Investing for savings

New opportunities in a changing oil & gas market

I recently attended the Offshore Technology Conference (OTC) in Houston, the largest oil and gas conference in the world, where just about every end-user and supplier from the offshore energy market was running around. It was, therefore, the perfect place to listen in on the most significant concerns, which included essential themes such as cost savings and efficiency. However, action here is often about quick wins, while a clear, long-term strategy could yield much more.

At the moment, the low oil and gas prices are top of mind since the pricing has direct repercussions on projects in the industry. Many missions are on hold, and new projects are starting more slowly. Oil and gas supplies are still available but are often difficult to extract. The raw materials are located deep in the sea, or the circumstances in which they can be found are extreme. Exploitation is thus expensive because it requires costly technology. Of course, there are still plenty of parties here who are benefiting. Right now, a weak dollar makes doing business with the US favorable for European companies. Trading with the Americans is currently about 30 percent cheaper than it was in the past.

While companies, on the one hand, are struggling with the economy, on the other hand, there is still room elsewhere for development and growth. The popularity of Liquid Natural Gas (LNG) is a good example. LNG is increasingly popular, and as it happens, is a specialty of the Dutch. The increasing demand for LNG is also accompanied by LNG measuring systems and other related technology. Because it is a relatively new fuel, there are almost no standards in this booming business. Plenty of workarounds then for engineering companies.

LNG has significant advantages. The transport is relatively easy, as it can be shipped, and, for countries with no energy resources, it is a godsend. Many emerging economies have to rely on energy imports to meet their demand. Transport through pipelines is, in many cases, either impossible or very expensive. An LNG carrier may offer an excellent alternative to get gas from A to B, but more is it. To transport the gas through cooling, it must first be liquefied and then heated again at arrival. LNG also calls for new installations, both on land and offshore. All in all, a more expensive operation than when you withdraw the natural gas from a gas bubble in the traditional way.

So, how can a profit be made from LNG? The key is to cut costs and operate more efficiently. For this, you need to invest in innovative systems and installations. Especially now, at a time when we are at the height of the economic crisis. The recession should be bringing new techniques to optimize operations. I plead for countercyclical investments in preparation for when the market picks up again, permanently. By using more innovative solutions, operators will be able to do more with fewer people and thus, save money. This is also sensible given the disappearance of all the workplace knowledge lost to an aging population. Put this knowledge into intelligent engineering tools so that the younger generations still have access to the necessary tools.

Preferably, investment has already begun in the first stages of development for oil extraction in a new place even though the tendency here is to save on investment. However, this is only beneficial in the short term. A large amount of the expenses will come only when the factory is in use. Maintenance costs of a factory and its expected lifetime upkeep are often not included in its construction costs. A new development is charged in the CAPEX and sits on the balance sheet, while maintenance belongs on OPEX. If the two budgets are integrated, and innovative techniques are bought together initially, this can result in cost savings for future decades. Upgrading a plant once it is built is much more radical and costly. Fortunately, this longer-term view is increasingly espoused by clients and can be seen in projects in Saudi Arabia and other countries in the Middle East already. It’s now a best practice but will be common place in the future.

Wouter Last, president of Hint