‘Cookie-cutter’ wells may drive down offshore drilling costs
Like snowflakes, every offshore oil and natural gas well is different, but unlike a snowflake that is naturally unique, the bespoke nature of an oil rig is a function of corporate pride and engineering egotism.
Making every oil well different also drains shareholder value for no legitimate reason.
Industry accountants have complained for decades about how each engineer puts his or her own stamp on a well, but finally the sudden drop in oil prices has some executives calling for standardization. Not only within their own companies, but across the whole industry.
“We are literally destroying value at the outset, spending money reinventing the wheel, and it affects our ability to consistently engineer reliable facilities and start up on time and stay on it,” Ian Cummings, head of upstream engineering at BP, told a panel Monday at the Offshore Technology Conference. “I believe the solution lies in standardization.”
If there is a buzzword in the offshore drilling world at the moment, standardization is it. The word was bandied about by CEOs at IHS Energy CERA Week last month, and now top engineers are using it at OTC. Speak to the oil field services companies that make the equipment, and they are hoping to finally capture an efficiency of scale that was impossible when every valve and every fitting had to be slightly different on every project.
“If you really want to cut costs, standardize on our specifications, standardize on a couple of configurations that we sell
regularly, use the same partners and we can take 20 percent to 40 percent off the price,” Brad Breitler, vice president of technol-
ogy at FMC Technologies, told me.
Investors push standardization to bring down costs and improve profits.
“Used to be everyone wanted their own special design and their own special stuff, which is all good when oil is $120 a barrel, but it doesn’t work when oil is $60,” Marshall Adkins, an oil and gas analyst at Raymond James financial advisers, told me. “I think what you are going to see in the business as a whole, and the majors are pushing this, you squeeze out a lot of those extraneous costs.”
This is incredibly important to the offshore oil industry. Corporations have spent billions on offshore rigs and acquiring expensive leases around the world in anticipation of sustained high oil prices. But a glut of oil from hydraulically fractured wells in North America and weakening global demand have sent prices tumbling more than 30 percent since last year’s conference.
Before 2014, major oil companies like BP made investment decisions expecting that oil on the global market would not drop below $85 a barrel. Brent, the international benchmark, is now trading in the $60s.
One reason for the success in fracturing onshore wells is that operators have turned it into an industrial process. The oil fields operate like factories using largely standardized equipment, bringing costs down 20 percent to 30 percent, according to most industry estimates.
Oil that once needed to earn $75 a barrel to break even now makes a profit at $55. That kind of industrial process could bring down the cost of offshore oil.
“Most of these offshore projects could take a standardized, cookie-cutter version and adapt it with minor changes to make it work,” Adkins said. “If break-even used to be $80$85 a barrel for oil (at Brent benchmark prices) and you lower costs by 30 percent, then all of a sudden you are back to making good money at $65-$70.”
Just simplifying the purchasing process and reducing the paperwork can save millions, Cummings said.
“On every major project, we’ve been spending $12 million to $15 million recreating procurement specifications based on interpretation of our design standards and it contributes to projects that are not engineered to value,” he said.
The problem, though, is that engineers and oil field service companies make their marks by doing things differently. For years, management has been pushing for standardization, but engineers have argued that every well is unique, or that their way is better. A custom well is a source of pride.
“There needs to be an alliance between senior management and the engineers to get this going,” said Roald Sirevaag, vice president of subsea technology and drilling at Norway’s Statoil.
Oil field services companies also are forming consortium, such as one between FMC Technologies and Technip known as Forsys Subsea, to standardize products. On Monday, Baker Hughes announced a trademarked system for ultradeepwater drilling that for the first time standardizes the 58 processes that go into drilling a well.
Standardization is not a new mantra, but it could be an idea whose time has finally come due to low prices. In addition to saving money, standardization can improve safety though the adoption of best practices from across the industry, drawing on the most talented engineers and the best systems. Build times could be reduced by using offthe-shelf products rather than waiting for them to be manufactured.
These new consortium, though, are each creating their own standards. The kindest explanation is that they think they have the best solutions and want to compete on that level. The cynical see a bid to lock customers into choosing one standard and then sticking with it for years.
While some goods, such as the choke on a subsea well, can set themselves apart through design, others could be the same no matter the manufacturer.
“Can we standardize procurement specifications for valves?” Cummings asked. “I think with some easy wins, we as an industry can progress.”