The new year is the time to think about diets and abstinence – resolutions to temper the excesses of a blow-out Christmas.
At the start of 2015 the oil and gas industry is no exception. The annual GE Oil and Gas conference in Florence, Italy is an opportunity for the US engineering giant to showcase its latest plant and equipment to its customers. The company is one of the largest suppliers of equipment to the oil and gas sector: from turbines and compressors to drilling equipment. Big deals are normally done here with some of the leading lights in the industry.
But last year the oil price started to tumble. It's now hovering around $50 a barrel. Revenues in the sector have halved since they hit a high in June last year. The consensus is that lower prices are here to stay. As a consequence oil and gas businesses have to be restructured. Companies are making job cuts, scaling back activities and working with suppliers to reduce costs.
The mood of the conference is downbeat. Executives from the US, Europe and the Middle East are resolving to reshape the oil and gas sector to the reality of lower oil prices. From operators to engineering consultancies and suppliers, upstream and downstream – the view is unanimous, its time to tighten the collective belt.
Inspection of a GE turbine's combustion chamber
Most believe that the sector had become profligate because of the unrealistically high oil prices. Research from consultancy Ernst and Young has found that a shocking 64% of all oil and gas projects in the world are running over budget. Some 73% are running late. Neil Duffin, president of Exxon Mobil says: “The crude price makes it difficult to make money. We knew we were going through a cycle, we just got caught up in the environment we were working in.
“We can keep this industry running, we just need to learn to do it more efficiently. We need projects that can deliver profits over the long term, throughout the cycle.”
Costs can be cut through standardisation and the use of the minimum amount of kit in projects, says Duffin. Often, meeting a company's own standards and requirements adds cost to the supply of equipment, sometimes many hundreds of dollars. Duffin says: “Now we start with the minimum and justify what you have. In many cases it's not economic. We can make an effort to get the it right up front. That's not just engineering. It's having people with execution capability so you can execute right off the drawing board."
Bernard Looney, chief operating officer of production for BP says the company, which recently posted a 10% year-on-year drop in profits for 2014, has been going through a similar exercise in order to constrain suppliers. “We've looked at orders for 500 pieces of equipment that were BP specced. They were above the industry standard and were too complex. We now have to justify why we have to go beyond the industry standard. When that happens it should be the exception, not the norm,” he says.
The company is working closely with suppliers to tailor equipment for projects earlier and also looking at standardising plant as much as possible, a difficult task because there are so many different equipment specifications not just across the industry but even within individual companies. Standardisation has been talked about for a long time in the oil and gas sector and Looney likens efforts to reach parity to “ending world hunger”.
Another area Looney says the industry needs to cut costs is documentation. He says: “We've lost the plot with document tendering sizes. It puts cost in to the system that doesn't bring any reward. We're working to get these documents a lot clearer and simpler.”
The exploration and exploitation of oil and gas fields in remote places and emerging economies, so-called “frontier locations”, also adds extra costs to projects that need to be managed, says president of Exxon Mobil, Neil Duffin. “Things have got out of control because of indirect costs,” he says. “A lot of projects are now in remote areas. You have to fly people out there and camp them and train them. There's no point in doing a whole bunch of work there because the your indirect costs are huge. You need to modularise and build in intermediary places, then ship out and integrate.
“You put it on the ground, flick the switch and it's ready to go. That's where the industry needs to go, while still meeting local content requirements.”
Frontier projects also have socio-economic aspects that cost and need to be managed. Exxon Mobil has recently run a $19 billion project to build LNG production and processing facilities in Papua New Guinea. Rarely for an oil and gas project, it was completed ahead of schedule. Duffin says: “If you don't get the socio-economic aspects right it will kill your project. We have to deal with the local people and governments. In some places its complex, in other places not so complex. It was a huge part of what we did in Papua New Guinea.”
The processing facilities in Papua New Guinea took 4 years to build
The unscrupulous attitude towards cost cutting has not escaped the notice of suppliers to the sector. Orders in GE Oil and Gas' business fell 10% in the final three months of last year, as operators stopped buying new plant and machinery. This has resulted in job cuts and restructuring within GE Oil and Gas. The Oil and Gas business represents 15% of GE's total industrial earnings.
Lorenzo Simonelli, president and chief executive of GE Oil and Gas, says that the company is partnering with oil and gas companies to ensure that cost cutting exercises and technology matches. He says: “We've had a very volatile 2014, we know it will be volatile in 2015. But the macro outlook is that energy is required. We need the best projects at the right cost with the right environmental footprint.”
The oil and gas sector is getting over a christmas that hasn't stopped giving for the last decade. Now that's over, it has to get leaner and meaner to survive a new economic reality. But unlike most resolutions, the ones these executives and companies make, have to stick.