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C O M M E N T David Paganie • Houston
Efficiencies key to unlocking
offshore project value
Walking the halls of the largest oilfield conference and exhibition last month in Houston, it was evident that the offshore industry is still a long way from the solution to its
broken economics. Service company initiatives, as discussed in past issues, are aggressively attacking the structural changes that are needed. Collaborative efforts, such as
DNV GL- and ABS-led JIPs, aim to improve industry procedures by establishing new
recommended practices. The recently launched “Standardization Unified Joint Industry
Project” is a group of 14 companies with a one-year remit to establish industry standards
for offshore engineering. Operators are taking a hard look at their internal processes.
Meanwhile, the industry-wide cost cutting measures – staff reductions, travel restrictions,
supplier and service discounts – continue. These approaches may help in the short term,
but the fear is that the industry is already reverting to old habits. The industry must adopt a
new way of thinking to sustain it for the long term. Indeed, easier said than done. Other wise,
offshore projects will struggle to compete for capital and other resources with lower cost
plays (see page 10 for Rystad Energy’s global liquids cost curve and breakeven analysis).
Finding efficiencies early in a project is gaining momentum as a means of reducing
costs.Capital project management firm Independent Project Analysis (IPA) believes that
the only viable, long-term, solution is to make projects simpler; i.e. easier to design,
build, and manage. “We believe that offshore projects have become far too complex and
that the industry has been routinely over-scoping these projects because it appeared to
make sense in a $100/bbl world in which getting any upside potential would be quite
valuable,” says Edward Merrow, president and founder of IPA. “In the current lower
price environment, lean scopes need to be the order of the day,” he says.
To help illustrate this point, IPA compared two development options for a hypothetical 100-MMbbl reservoir. Strategy 1 delivers a high production peak and a rapid decline.
Strategy 2 delivers half the production rate in the early years with a gradual decline. The
recoverable volumes are the same for both strategies, but the associated capital investments are not. The peak production strategy, 1, requires more wells, a larger facility
throughput, and larger pipelines too. Considering the present value of the two alternatives, this high rate/high investment scenario looks to be more attractive because the
early production is much more valuable than later production, especially when commodity
prices are high. This is the approach that the industry has been chasing over the past 15
years with high oil prices justifying oversizing facilities for higher depletion intensity, IPA
observes. However, the firm notes that while the marginal barrel may be NPV positive, it
is less capital efficient. Now that the industry faces a lengthy period of low oil prices, IPA
contends that Strategy 2 is the production rate that the industry ought to chase.
The findings of a paper prepared for OTC last month, “Energizing Worldwide Oil and Gas
Developments,” agrees with the premise that project design inefficiencies played a leading
role in the period of cost escalations. The paper references a McKinsey & Co. analysis that
compares the cost of a deepwater floating platform in the North Sea in the early 2000s to a
functional replica of the project designed in 2013. The study found that project costs increased
2-3 times on a like-for-like basis, and that more than 70% of this capex escalation was due to
inefficiencies and new regulatory requirements – not commodity costs or supplier margins.
Standardizing and simplifying specifications for project scope, material, and equipment
has the potential for significant cost savings. Shell’s Appomattox achieved a 20% cost reduction pre-FID on account of this approach and other supply chain improvements.
Standardization can be extended to full platform designs as well, as Anadarko and
LLOG have proven with favorable results. Anadarko used its “design one, build two” philosophy for its Lucius and Heidelberg spars in the deepwater Gulf of Mexico. Replicating
the design reduced engineering man-hours and the cycle time to first production. LLOG
also used a similar platform design for its sequential deepwater GoM projects – Who Dat
and Delta House – to reduce costs and accelerate cycle time. While the Anadarko and
LLOG approaches are different, they share design efficiency as a key project enabler.