How to Cope With Low Oil Prices

Offshore drilling companies coming to terms with low oil prices requires more than laying off workers and just trying to hang on until the industry turns around. Improved efficiencies are key to continued survival.

Inevitably, any discussion these days about business in the oil and gas industry is going to include something about the price of oil. But that discussion has shifted a bit. At the Offshore Technology Conference (OTC) in Houston last year, much of the talk was about how long oil prices would take to come back up. At the show this year, it was more about how to change the way you’re operating so that you can survive in a continuing climate of low oil prices.

An important panel discussion at OTC 2016 last month focused on exactly that: coping with lower oil prices. Lars Nicolaisen, partner for Rystad Energy and the head of Rystad’s New York office, presented a lead-in to the discussion that centered on all the reasons why oil prices just have to come back up. He argued that current prices are not high enough to sustain continued investment from the producers.

Granted, oil prices have surged considerably since hitting historic lows of $26/barrel in February. But prices continue to be low, and OPEC has continued to show that it is no longer willing to be an oil price savior.

Nonetheless, Nicolaisen pointed to four key reasons why current oil prices are too low:

  1. The current price doesn’t incentivize investments in new supply. “At 90 mbbl/d, we still believe oil prices need to be higher,” he said.
  2. Cash costs are at unsustainable levels. The average non-NOC (national oil company) collects about $25.5 per barrel, leaving no free cash flow (based on February’s low). “Oil prices have never been as low as February of this year when you see it in the context of cost,” he said. “Or, from the other direction, cost has never been as high.”
  3. Sanctioning activity is at unsustainable levels. “We’re not sanctioning as many barrels as we’re consuming, which is not a steady-state mode,” he said.
  4. Discovery rates are at unsustainable levels. The oil price has to respond to this, he said.

Nicolaisen seems to argue that oil prices will go up because oil producers need those prices to go up to survive. He conceded that perhaps costs need to come down as well, but ultimately, he argued, “the price needs to be higher.”

But the oil producers themselves, and the companies that serve them, seem to recognize that much more is needed on their end to improve the cost structure of their businesses. While rising oil prices might make the industry breathe easier, it’s not something they should be banking on. “Clearly, a higher price of oil helps us cope with the situation,” commented Lorenzo Simonelli, president and CEO of GE Oil & Gas, and one of three panelists grappling with the topic. “But how do we deal with it while it isn’t $100?”

Moving the breakeven point

Surrounding the many discussions throughout the oil and gas industry about low oil prices is the question of how much any given sector or producer needs the price of oil to be in order make drilling worthwhile.

The breakeven point for Shell’s exploration operations can span anywhere from less than $30/barrel up to $100/barrel, according to Wael Sawan, executive vice president deepwater for Shell. “We need to make sure we play in the lowest end of that cost curve so that we can remain resilient when oil prices do go through the natural cycles that they go through,” he said.

In the early days of shale exploration, $100 was often quoted as the breakeven point. But as oil prices remained low and efficiencies improved, some wells could break even with prices as low as $30/barrel. According to figures from Rystad Reports, break-even oil prices for offshore rigs is around the $70 mark.

Transocean, one of the world’s largest offshore drilling contractors, is looking at ways to reduce those price points, according to Pete Miller, chairman of the company’s board of directors. “We were told by our customers nothing works in the 30s,” he said, referring to where the price of oil had fallen. “So we said OK, how can we make things work in the 30s? Because it might not come back.”

Looking at the shale industry and seeing how they’ve been able to improve efficiencies is one way. “How can we take the learnings of the land shales, take it offshore, and become much more efficient?” Miller asked. “If we can do that, it will help us move the marginal costs down. We’ll become much more competitive and economic. We need to make sure we’re looking at things differently as the offshore industry.”

This would give the oil majors more flexibility, but also make them want to play in deepwater, Miller added.

“We fundamentally believe that there is significant scope to improve the efficiency of the way we deliver our business,” Shell’s Sawan conceded. “Competitive growth is a must have. Unfortunately, from the years of excesses of $100/barrel, we have not taken advantage of efficiencies.”

The industry needs to do things cheaper, faster and absolutely safer, Sawan said, noting that Shell’s team in the Gulf of Mexico has been deploying continuous improvement methodologies for a few years. “They are trying to improve every single KPI that they’re working towards that ultimately creates value,” he said. It’s not about revolutionary change, but about better planning and the evolution of technology. “We have, as an industry, added layer after layer after layer of complexity. We try to peel off the last layer and say we’ve reduced 5 percent of our costs. That’s not enough. We’re going back now to begin to unravel some of that. We’re reducing the number of interventions by 30-40 percent in some cases. We’re focusing on where true risks are and where true value is.”

Transocean is emphasizing Big Data, Miller said, analyzing everything its crews do. “We break it down into many discrete steps,” he said. “Why is the crew over here in Angola better at everything than the crew in the Gulf of Mexico? How can we take the best learnings from here, here and here?”

There is also much to be learned by analyzing the data from all of the wells that Transocean drills—taking that data from around the world, synthesizing it, cutting it up into smaller pieces to learn, Miller said.

In one example, Transocean was able to achieve a 75 percent reduction downtime related to blow-out preventers (BOPs) through a collaboration with its OEM.

Collaboration needed

Aligning with customers on this agenda is important, Miller said. Transocean shares savings with customers—and also the risk. “We can really drive down the cost associated with a particular field,” he said. “Part of what we do is we’re going to have to be putting some risk on the table; some risk that we can share with our customers. If we can’t gain from that, then we’ll suffer for it.”

Internal collaboration is just as important, Sawan said, and needs to happen first. “To change the paradigms going forward, it’s about moving from silos to fully integrated collaborations,” he said. “As we become bigger and bigger companies, we functionalize more and more. The paradigm can only be shifted when the silos become fully integrated internally. Then that allows you to externalize what you’re talking about to many of our partners.”

Collaboration is key, GE’s Simonelli agreed. “Alone, we’re not going to achieve any of this,” he said. “We need to focus so much on collaboration and innovation.”

One of the biggest costs in industry relates to BOPs going down unexpectedly. Simonelli pointed to an example just executed the first quarter of this year in which a $700 million service and lease-back agreement guarantees BOP performance. Digital capabilities reduce downtime and operational expenses; and the customer, Diamond Offshore Drilling, only pays when the BOP is working. Up to 15 unplanned pulls in a year have been reduced to two. “We’re out there on the rigs making sure that there’s uptime on this blow-out preventer,” Simonelli said.

GE is working much more closely with its customers than it has in the past. Co-creation with Statoil is accelerating industry firsts—from concept to test in 30 months instead of five years, in one example. BP has been a strong partner on digital efforts, Simonelli said, starting with the connection of their 4,000 wells. “Now we are working with BP on a topside solution for reducing downtime in their offshore operations,” he added. “With a holistic, process-level focus, the solution will introduce new process surveillance and predictive analytic tools for early warnings of potential facility issues.”

The No. 1 cost in the offshore oil industry is inefficiency caused by unplanned downtime. Going forward, an ecosystem of mobile apps around the oil and gas industry “will make sure we can survive periods of low oil prices,” Simonelli said. “We need to take efficiency from 88 percent to 99 percent. We need to take an industry that is two to three times worse in unplanned downtime than other industries and bring it to the norm.”

Are we there yet?

The industry has a lot more work to do to successfully cope with lower oil prices, according to Miller. “We think we’re just scratching the surface,” he said. “We have to be able to drill in this industry in the 30s. Are we there yet? Nope.”

Citing an oft-quoted Wayne Gretzky line about skating to where the puck is going rather than where it is, Miller added, “As an industry, what we have to figure out is: Where’s the puck going?”

 

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