have stopped falling, confidence in the oil and gas industry has as well. It’s still much lower than it was before the price bust of 2014, but industry players at least appear to have a more stable attitude about surviving in such an environment, according to the findings of this year’s industry outlook survey from technical advisor DNV GL.

The oil and gas industry is on a balancing point, Paul Doucette, global leader for public policy and external funding at GE Oil & Gas, told DNV GL. “Companies are trying to decide where the new normal is,” he said.

So while many companies are finding that they can indeed adapt to make an operating profit at $40 per barrel, cost management is still a high priority among 85 percent of the respondents, with key cost-cutting priorities for 2017 including operating expenses and organization restructuring. And 64 percent of the professionals surveyed cited low oil prices still as a top three barrier.

Automation, however, is an area where companies look willing to loosen their purse strings in 2017. According to survey responses, 39 percent expect their organization’s spending on digitalization to increase in 2017. The same percentage say that low oil and gas prices have increased their focus on digitalization, in fact.

Oil and gas companies have been relying increasingly on digitalization as a means to improve profitability and reduce risk, steadily upping exploration of automation, artificial intelligence, predictive analytics and machine-to-machine communications, DNV GL notes. “Among the 15 emerging technologies investigated in our survey, digitalization is the area in which companies are most likely to invest in 2017—across R&D, trials and full-scale implementations,” the report says.

Any hesitance to invest further in digitalization has very little to do with concerns about any sort of technical obstacles, apparently. Instead, survey respondents cited issues with funding and an old-fashioned organization culture as the top barriers.

The size of the organization also has some bearing, with larger companies more willing to embrace digitalization: 60 percent of respondents from large companies see digitalization as an important means to increase profitability, compared with 56 percent from mid-sized companies and 45 percent from small companies. Correspondingly, 57 percent of large companies expect to increase spending on digitalization in 2017, compared with 42 percent of mid-sized and 30 percent of small companies, DNV GL reports.

GE’s Doucette points to a general acceptance of Big Data as important to the future of oil and gas. DNV GL estimates that the industry could improve efficiency by at least 20 percent by making full use of digitalization.

Maintaining efficiencies

There has been some concern that, if oil prices come back too quickly, industry players will be quick to abandon the recently learned habits in production optimization and efficiency. But DNV GL’s survey results indicate that danger my have passed. Current cost-efficiency measures can be seen as a permanent shift toward a leaner way of working, according to 63 percent of respondents.

“The key learning for us is that, should there be an increase in the oil price, we need to make sure that we maintain the strong cost focus so that expenses do not escalate again,” said Thore E. Kristiansen, COO (E&P) and executive director of Galp Energia, an integrated energy company in Portugal.

Management has become very aware of the need to optimize costs and improve efficiency, according to Ye Hua Huang, deputy director-general of the Bohai Oilfield Bureau for China National Offshore Oil Corp. (CNOOC). “We can’t abandon this cautious strategy when prices are high,” Huang told DNV GL. “We need to adopt a consistent approach.”

Oil and gas companies—especially those in exploration and production (E&P)—have made great strides in cost efficiencies. Kristin Færøvik, managing director of Lundin Norway, told DNV GL that they have seen a drastic reduction in exploration drilling costs. “The rates have come down on almost everything,” she said.

But when Galp Energia’s Kristiansen marvels at being able to get an offshore rig for $250,000 or less these days that used to cost more like $600,000 to $650,000, I think of conversations I’ve had with automation suppliers who are feeling the squeeze of those price demands.

Much of that cost cutting has been achieved, in fact, by pushing suppliers and contractors on rates. “Since the downturn in the oil price, the supply chain has faced substantial pressure from the procurement desks of operators, who are renegotiating even quite recently agreed contracts,” said Graham Bennett, vice president of DNV GL—Oil & Gas. “This has strained many long-standing relationships between operators and their suppliers, and damaged trust within the supply chain.”

But according to the survey’s results, the trend is expected to continue, with the same percentage of respondents as last year (27 percent) looking to cut costs by pressuring suppliers to reduce their prices.

Safety concerns

These pressures—combined with reductions in labor force hiring and training—raise concerns about whether safety is sustainable in this environment.

Expectations for health, safety and environment (HSE) spending are down this year. Only 10 percent of survey respondents expect HSE spending to rise in 2017, compared with 15 percent in 2016.

CNOOC’s Huang told DNV GL that the industry has not been spending enough on safety. “Safety facilities and management are affected when you cut costs. Many use cheaper facilities and cheaper services,” Huang said. “Will that lead to accidents this year? Maybe. We all need to be careful about safety all the time—no matter what the oil price is. It can never be compromised.”

Asked whether cost-cutting measures are increasing health and safety risks, only one in five said yes. Interestingly, though, that rate goes up progressively the further down the ranks you go. While C-suite executives chimed in at 11 percent, 25 percent of those in non-management positions saw cost cutting as a danger to health and safety.

And DNV GL contends that there is reason to believe the survey response underestimates the issue. “I think it is easy for the industry to say that safety has not been affected,” Bennett said. “But if you look at some of the recent feedback from regulators, they are seeing signs of a deteriorating picture for safety.”

Unions are also expressing concern. In late 2016, the UK’s Unite union reported that 58 percent of offshore workers (from a survey of 700) believed health and safety standards had dropped in the industry during the previous six months.

Important to consider is the time lag between spending cuts and accidents, the report notes. “Cutbacks in investment do not produce an immediate safety impact; their effects are felt in the medium term, so it is difficult for the industry to claim that safety has not been affected, as they do not yet have the operating data to support that statement,” Bennett said. “But the lack of investment in inspection, maintenance, competency training and the physical fabric of installations will come back to bite hard if it continues into 2017.”

 

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