North Sea collaboration shot
Report suggests that UKCS actors are slipping back into bad habits
UK North Sea industry regulators have warned of consequences for the future of the basin unless behaviours improve more quickly, after a report measuring collaborative behaviour across the UK continental shelf (UKCS) oil and gas sector revealed a decline in performance for the first time.
The fifth annual Collaboration Index, by trade body Oil and Gas UK (OGUK) and financial services firm Deloitte, cautions that the North Sea could face returning to “old ways” that resulted in costs escalations and skills shortages. It further warns that the problems detailed in the report could hinder ambitions to transform the basin into a driver of the UK’s net-zero carbon economy. Plans for decarbonising the North Sea having recently been set out by both the OGUK and the industry watchdog, the Oil and Gas Authority (OGA).
Sir Ian Wood, whose landmark report published in 2014 set out directions for the troubled sector’s survival, admits it is "surprising" that the collaboration he called for had fallen back for the first time in five years. Collaboration amongst operators and the supply chain was a key plank of the UKCS Maximising Economic Recovery (MER) review, which led to the establishment of the OGA as well as a raft of task forces aimed at transforming the sector’s ways of operating.
The report of 262 industry members says there has been “plenty of talk but less action” when it comes to demonstrating the desired collaborative behaviours. The reduction in performance was due to "fatigue" amongst the supply chain, who were fed up with the cost cuts imposed by operators in the wake of the oil price crash of 2014, according to Emily Taylor, OGUK’s continuous improvement manager.
“There is now evidence of a very significant mindset change towards collaboration,” Sir Ian Wood
"What we heard is suppliers are tired of the long cost reduction programs they endured throughout the downturn,” says Taylor. “They thought they had been listening to operators and reducing prices. They listened to requests for innovative ideas but did not see returns they needed to maintain investment in future products and services."
Buck stops at the top
Phil Kirk, chief executive of Chrysaor, the largest privately-owned North Sea operator, blames leadership failure for the decline and calls for more openness. “We talk about permafrost and layers in the organisation. I would lay blame back at doors of leadership,” Kirk told a panel at the launch of the report.
“It is not acceptable to talk and set targets. You have got to get out and show people that you want to hear the good, the bad and the ugly, and you will not get shot if it is bad.”
The Collaboration Index shows a marginal decrease from 7.1 in 2018 to 7.0 in 2019. Nevertheless, the survey reveals “strong support for collaboration”, with more than 90pc of respondents saying they had been “committed to working collaboratively” over the past five years, 89pc reporting that they work collaboratively “every day”, and 91pc say they are “taking strategic steps to do so”. The report identifies private equity-owned oil and gas operators as largely better at collaboration than their state or shareholder-owned peers.
The report finds “misalignment of expectations” between operators and suppliers cited as the leading cause of collaborative failures over the last five years, while “power imbalances” was also a significant cause. However, the report’s authors conclude that the latter problem was “perhaps not that surprising” as operators have been more likely to be working with tier 2 suppliers lower down the food chain in recent years, while there were also more medium-sized companies responding to the survey this year.
A combined 48pc of respondents said that legacy organisation, ways of working and bureaucracy hindered closer collaboration.
Increased use of digital technologies is seen as one way to accelerate the speed of improvement. However, the survey finds that only 52pc of operators say they have a digital strategy, compared with 71pc of suppliers.
Back in the old routine
“While support for collaboration has increased over the past five years and there are some great examples of operators and supply chain finding more collaborative ways of operators working together, barriers remain to it being consistently applied across the UKCS,” says Graham Hollis, a partner at Deloitte in Aberdeen. “Further empowerment and incentives to encourage and reward collaboration across all levels of an organisation, combined with investment in digital infrastructure and talent, is now required to push further.
“The last five years have been a challenging time for the industry. However, with cost reduction continuing to be the main reason for collaboration and activity continuing to pick up in the basin, it is also important the industry does not slip back into old ways of working.”
Increased use of digital technologies is seen as one way to accelerate the speed of improvement.
The report highlights case studies of best behaviours and remedies for the problems, including a list of agreed supply chain principles, while an improved approach to contracting is the most significant theme.
“What we are potentially starting to see more of is a fresh look at some of the contract arrangements that have historically been difficult to change,” continues Hollis. “What we are seeing is some good examples of where a new mind set is being applied to contracts in way that provides financial incentives to both sides and generates real value through greater operational uptime. That is the way to do it—a fresh approach to legacy contract arrangements that tend to be overly complicated.”
Collaboration is essential if the North Sea was to take part in energy transition, according to Steve Phimister, vice-president at Shell. “I do not think there is a bigger challenge of our time. No single entity—public, private or otherwise—can crack this thing on their own. It is impossible. If that is not the reason for collaboration, I am not quite sure what is.
“The challenges are huge but the opportunities that go with it are significant. Economically, making a shift in our investment towards energy transition and net zero is loaded with difficulty,” says Phimister.
“With CCUS, hydrogen and electrification at its heart, it is going to take our supply chain and oil producers working together to crack that. We are really going to have to go above and beyond. Just like collaboration in our normal oil and gas business, it is going to be about leadership, our behaviours and our innovation.”
“There is now evidence of a very significant mindset change towards collaboration, particularly between operators, as a result there are really good projects proceeding that otherwise wouldn’t take place, so it is surprising to see the slight decrease which may well be due to increasing attempts to involve the supply chain,” says Sir Ian Wood.
“The good news is we are totally moving in the right direction, although there are still areas to address, especially as we move towards low carbon and integrated energy including wind, hydrogen and CCUS.
89pc reported that they work collaboratively “every day”
“There is absolutely no danger of complacency—we realise how important UK energy resources are, including oil and gas and now renewables. The northeast of Scotland is fast becoming a global energy capital, applying our significant capabilities and innovative technologies to reduce carbon emissions. We have the skills, knowledge and strong track record to turn the challenge of climate change into an opportunity.
“Increased collaboration on the UKCS is crucial to creating a competitive integrated energy transition cluster in the region, and the industry is making good progress.”