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Lloyd's Register: Lower prices force change

Today's low prices must result in long-term improvements to the way the energy industry does business

Desperate times need desperate measures and there are signs that the oil and gas industry is collectively responding to the new price environment, according to the second edition of Lloyd's Register’s second Technology Radar report, published in November.

The oil price has more than halved since the technical consultancy’s spring 2014 survey; and this is the first time that many executives have had to deal with a price fall of this magnitude.

But while interviews that the consultancy conducted with the industry revealed a major drop in innovation initiatives, with three quarters of the respondents admitting their companies have slowed or halted them altogether, they have typically been in expensive, longer-term plays. Less affected by the austerity measures have been those initiatives focused on achieving short-term gains through lowering costs and raising efficiency. “This is evidenced for example in their greater openness toward collaboration with other firms, and their receptiveness to crossover technologies from other industries”, reads the report. It finds that a sustained period of low oil prices can erode the conservative attitudes toward innovation that have long been evident in the upstream oil and gas industry.

“This sector is operating in a new era and a new environment. The current industry conditions are not a repeat of an earlier cycle: this is different and so we all need to do things differently. Some of the challenges we face may look familiar: increasing efficiency and competitiveness, securing access to the right skills and above all protecting life and the environment. But the dynamics have changed”, the report says.

However, the industry draws the line where commercial gains are concerned, according to a delegate at a Technology Radar briefing session hosted by LR. Collaborating on health and safety is one thing; but anything related to wells and drilling could be off-limits, he said. “If you’re at the cutting edge of technology and early on in the development, you just won’t want to share or collaborate because you’d be exposing your IP and capability which could be stolen or copied. You’re more likely to collaborate when you are further along.”

Speaking to Petroleum Economist in early November, LR's group energy director John Wishart appeared to agree. “Companies are used to putting one over their rivals and so it would be a big leap to go from that to one where they are all part of one big happy family. But the oil price challenge is not a blip and it needs a different approach.”

Necessity being the mother of invention

Wishart said that there was a precedent for a rethink of the way the industry did business. The crash in the late 1990s gave rise to a new approach to the UK offshore: Cost Reduction Initiative in the New Era. It led to the Industry Technology Facilitator, a group of company representatives set up to benefit the industry. It happened because the low oil price forced a new contractual way of doing business in the North Sea. “And some of that needs to be dusted down again,” he said. “Historically, we have seen dips before but there has been the general acknowledgement that they were only temporary and prices will come back up again soon. But this time it is different.”

Much has been made of the deep hole the industry is digging for consumers by deferring final investment decisions. But Wishart believes that this sort of analysis could be missing the point, thanks to technology.

“There are grounds for believing that average recovery rates from a field could rise from 35% to 70%, meaning we need not look for anything additional for the next 30 years or so.

And even though some of the booked reserves are expensive to produce, such as tar sands, there is a range of costs even within that sub-sector,” he told PE.

Low oil prices should also drive innovation in data and digitisation, Wishart says. As well as improving seismic analysis, large-scale data collection through the use of remotely-operated vehicles and the use of drones could enable action to be taken before technical problems can develop. The oil and gas industries are lagging behind in this regard. Rigs could be fully automated.

The so-called “data of everything” is already happening in the power-generation sector. It allows a holistic approach so operators can look across the different systems and see how much electricity is generated, by which fuel, where it is consumed, and when. But this again does not fit with a conservative industry: it needs more people who are more comfortable with data.

One size to fit all

Standardisation is the holy grail and it will eventually bear fruit, as it has in the automotive sector which Wishart says has become very good at designing new vehicles while using standard components.

Companies will look at the whole process of building - say a refinery - and come up with recommended practices and then can simply ask how much capacity they want of which type of unit. At the moment there are different safety regulations in different countries. More variations on a common theme mean more costs and more time in the shipyards.

Lloyd's Register, which classifies vessels, is working with the industry on a technical committee to produce standards for complex offshore assets such as floating LNG plant which will also bring advantages to the marketplace.

It is one of the baby-steps that will ultimately lead to plants that are simpler to build and so bring revenue faster to host governments, operators and contractors, Wishart says. “Everyone has a bit of skin in the game. The International Maritime Organization can work on cross-border collaboration as well.” 

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