Since the oil price crash of 2014 many in the industry have spoken about the need for collaboration to reduce costs, standardisation and increased efficiency, even to the extent of supplier led solutions. This has evolved from technical solutions to collaborative contracting models from suppliers.
The topic of collaboration was forefront at this year’s Baker Hughes' Annual Meeting, and at CERAWeek in Houston. At the Baker Hughes Annual Meeting, BP’s Chief Executive, Upstream, Bernard Looney, stated:
“In a complex world, no one can do everything. We must trust our specialist partners. I call this collaborating for competitiveness” [1].
As Looney continued, “instead of buying the turbine, BP will receive it in a way that is similar to the power-by-the-hour agreements common in the airline industry. BKR will maintain the equipment [and be] incentivised by maximising availability”. This type of partnership allows the risk and reward of the Operator and the OEM (Original Equipment Manufacturer) to be aligned to common objectives and demonstrate “digital transformation, agility and a changed mindset” [1]. It can be seen how companies, such as BKR, are taking concepts from other industries, such as aerospace, and applying them to oil & gas.
BKR has also entered into other partnerships, which have led to innovation; such as digital fingerprinting, which has both reduced costs and improved safety by changing the inspection method (to scanning rather than breaking down a BOP (Blow Out Preventer)) reducing the duration of each task and therefore the time required for personnel to be offshore [10]. Louise Goetz (Europe Director Oilfield Equipment - BKR) stated
“in this context technology and commercial innovation are key to bringing our partnership with customers to the next level aiming to maximum efficiency, safety and on schedule deliver” [2].
These partnerships and collaborations allow different knowledge and skillsets to be brought to a project or a challenge, i.e. distributed problem solving, and the diversity of the team will increase in comparison to each company working alone.
“Diverse groups of problem solvers consistently outperformed groups of the best and the brightest” [12].
What is Diversity?
Most people when presented with the word diversity think along the lines of gender or race, however, diversity is better described as:
“Differences in how people see, categorise, understand and go about improving the world, this is cognitive diversity (who we are inside our heads) rather than identity diversity (who we are on the outside)” [12];
“Differences in perspective or information processing styles”[13].
It has been shown that diverse teams are better at focusing on facts; thinking more carefully about facts and are more innovative [8]. Gill Morris, Global Head of Talent Management at Jaguar Land Rover also said
“we really need that cognitive diversity to challenge the status quo and bring in those new perspectives and ideas” [4].
Furthermore, diverse teams bring benefits to corporate bottom lines [9]. However,
“more than a third (37%) of organisations said they were ‘not effective at recruiting for cognitive diversity’ which is a key predictor of positive team performance” [4]
and therefore collaboration between organisations may be a more effective means to obtain it. As cognitively diverse teams outperform the ability of individuals then collaboration within the industry, and across industries, is a means of outperforming a single company’s best and brightest.
Collaboration in Oil & Gas
If collaboration, through the use of cognitively diverse teams, is already proven to improve project performance in the execute and operate phases of projects then why is collaboration not being more widely used in the early phase of projects, i.e. Front-End Loading (FEL), when arguably the ability to influence the overall project success is greater? In fact, somewhat contradictorily, during the downturn in the oil & gas industry, many operators have taken work in-house rather than use consultants, which lessens the cognitive diversity of the teams and the financial performance of projects could be expected to suffer as a result.
What is Front-End Loading?
“IPA research has shown that project definition, or Front-End Loading (FEL), is one of the most significant drivers of project success. Well-defined projects cost less, take less time to execute, and operate better” [5].
In September 2017, a McKinsey and Company report [3] stated
“invest heavily in Front-End Loading but understand the limits…Front-End Loading does not guarantee success, but not doing it properly leads to certain disaster. Our experience shows that most failed projects had poor Front-End Loading”.
FEL is an established method that takes a deliberate approach to capital project planning and uses phases with stage gates. A good FEL methodology ensures that there is sufficient data, definition and economics prior to a project moving onto the next phase. It should also prevent bad projects from moving on; stopping a bad project is as much a success of an effective FEL methodology as moving a good project to the next phase.
In March 2017, the UK Oil & Gas Authority (OGA) reported that less than 25% of oil & gas projects have been delivered on time between 2011 and 2016, at an average 35% over budget [6]. The OGA [6] stated “generally speaking projects with high levels of FEL have more predictable costs, shorter schedules and better production attainment. Assessing FEL provides improved efficiency by aligning all elements of work in parallel, at similar levels of definition, to ensure better quality decisions. Benchmarking can confirm the readiness of a project investment decision and the appropriateness of cost and schedule.” Collaborating with an experienced and effective consultant brings both diversity of thought and rigour to a FEL application, which brings an improved chance of project certainty and success.
What is Decision Quality?
The Strategic Decisions Group states “Decision Quality (DQ) provides the defining framework for a good decision. It is an extension of Decision Analysis (DA)—a set of concepts and tools that produce clarity about the best choice in an uncertain and dynamic environment. DQ not only uses DA to get to the ‘right’ answer, but also engages the most important parties in the decision process to achieve alignment and commitment to action” [7].
DQ should therefore be inherently embedded in the FEL process to ensure that the correct project is selected and the level of definition is sufficient to move to the next stage of the process. Yet very few oil & gas operators, consultants or contractors use DQ with any rigour. Often there are fears that DQ slows the pace of the project or requires a large investment whereas the opposite is true (refer to the table).
Throughout the DQ process appropriate people need to be involved at the correct time, so that decisions can be taken which add value and avoid mistakes. One means of doing this is to ensure that a cognitively diverse and holistic approach, is taken to the formation of the project team and working methodologies. As Dr. Redelmeier, a physician researcher, stated, “Wherever there is uncertainty there has got to be judgement…and wherever there is judgement there is an opportunity for human fallibility” [11]; DQ seeks to remove this human fallibility and the biases that are brought to the decision making process.
Collaboration in Appraise (FEL1) and Concept Select (FEL2)
Collaboration in FEL1 and FEL2 should therefore incorporate cognitively diverse teams; including all the technical and non-technical disciplines that are key to project success, so that the project can be viewed holistically. By doing so, and incorporating methodologies that remove undue influence and biases such as DQ, ensures that the optimal business case is found within the solution space for each individual project while considering the unique factors that define the project.
To make better decisions a project must be considered in an integrated and collaborative manner, where the project economics are evaluated in conjunction with the subsurface, subsea and facility requirements. Too often in the oil & gas industry engineers are deliberately shielded from any cost or pricing data and yet are expected to make cost benefit decisions. Often the technical part of a project is over-worked in a separate silo to the commercial and the strategic aspects of the project. Technical “perfection” often makes for an uneconomic project and re-work in the guise of “cost reduction” or “value improvement practices” brings in additional engineering cost; how can an uneconomic project have the right technical solution?
Another clear driver for the economic viability of any project is understanding how the CAPEX will be phased and then recovered under the fiscal terms; which economic levers can be adjusted including project phasing; and whether a shift from CAPEX to OPEX will be advantageous. Whilst these aspects are often understood by individuals in a project team, it is only when a solution is developed in its entirety that the maximum benefit can be brought. This means that the optimal solution will vary region by region meaning that expertise in these areas, and knowledge of these differences, is critical to the project’s success; commercially and technically what is optimum in the North Sea may not be in the Middle East.
How does io make a difference?
By bringing together the holistic team at io, we can create, adjust or revise a field development plan together with our client to optimise the business case. By adjusting the reservoir depletion profiles or reservoir recovery strategy and aligning these to the number of wells; the sizing of the facilities; and the downstream systems, we optimise the project economics according to the client’s value drivers, whether this be to maximise NPV or, at the other end of the scale, minimise capital exposure. In collaboration with the client, we can establish a robust business case to move a development forward.
io Case Studies
One such example of this is a project where io developed a systems model of the development to integrate the team’s work within a single holistic model. This innovative approach developed a dynamic model linking reservoir depletion, facilities sizing (including installation of new compressors) and economics to establish the optimum sizing of a new compression platform to maximise the value to the client. This project was thought to be uneconomic before io’s involvement, following io’s work in 2016, the project continued and is now nearing FID.
In this project, it was critical to optimise the facility design capacity with the production profile to construct the business case that maximised the project value. The figure below highlights that the P50 profile, as delivered by the subsurface group, was used as a starting point for the study. By integrating the subsurface, developments, estimating and economics groups an optimum facility flowrate (#1 Opt rate) for a given concept was developed and the potential lost value (#1 lost value) recovered. However, each alternative concept had a different optimum facility flowrate. Here we demonstrate one example of an alternative concept, which has a higher optimum facility flowrate (#2 Opt rate) and a higher potential lost value to be recovered (#2 lost value).
Another project example is one whereby, in collaboration with the client, io revised the reservoir depletion strategy for an onshore greenfield development from pressure depletion to water and gas re-injection. io’s study increased the overall recovery from the reservoir in the licence period by optimising the plant throughput and improved the NPV by 150% on the operator’s base case. Reservoir risk was also mitigated by an early production scheme. In this study, the solution space (plateau rate vs development scenario) was large and many different facilities designs could be utilised with varying the phasing of the project to optimise the business case.
Why use io?
The UK OGA states that “if sufficient FEL is not undertaken, there are two main drivers of lost value: selecting and executing the wrong project (even if it is executed well); and changes required due to an incomplete level of definition subsequently impacts execution resulting in cost/schedule escalation” [6].
Other research has shown that the most successful companies create opportunities where people from different backgrounds, cultures, and perspectives, i.e. cognitively diverse, come together to challenge assumptions and explore new ways of doing things; this is known as the Medici Effect.
The result is a significant increase in creativity and innovation and it benefits the bottom line. “Innovation is springing not from particular industries or disciplines, but rather across them” says Frans Johansson, author of The Medici Effect: Breakthrough Insights at the Intersection of Ideas, Concepts & Cultures.
At io we bring a cognitively diverse and integrated multidisciplinary team to each of our projects, incorporating experts in subsurface, developments (facilities, subsea and marine), environmental, decommissioning/asset life extension, cost estimating and economics. Our experts have career backgrounds in operators, OEMs, EPC (Engineering Procurement and Construction) contractors and consultancies and have expertise in all phases of project development from due diligence, M&A and appraisal through to EPCIC (Engineering, Procurement, Construction, Installation & Commissioning), performance testing and operations. This ensures we have a highly diverse range of viewpoints and expertise on all projects and allows us to maximise the collaboration with our client teams.
Together with our clients, we assess the unique value drivers for each project so that jointly we can develop a business case that meets their needs strategically, technically and commercially; we recognise that most problems occur in the commercial and strategic space. We embed DQ within our projects to mitigate biases, so that we understand the trade-offs we are making and that there is sound reasoning for our conclusions and recommendations. We utilise up to date market pricing from both our parent companies. Additionally, we have access to the latest innovation and technology development in the industry both from our parent companies, as well as other technology vendors and licensors.
[6] https://www.ogauthority.co.uk/media/3380/oga-lessons-learned-from-ukcs-oil-and-gas-projects-2011-2016.pdf
[11] Redelmeier, Donald A., and Amos Tversky. “Discrepancy between Medical Decisions for Individual Patients and Groups.” New England Journal of Medicine 322 (1990): 1162-64
[12] Page S. E., The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies, 2008