Oil Price Downturn Requires a Closer Look at Project Cost
In a recent webinar, the speaker discussed mistakes companies make when prices are falling along with steps to help manage project costs in difficult economic times.
With low oil prices negatively affecting the exploration and production (E&P) industry, operators are trying to find ways to stay afloat financially. In this environment, it is important for these companies to control the rising cost of offshore projects, an expert said.
In a webinar, “An Agenda for the Lull: Coping Successfully in These Volatile Times,” held by the SPE Gulf Coast Section’s Projects, Facilities, and Construction study group, Neeraj Nandurdikar spoke about the mistakes that companies made in the immediate aftermath of the drop in oil price.
Nandurdikar, director of E&P practice at Independent Project Analysis, also outlined some steps that companies should take to help manage the cost of projects in the midst of an economic lull.
He said the market for capital projects hit its peak between 2012 and 2013. While the current decline in project activity is not a surprise, its abrupt occurrence caught the industry off guard, and businesses are unsure of the direction that the market may be headed. The fundamental reality with projects has not changed since the oil price downturn. There are still a few opportunities for international oil companies to develop the projects without a significant investment in technology or infrastructural development.
“If you’re a supermajor, a subsea tieback alone isn’t going to improve your reserve replacement ratio,” Nandurdikar said. “That’s not going to be enough. You’ve got to be looking for elephants. That’s what all the supermajors are looking out for now—the next big elephant—and it just happens that all the unexploited elephants are going to be in countries where there hasn’t been that much exploitation in some time.”
Companies responded to the volatility in oil price with actions focused on short-term gains at the expense of long-term success, with the following measures:
- Reducing capital spend for all businesses
- Cutting training for staff
- Cutting travel
- Massive reorganization
Nandurdikar said the industry’s reaction has been predictable. “These are very familiar things we have done,” he said. “We fall back to the same things, and those things … didn’t help us set up for the future, which is why we’re in trouble now.”
The best way for companies to manage project cost is through a complete understanding of the problematic trends in project management, he said. The capital expenditure per barrel of oil is on what he called a “relentless” climb. Projects are getting larger, overly complex, and overly difficult to operate. Experienced owners are retiring as the projects get more difficult, and industry layoffs may exacerbate a knowledge gap in the industry workforce.
Nandurdikar said he sees the low quality of work being produced as the biggest risk in the industry.
“The work quality we are producing is absolutely terrible,” he said. “Our work quality as an industry is very poor, and so far, our response to these trends has been less than adequate because, until the price [of oil] collapsed, nobody cared.”
Companies must ask themselves difficult questions to determine a path for surviving the market lull. The first question is whether the work being done on projects is necessary. More time is being spent in the definition phase and, Nandurdikar said, the results do not support the need for such an increase.
Another question is whether owner teams are doing the work of other entities, such as contractors. He said the number of contractor interfaces being managed by owners has steadily increased in the past 15 years, primarily because owners now fear their work will not be of high quality unless they use more of their own resources to oversee it.
“We have to ask the question, why are the interfaces increasing? Are we doing oversight for somebody else’s work because the work isn’t of good quality when it should be of good quality because we’re all professionals? Maybe we need to scale back the oversight, or maybe the oversight is required,” he said.
Nandurdikar said companies must learn to recognize “disaster projects” early, as they tend to clog the value creation supply chain. They should talk to people in the fabrication yards about what can be done to increase productivity. It is also important, he said, to figure out how to measure engineering progress and understand what constitutes low-quality work.
The webinar is available at https://webevents.spe.org/products/an-agenda-for-the-lull-coping-successfully-in-these-volatile-times#.