It will come as no surprise that—given the rapid drop in oil and gas prices and the roller coaster rates for developing and sustaining projects—cost reduction is the oil and gas industry’s ever-present challenge. The evident consequences of such difficult market conditions have been the recent delay of a number of high-profile international oil and gas field developments such as the Sea Lion project off the Falkland Islands and three Nigerian deepwater projects.
Controlling capex and operating expenditures (opex) for any pipeline project while effectively managing risk is becoming a global challenge. DNV GL is working with the industry to identify the main factors affecting pipeline project costs and has recently performed a survey to try to establish the key issues impacting the costs of complex pipeline projects. The aim of this work has been to develop measures to reduce costs without compromising integrity and ultimately to create an enhanced model to facilitate effective planning.
The survey is a natural development from a number of industry workshops that were attended by a cross section of operators and contractors who are close to the challenges of owning, designing, constructing and operating pipelines.
The data from the study have been grouped into eight key points that those surveyed believed attributed to capex and opex increases.
Complex fiscal, regulatory regimes
The industry has seen increasing complexity in regulatory compliance and tax regimes. This has resulted in lengthy delays in decision-making. Survey respondents specifically used the legislation on local content in Africa as an example, citing how this impacts cost and creates difficulties in having a team working in unison to validate and ensure quality and safety.
Political instability in the Middle East and Africa also introduced uncertainties in the market and required further contingency for the investors. In the North Sea, revised regulatory arrangements will take shape over the coming years, along with a review of the fiscal regime. Oil and gas industry leaders also have called for taxes to be cut further and the supplementary charge on profits in the North Sea to be scrapped to help the sector deal with falling oil prices.
The respondents discussed how the industry is facing a shortage of engineering skills with resource management as a particular challenge. Professional and experienced engineers are hugely in demand, and this has forced companies to offer increased salaries to attract and retain high-caliber and experienced personnel. This drives substantial cost escalation in the supply chain.
New talent challenges also are emerging following announcements of major redundancies across the sector. Over time, sustained periods of layoffs and recruitment freezes reduce the overall attractiveness of the industry to young people. Indeed, previous downturns have seen large-scale layoffs from oil companies, depriving the industry of skilled staff when the inevitable revival happens. This is especially the case in light of a large number of skilled workers now retiring, which will add to pressures on business-critical skills and knowledge transfer in the years ahead.
Increased costs
Although the advancement in pipeline technology has made great strides, particularly with demand for innovation in deepwater and extreme environments, the costs of procurement and installation have not been reduced. Installation vessel day rates remain high, and the impact of the high cost is passed on to the engineering, procurement and construction (EPC) contractor. In some regions, EPC contractors have had to take higher risks where they had limited capacities.
The introduction of new technologies, materials and components has increased over the last 10 years to facilitate length of service, handle more demanding high-pressure/high-temperature environments and cut down on maintenance costs. The downside to this is the complex qualification and testing process that accompanies the development and deployment of new technologies.
The survey echoed the sentiment that the industry has underestimated the long lead items for technologies to become fully compliant and operational. A general observation has been that every deepwater development is treated as a “one-off” assignment, and experience sharing and best practice transfer through standardization and securing economies of scale have
not been transferred from project to project. A more unified approach can have major efficiency and financial savings and can help companies avoid the highly variable requirements by operators from field-to-field and associated quality assurance processes, which are often customized on a project-specific basis.
A zero-risk environment
After major events such as BP’s Macondo oil spill in the Gulf of Mexico, there has been a huge reduction in confidence, and industry and investors are requiring increased assurances to facilitate the mitigation of risks. The respondents noted a changing perception of how to control and manage risks and greater scrutiny in the design and financing processes pushing up costs.
As the industry enters uncharted territories and remote areas, it is natural that the technical challenges will increase for deepwater projects and extreme environments. This will result in longer tie-back and flow assurance requirements in some regions. The respondents highlighted that costs would be commensurate with the complexity of the work associated with harsher conditions.
The survey respondents felt that lack of detailed preFEED/FEED in the selection of solutions in the planning phases, over-engineering and multiple layers in the supply chain would result in cost increases later.
While some of those questioned felt there has been insufficient project quality control, other respondents felt there has been a substantial increase in documentation due to internal and external procedural requirements. The usefulness of increased guidelines and procedures was questioned by respondents. Fast-track projects put pressure on all parties from engineering to construction phase, which increased the cost of the project. Furthermore, poor project management was highlighted as a contributing factor in rising project costs. Independent third-party verification is a tool that can assist in managing such risks.
Ineffective business models
The study highlighted the need for the industry to revisit its business models and called on asset owners to take a longer term view to operations rather than relying on short-term fixes. Another observation noted was that due to the complexity and geographical span of some larger projects, more joint ventures should be considered, resulting in more collaboration between companies. However, costs creep up due to different approaches between some of these partners, and delays in the final investment decision become unavoidable due to the increased number of stakeholders.
There will inevitably be more deliberation in 2015 before the green light is given to a number of pipeline projects in a high-cost, low-price environment.
The findings from DNV GL’s pipeline forum reflect the difficult balancing act facing industry leaders today. On the one hand, long-running pressures to find and access new hydrocarbon reserves have not gone away despite a recent surge in supply. On the other hand, the financial risks are clearly intensifying as prices drop, given that these environments typically demand costly new technologies and innovative approaches to curtailing costs.