New Contracting Strategies Needed in Oil Price Downturn

The global oil and gas industry will need to adopt new contracting strategies and approaches to managing supplier relations for deepwater exploration and production to move forward, an official with Total S.A. said during a recent industry conference near Houston.

The complex, costly oil and gas projects common in the industry, particularly offshore, cannot continue, Phillipe Ronde, vice president of operations and field development at Total E&P Americas, told attendees recently at the Association of Petroleum Negotiators (AIPN) International Petroleum Summit. Over the past decade, oil and gas companies not only have faced severe escalation of capital expenditures, operating expenditures and complexity, but also tougher expectations by countries that are home to these oil and gas projects. These expectations include contractual terms, government take and local content requirements.

The decline in oil prices not only has made these projects more challenging, but has led to some projects being delayed or cancelled. Noting that most deepwater projects do not break even below $60 to $80 per barrel, Ronde said that oil and gas companies will need to make lowering project breakeven costs a priority.

To adapt to the current environment, oil and gas companies need to secure cost reductions, capitalize on their strengths, and be innovative through the introduction of new technologies, such as better imaging and digital technologies. Technology not only will play a pivotal role in boosting recoverable oil in existing areas, but in identifying hydrocarbons in new or less accessible areas, and to drive development costs and risks down, Ronde explained.

Companies also will need to review project design and specifications, increase value from simplification and standardization, and look for synergies to optimize operations. For example, floating production, storage and offloading (FPSO) vessel topside continue to get more complex, with weight exceeding 40,000 tonnes. FPSO costs have remained resilient, but new projects will remain frozen until more significant cost reduction is achieved, Ronde stated.

As projects have grown in complexity, unique-to-company specifications have proliferated, and suppliers have not been able to leverage scale and continue to manufacture in custom, bespoke regimes. As a result, prices have nearly tripled, said Ronde, noting that 70 percent of industry capital expenditures (CAPEX) escalation comes from inefficient practices. For these reasons, standardization and harmonized specs are a business imperative.

The industry must move towards a vision of common design solutions with less customization, enabled by collaboration across the supply chain, through organization changes. Industry-level changes through industry groups such as the American Petroleum Institute and the International Association of Oil & Gas Producers are needed to drive common design initiatives. Some efforts to drive standard design across oil and gas companies already is underway, such as efforts by BP Plc, Statoil ASA and Total. Ronde said the companies expect these efforts to create 30 percent in direct cost savings and reduction in project schedule by 12 months.

“Technology can play a significant role in reducing project costs, but the industry must simplify and adopt new contracting strategies to address costs,” Ronde concluded.



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