Market changes are forcing the offshore industry to become smarter, leaner and more modern — and that’s a good thing.
Offshore oil and gas is one is one of the world’s most important industries. Its success powered much of the global development that took place in the latter 20th century, and the industry remains a key provider of energy to the world.
Yet despite its crucial importance, many oil and gas projects are poorly run and under-deliver. Indeed, according to a recent EY survey, two-thirds of projects in the offshore sector run over budget, are delayed, or even cancelled. For an industry that should be aiming to set world-class standards, it is strange that the offshore sector has been so willing to accept mediocrity and under performance.
Belatedly, the offshore industry seems to be acknowledging its shortcomings. One oil executive recently told The Economist that it had got too “fat and happy” during the boom years, with an average U.K. salary of £64,000 comparing extremely favourably with the national average of £27,200. But this period of bountiful revenues has come to an end, and the recent fall in oil price has begun to provoke change that is long overdue. Last month, BG Group became the first producer to announce in detail how to make its offshore platforms more efficient, and others are expected to follow.
But why has the oil industry accepted inefficiencies for so long? Ultimately, because it could. Drilling offshore wells is a hugely expensive undertaking that requires vast sums to be committed to a project with no guarantee of a quick return. The huge start-up costs of any offshore project are barriers-to-entry that exclude all but the small number of operators who benefit from vast cash reserves accrued from decades of high profits. As a result, the level of competition in the industry is low, resulting in little downward pressure on production costs. Ultimately, when business-as-usual is providing impressive profits, there is little incentive to look at ways of making efficiencies (particularly when those efficiencies may lead to technological and managerial challenges that did not exist before).
It is telling that one of the biggest threat to the offshore industry has been America’s shale-oil industry, whose lean and innovative production processes caught the offshore industry sleeping and have eaten into its market share. In contrast with expensive offshore megaprojects that can take up to a decade to come online, shale wells cost in the tens of millions (USD) and can begin producing in a matter of month. This agility and competitiveness is in stark contrast to the long years the offshore industry enjoyed without serious competition, which has made it flabby and complacent.
In truth, the offshore industry should have spotted the threat of renewable and unconventional energy sources much earlier, and could have made the necessary structural changes in good time. However, this opportunity has been missed, and the industry now faces a scramble to become competitive and remain a vital part of the global energy mix.
All is not lost, and there is still time for offshore to renew itself as a smarter, leaner and ultimately more modern industry. There will undoubtedly be companies that don’t survive and, for those who do, change will be difficult and painful. Yet competition and low oil prices are forcing the hands of an industry that didn’t address its vulnerabilities when it had the chance. Offshore can change, and the industry will be much better for it.
(Top image: Courtesy of Thinkstock)
This piece first appeared on the io’s Powerful Thinking blog.
Dan Jackson is CEO of io oil & gas consulting, a GE and McDermott venture. For more information about io oil & gas consulting, visit www.iooilangas.com. To read more from Dan Jackson and the team, follow io on Twitter @io_oilandgas.