Lessons from the history books … how looking back can help us moving forward

The need for change and transformation in the way the oil and gas industry does projects has been io’s call to arms since its inception; it is precisely the reason why we were created. Change means to make or become different. But this need not mean that the only option is to undertake the activity in a manner that has never been done before. It is often said that history can teach us a lot about the present and the future. Looking back over the past few decades for the oil and gas industry, this adage could certainly be true as this is not the first time the industry has seen such challenging operating conditions driven by extended low oil prices.

Several of our previous powerful thinking articles have looked at how other industries have addressed similar problems to those currently facing the oil and gas industry. In a lot of cases, our own industry’s problems have been seen before and solutions found. Sometimes we forgot how we arrived at the answers for different reasons; perhaps because of the much discussed ‘Great Crew Change’, perhaps because higher oil prices meant the impetus to change petered away and we returned to our old habits, or perhaps simply we hadn’t engrained in our industry’s psyche some of the new solutions to age old problems.

A great example is considering the use of contractor alliances. These can be defined as arrangements between contractors who have agreed to share resources to undertake mutually beneficial projects. Alliances had become a tried and tested practice in our industry, particularly during the 90s following, at the time, historically low and stable oil and gas prices.

Perhaps one of the more notable Alliances was on BP’s Andrew discovery in the North Sea. Andrew lies 230km North East of Aberdeen and was discovered in 1974 [1]. As a small to mid-sized field with complicated geology, conventional development of the field at the time was uneconomic, a fact that resonates across our industry today. In fact, Andrew’s development remained uneconomic for two decades [2] when BP, buoyed on by the apparent success of an alliance approach on the smaller BP Hyde and on BP Bruce, looked for a different way of making Andrew viable.

BP looked to implement a behavioural change, to move from the usual separate, confrontational, operator / contractor negotiations to a more cohesive, collaborative structure. It was believed that a coalition consisting of the operator and likeminded contractors could achieve this. To facilitate finding compatible partners they approached the Alliance contractor selection using ‘Ten Minimum Conditions of Satisfaction’ (MCOS) [3] .

The MCOS consisted of:

  1. Commitment to the target development cost
  2. Proposal of a commercial basis and accountability for services
  3. Demonstration of continuous performance improvement programme
  4. Confirm availability of key personnel and their personal commitment to efficiency of the development. Abide by BP’s Offshore Contractors’ Charter covering the working environment and respect for individuals
  5. Adopt company quality and safety management systems which contain self-regulating mechanisms
  6. State preparedness for accountability in post start-up and logistics activities
  7. Pursue design philosophies and standards to deliver a safe, operable minimal intervention platform and minimise asset life cycle costs
  8. Possess a strategy for managing information throughout the lifetime of the field and across all parties involved
  9. Eliminate inefficiencies at all interfaces
  10. Establish relationships with suppliers and subcontractors which are aligned with the projects philosophy and which result in significant reductions in cost and delivery periods. The procurement process will produce quality and reliability, complete delivery, and will recognise BP’s obligation to comply with European Community legislation.

The vetting process resulted in the choice of a comprehensive alliance, ranging from pipelines to the construction of the accommodation modules. The chosen alliance comprised of:

Work scope Contractor Contract Type
Design, procurement and management support Brown and Root Fixed overhead and profit with man hours reimbursed at cost
Integrated deck fabrication Trafalgar John Brown (TJB) Fixed overhead and profit with man hours reimbursed at cost
Jacket Fabrication BARMAC Fixed overhead and profit with man hours reimbursed at cost
Platform Installation Saipem Fixed lump sum
Pipelines Allseas Lump sum + schedule of rates
Drilling Module Santa Fe Lump sum (engineer, procure, construct)
Accommodation module Emtunga Lump sum (engineer, procure, construct)

Table 1 – Chosen alliance details [4]

Contracts remaining to be awarded at sanction were equipment and material for topsides, jacket, piles and template.

The alliance contractors were asked to take responsibility for a percentage share of any cost savings or overruns that Andrew might potentially produce. The final agreed risk split saw the contractor group take a 54% share. BP took 46% of the resulting cost risk. A cap was put in place beyond which BP and their licensee partners would bear any additional overrun. Any savings that could be achieved on the target cost was to be shared at a similar percentage. Within the contractor group, the individual percentages constituting the overall 54% were agreed amongst the alliance members, both for the cost of the risk as well as the proportion of the reward [5].

An Integrated Management Team (IMT) was formed and a non-executive alliance board was set up, comprising a senior corporate representative from each of the eight alliance companies outside of the day to day running of the project. The board’s purpose was to offer guidance to the IMT regarding the projects direction as well as maintaining the commitment to Andrew’s goals within the individual corporate organisations.

At a level closer to the coal face, the project utilised a previously employed means of managing the interfaces. BP reintroduced budget responsibility officers (BROs). For each alliance contract a BRO was assigned to manage the interfaces throughout the project, assisting with technical and commercial issues which could impact the running of the alliance or the project. This interface also eased communication between the partners and helped both transfer innovative ideas and identify problems at an earlier stage than occurred on projects with a more traditional contracting structure.

Andrew’s costs were prohibitive at the £450 million estimates made prior to BP’s change of tack. Based on the alliance methodology and a revised forecast of £320 million, the Andrew project gained sanction in February 1994. In June 1996, at first oil, the actual costs were just below £290 million [6]. BP and its Andrew Alliance partners, proved that not only was the change necessary but that this drastic change in behaviour could be made to work beyond initial expectations.

Admittedly, BP was not alone in believing change in the industry was necessary.

Based on his experience with Amerada Hess and his belief in the need for change, Dr. Rex Gaisford started and initially led the ‘Cost Reduction in the New Era’ (CRINE) North Sea Oil and Gas Industry initiative. The CRINE report was presented to the industry in December 1993. According to Wood Mackenzie, the collaborative relationships and revised contract structure brought in by CRINE, led to a 30 % reduction in costs of subsequent projects [7].

However, in the “Cost Reduction in this Era” conference, held in London in June 2015, Gaisford expressed the opinion that,

“The policing of CRINE afterwards, we didn’t do well enough. There was a successful effort to develop standard construction contracts, but even this has now reverted to old ways with each project/company having its pet ‘standard’” [8].

Slowly, over time, cost saving in the UKCS has reverted to where it was before CRINE was introduced. How can the oil and gas industry learn from successful initiatives in the past and make them relevant in today’s operating context to get projects sanctioned? Today one of the many challenges faced by companies to get projects moving is how to finance them. Hence innovative financing techniques have become increasingly important since the oil price decline of the past couple of years. This is where we have seen the rise of consortia, which can be defined as an association or a combination of businesses, financial institutions or investors for the purpose of engaging in a joint venture. Consortia therefore by definition, relate more to investment than technical collaboration. Licensee consortia are a common means of ownership of offshore licenses. Contractor alliances are common for EPCI bids, though the use of consortia methodology to finance a project is more of a rarity in the oil and gas industry.

At io we believe a combination of alliances and consortia can provide a step change in the way the oil and gas industry develop projects to get marginal fields sanctioned. This is one of many areas where io is in a unique position to work with clients, having ready-made access to the resources and industry network of our parents’, GE Oil & Gas and McDermott. This, combined with io’s depth and breadth of full field development knowledge, is one of io’s key differentiators.

Financing external to the development licensee has been an optimal answer for several project reviews in which io has participated. This may be because the field is marginal, there is difficulty in raising capital in a traditional manner or for a variety of other commercial reasons (e.g. transfer of a production unit between fields with different licensee groups).

Access to GE finance and io’s contacts in the contractor environment, has allowed io to develop various consortium models where a combination of contractor companies raise the required finance to progress a project and recoup their costs and their profits, from a tariff or a production sharing agreement.

How is this similar to BP Andrew?

BP set a stretch cost target to achieve FID. This set the criteria against which the alliance partners would have to perform. Likewise, a consortium needs to be sure how much capital is required. This target must introduce greater certainty or it will not achieve acceptance by the prospective partners. To support greater certainty io use a number of techniques including reference class cost forecasting based on its parents and other industry partners cost databases.

By a similar token this financial realism must be founded on a fit for purpose technical solution. io’s breadth and depth of technical knowledge, combined with a holistic approach to full field development, allows for an appropriate and more certain development answer to be identified and validated.

On Andrew, ensuring the compatibility of the alliance members and their belief in a common goal, was achieved by a strict selection process. By understanding the key field development drivers and by having access not just to their parents but also to a variety of key contractors, io can identify the best fit, both technically and financially.
This is further supported by an in-depth knowledge of structuring Special Purpose Vehicles (SPV’s), of utilisation of Import / Export Bank’s supported finance and an understanding of Contractors financial objectives and technical capabilities.

Throughout all the stages of a project the devil is in the detail, a factor that is often lost sight of at the interfaces between contractors, between disciplines and between different activities during the phases of a project. BP addressed this by their use of BROs as a communication conduit between contractors and as a means of continuity. io offers a comparable facility given it is an entity independent of its parents and is capable of taking a holistic overview.

io employ a ‘start with the end in mind’ philosophy, looking at projects from a holistic point of view, working with operators and non-operators alike to get the best solution. Having this breadth and depth in technical, commercial and economics expertise allows io to approach projects as an operator does. By thinking like an operator, in addition to having deep roots within the contactor environment, io can offer a different way of moving projects forward based on an approach that BP and the Andrew Alliance employed when the industry faced the same cost difficulties in the 1990’s.

[1] http://www.bp.com/en/global/north-sea-infrastructure/Infrastructure/Platforms/Andrew.html
[2] https://www.kbr.com/Documents/Project%20Profiles/ProjectProfile_Andrew.pdf
[3] ‘No business as usual’, by Terry Knott
[4] ‘No business as usual’, by Terry Knott
[5] ‘No business as usual’, by Terry Knott
[6] https://www.kbr.com/Documents/Project%20Profiles/ProjectProfile_Andrew.pdf
[7] ‘What can we learn from CRINE’ – Digital Energy Journal, August 2015
[8] ‘What can we learn from CRINE’ – Digital Energy Journal, August 2015