Recently, the 47th Engineering & Construction Contracting Association (ECC) Conference was held in San Antonio, Texas. The ECC is a community of industrial asset owners, contractors, suppliers and academics who share their knowledge and experience with each other in order to achieve better performance in the industry. During this conference, cost reduction was high on the agenda and three ideas, especially, interested me.
One of the main activities of the ECC is the annual conference. About a thousand visitors meet and listen to keynote speakers, as they did with this edition, as the former US Marine Corps General, Peter Pace and Ian Bremmer, founder and director of the Eurasia Group, a risk consultancy, spoke.
Projects under water
This year the theme was Complexity, Ambiguity, and Volatility: Leading in the New Normal. That’s a rather cryptic way to approach the subject of cost reduction. I know from my own work that this is indeed a hot topic in the oil and gas industry. It was shocking to learn that 30 percent of projects in Africa are currently under water. The reason is that these new constructions are estimated at an oil price of $70 per barrel, which is considerably more than what we are now looking at (less than $50 per barrel). These plants are often trying to exploit difficult to extract resources. A costly affair. The multinationals are able to spread the risk and, therefore, will not go bankrupt immediately. They turn the ‘expensive’ plants off and increase the production of the ‘cheaper’, read: older, production sites.
Three perspectives for cost savings
Yet this is not the strategy we should pursue in the long term. Eventually everyone, even the still profitable big energy producers, will begin to feel the pinch of lower oil and gas revenues. What solutions can we use to regain the historically high profitability of production? The ECC has some suggestions. These were the most interesting perspectives in my opinion.
We need to work more efficiently
Working more efficiently reduces costs. It is so clear, but for many years efficiency was not high on the agenda of the oil and gas companies. There was enough money, so they didn’t feel the need. Now is the time to succeed here. Companies are aiming to keep their OPEX under control. This is done preferably by not intervening ad hoc in operations. It is possible to do so, but it requires a lot of extra work and adds unnecessary difficulties. In fact, it is already too late at that point. It is more beneficial to invest everything in effective techniques at the beginning of a project in order to realize lower operating costs later on. This sort of attention will allow for the creation of a lean industry that can cope better with an oil crisis in the future.
We have to prepare better projects
The way we run projects should be done differently. Since the channels are still extremely long, budget and time overruns are common. Since time is (still) money, there is a lot of potential savings in optimizing the project development, simply because time savings make it possible to go earlier into production. However, time savings are a challenge because the industry is not accustomed to strive for the earliest possible completion of a new construction. The key to achieving this, therefore, lies in preparation. In the first phase, immediately involve all stakeholders in the project, including those who will have an interest much later on. Consider the operational maintenance managers and engineers who will be working at the new plant after completion. Combine the field development and feed stage and involve the solution providers to create the design and to help with the realization and maintenance, which will in turn help them take responsibility for any design flaws that come to light during maintenance.
My preference is strongly for this, more holistic, approach instead of reaching for old, tired methods. Now, for example, many companies work on a new project with a copy of an earlier draft. This saves design costs, but is not state-of-the-art and will prove more expensive to maintain. Specifically, a number of critical parts of an installation should be considered with this approach. Think of metering and allocation, the specialty of Hint. By looking at life cycle costs you are able to extract, in the most efficient way, the last drop of oil or gas from a reservoir and let your installation measure dollars, instead of volume or weight.
We must embrace digital technologies and train young people
Intelligent, digital technology for production plants and other factories saves us money in the long term. Firstly, because sites can run with less downtime, and secondly, because there is less staff needed to run them. An important role is played here by the younger employee. Every fifteen years a whole new generation enters the labour market. The next generation is currently ‘Z’, a group that has grown up with the internet and digital resources. But talented young people do not function well on their own in an industrial environment. They should be practically trained by the ‘old hands’. This doesn’t happen often enough and, meanwhile, the knowledge of the old guard disappears with aging and has not been adequately specified. Generation Z consists of the future leaders of our companies. We are dependent on them for the integration of new digital technologies in key processes. If we can achieve this, then the savings will follow.
Wouter Last, president Hint