Reducing the complexity and controlling the cost of major offshore projects are together one of the biggest challenges facing the oil and gas industry. The collapse of oil prices has only accentuated the issue, which was already evident when prices were still at USD 100/bbl. To combat the problem, operators are looking at ways to standardize and simplify projects globally as a means of expediting design, construction, installation, and startup; reducing costs throughout the process; and creating safer, more predictable, reliable facility operations.
The scale and complexity of many deepwater projects have driven costs out of control, despite the cyclical pullback of the past 2 years that has reduced the number of active projects and caused equipment and service providers to cut prices.
An analysis of 400 major projects executed in the last 5 to 10 years, cited by Jim Nyquist of Emerson Process Management in a presentation at the IHS CERAWeek conference in Houston, showed a 65% failure rate based on cost overruns of at least 25% or schedule overruns of at least 50%.
Focus on Capital Efficiency
Many of the projects analyzed were launched before the breadth of the shale revolution was apparent. In a future offshore market recovery, in contrast to prior upturns, potential major projects will likely be evaluated against highly competitive shale development plays in the quest for investment funding. The focus on capital efficiency will be even greater, which is why increasing standardization across global projects is likely to become an essential competitive strategy for major offshore operators irrespective of market conditions.
Probably the broadest initiative so far to push for global standardization in upstream development activity is Joint Industry Project 33 (JIP33), facilitated by the International Association of Oil & Gas Producers (IOGP) and supported by the World Economic Forum (WEF), whose “Capital Project Complexity” workstream is being used throughout the project.
The workstream’s core focus is on improving industrywide noncompetitive collaboration aimed at the standardization and reuse of procurement specifications that build on industry and international standards. In doing so, the oil and gas industry could decrease project costs and improve schedules. Moreover, the industry would likely capture a number of additional benefits, including improved engineering efficiency, enhanced equipment reliability and quality, and increased safety.
JIP33, which was launched in November last year, includes 17 companies that represent a cross-section of the global upstream industry: BP, Chevron, Engie, Eni, ExxonMobil, Maersk, OMV, Pemex, PTTEP, Repsol, Saudi Aramco, Shell, Sonangol, Statoil, Total, Wintershall, and Woodside.
Operators Overspending
Operators across the world are spending much more than needed on developing capital projects,” said Gordon Ballard, IOGP executive director. “Following an IOGP benchmarking exercise in 2014, we realized that despite decades of API, ISO, and industry standards work creating thousands of standards across the industry, operating companies still tend to develop and hold onto large volumes of their own specifications.
“These bespoke designs supplement the industry and international standards and create further engineering cost and schedule implications for operators and contractors.”
Company specifications of this type are often referred to as preferential engineering and sometimes more pejoratively as gold-plating.
Industry Erodes Value
“The industry has been eroding value by creating bespoke components in each of our projects and in doing so has missed the opportunity to leverage industry-level standardization,” said Ian Cummins, head of upstream engineering at BP and chair of the JIP33 steering committee. “Standardization is a huge benefit. Everyone is clear about that. Other industries reflect standardization—the aviation industry, the automobile industry, and shipping. And we’ve progressed it within the oil and gas industry, but one might argue not to the same level.”
JIP33 is focusing on the standardization of equipment and bulk materials (components), which represent the building blocks common to major projects. To prove the concept, the JIP is developing standardized equipment specifications for the procurement of several components: ball valves, subsea Christmas trees, low-voltage switchgear, and piping and valve materials, which were recently added to the project scope. This effort will be completed by year-end and will incorporate supplier feedback.
A draft document on the industry culture change needed for successful standardization was discussed at a June WEF workshop and has been finalized.
The objective is to show that these specifications can be standardized across the industry at the component level to give impetus to standardizing them for the vast array of components used in oil and gas projects. With success at this level, standardization could expand to packages (subsystems), modules (systems), and eventually projects themselves.
Looking at Procurement
Procurement specifications represent the document package that an operator sends to a vendor to obtain a potential bid. If those specifications for a component are standardized, for example, the components delivered will be standardized.
To focus on standardizing procurement specifications is to attack the problem of bespoke designs and preferential engineering at its source, as Cummins explains about BP’s efforts over the past several years to increase project standardization internally.
“In BP, we were spending millions of dollars per major project recreating procurement specifications based on interpretation of our design standards,” he said. “We saw different projects ordering the same equipment—at the same time from the same supplier—with different procurement specifications. And it was not just those specifications, we asked for different documentation and different inspection and test requirements.”
Avoid Reinventing the Wheel
“This was literally destroying value from the outset,” Cummins continued, “spending money reinventing the wheel. And this affects your ability to consistently engineer reliable facilities that start up and stay up.”
To address the lack of consistency, BP has developed a suite of standardized procurement specifications that now number more than 300 and continues to grow as additional specifications are written. The specifications, with supporting quality and documentation requirements, are based on company and industry design standards and are used across projects companywide, supplemented only by specific project data.
As internally standardized specifications have been developed, the company has benefited by seeking direct feedback from its suppliers.
“In a downturn, we traditionally turn to our suppliers and request cost reductions, and we must continue to challenge these costs,” Cummins said. “However, we can also jointly challenge costs by challenging our requirements, where we have gone beyond good practice and, in the supplier’s view, required things that do not add to the safety, integrity, or performance of the equipment. Using this insight, we can remove inefficiency in our project execution, and with this approach we are good for all seasons.”
Standardization of procurement specifications, Cummins noted, holds benefits at a number of levels.
- Procurement cycles become shorter, with improved, more predictable schedules. For example, BP has reduced its typical bid evaluation period for major rotating equipment from more than a year to less than 6 months.
- Direct savings amounting to millions of dollars per project result from using the same specifications rather than rewriting them.
- Significant, often greater savings result from eliminating unnecessary costs related to preferential engineering.
- Removing unnecessary requirements, inconsistencies, and features reflecting preferential engineering leads to fewer fabrication defects and reduced risk.
- Engineering teams can focus on optimizing design rather than rewriting procurement specifications.
- A consistent language emerges on technical requirements, which engineering teams can use globally across the portfolio of projects.
- A common global learning platform takes hold so that lessons captured can be fed into future projects by updating the specifications.
The ultimate success of JIP33 will depend on whether the procurement specifications it develops are put to use by companies and the push toward standardization continues. Ballard is hopeful. “With support from our members’ own senior managements, and the value of the input provided by the WEF, we are optimistic that this effort will succeed,” he said. “The economic benefit will probably become evident several years down the road, as we actually see equipment delivered more cost-effectively. But the prize is very big and worth waiting for.”
Overcoming Cultural Barrier
The biggest barrier to moving toward standardization may be cultural. “It’s not so much the technical side of it. That’s pretty straightforward,” Cummins said. “I think that all operators have got to, from the top down, embed a culture of standardization and collaboration, which is actually quite challenging because trying to align technical experts can sometimes be difficult. And that’s not a criticism. They’ve got many years of experience and learnings. It’s pulling that team together into a room and having that discussion to get that standard going forward.
“What we don’t want, though, and we’ve got to be careful,” he continued, “is that when we standardize a procurement specification, we just include the minimum requirements that all the operators agree on. That way, the operators individually are likely to take it and add their own requirements, and the supplier will again see different specifications coming in. So the process is about agreeing on the whole specification.”
In the end, operators want the same thing, projects that are managed safely, start up on schedule, and stay up. And operators need to ensure that future projects that can meet those objectives are economically viable. Standardization holds the potential to achieve large cost savings, improve schedules, and reduce risk. If embraced, standardization will bring a cultural change in which standards will form a global framework to shape and drive all projects and collaboration across companies.
“We are an innovative industry,” Cummins said. “Why not be innovative and standardize?”