As oil prices have steadily recovered over the past two years, the industry focus has shifted from cost reduction to long-term cost discipline. This focus on keeping costs lower for longer is nothing new. As the industry rebounded from past downturns, operators had every intention to rein in spending. But as the per-barrel price climbed, so too did the price of all services related to extracting each barrel out of the ground.
Of course, the industry has not yet reached the triple-digit commodity prices that it experienced earlier this decade, and most indications suggest that it won’t anytime soon. Market forces are driving operators to work differently—to do more while spending less—and oilfield service (OFS) providers are under pressure to respond to the growing need for structural cost reduction and changes in their customers’ buying criteria.
One of the most powerful ways to achieve this performance improvement is by leveraging the power of digital through the delivery of actionable data-driven insights and collaboration with the right tech providers.
From Specialized To Standardized
In their push to keep project costs low, more operators are embracing the idea of standardizing their projects. Instead of drilling a smaller number of very sophisticated wells with specially tailored equipment, they would prefer to drill more wells using simpler technology that is faster to build and install, easier to maintain and less expensive to replace.
Some operators in the North Sea, a region known for developing specialized solutions for every new project, have begun to shift to standardization. And, they have quickly started seeing the benefit of this shift, with project costs dropping by 20% or more. With results like these, operators are beginning to ask themselves if the premium they were paying for specialized technologies and services was really worth it, particularly when they might only get marginal gains on their production volumes.
Furthermore, operators are looking to change the fundamental relationships in the core value chain, by increasing the participation and risk exposure of key vendors. On the capex side, this might look like OFS providers receiving compensation in the form of production value in exchange for developing assets. On the opex side, it will likely translate to more performance-based service agreements.
Another major shift in buying criteria focuses on changes in how operators engage with the value chain. Operators are expressing a greater willingness to enter into strategic service models with key vendors and are more open to collaborate on projects where they can shift some of the cost burden over to the service providers.
This puts the OFS providers in a difficult position. How can they satisfy the growing needs for standardized services from operators while also differentiating themselves in terms of the services they provide? And how can they be properly incentivized and compensated in these risk-sharing agreements?
Leveraging The Power Of Digital
Fortunately for them, data is one area where OFS providers have an advantage. In a recent survey of oil and gas companies, we found that when it came to digital technology developments, only 17% of companies invested in developing their own in-house capabilities. Upfront costs were a reason, as was the challenge of long timelines to deliver results and keep data scientists engaged when a project is delayed or changes course.
This has created a situation in which, even though the data’s real value and impact is on the day-to-day business operations of the oil and gas producers, it is the OFS providers who are best equipped to actually use and interpret the data.
By translating the vast quantities of available operations data into meaningful insights, OFS providers will enable performance improvement for their customers. This includes conducting predictive maintenance to prevent breakdowns and enhance equipment uptime, as well as detecting and analyzing performance anomalies to deliver actionable, data-driven insights. Other digital elements in automation could drive further performance improvements.
More meaningful performance gains are possible by leveraging data across the value chain, such as moving data from exploration to production via data transfer. To be truly effective, this transfer cannot be a mere “data dump” but rather, combining and translating collective data sets into a common language across a number of sources, equipment and service categories.
Creating A Constellation
Leveraging data and digital technologies to its fullest potential, both within business units and across the organization, is a major driver for operators to set up strategic alliances with service providers. From a contractual point of view, such an alliance might look like an integrated service offering with a limited number of service providers.
But on a deeper level, operators will encourage a service provider to create a constellation of partnerships with other service vendors who offer specialized subsets of services, such as a specific type of data analytics platform.
This approach will change traditional pricing models and require OFS providers to find the right tech partners and develop a “best of breed” service offering: an offering that looks fully integrated from the operator’s perspective, but includes multiple technologies and services from different service providers. By drawing on the best services from the best vendors, such an offering promises to drive down both capex and opex while optimizing operations.
Such a constellation of collaboration provides clear benefits to operators, who will rely more heavily on OFS providers to achieve their operational goals. Rather than hire back large numbers of personnel at a premium price, operators will be able to get their work done with minimal additions to their own manpower.
But, what is the ultimate incentive for OFS companies to enter into risk-sharing agreements and build their own collaborative network of vendors? OFS providers could be incentivized with contracts that award their ability to improve performance through a bonus scheme. And, leveraging data will enable OFS companies to understand how their solutions are used, which will drive design improvements that lead to better solutions at a lower cost.
Will these incentives be sufficient for OFS providers, particularly if the industry rebound continues, commodity prices keep rising, and the demand for services gets more heated? As with other periods of recovery in our industry, only time will tell. However, the significant structural changes that we are already seeing take hold, and the increase in the number of digital-driven pilot projects, suggest that we are at the cusp of a new era for oil and gas.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global Ernst & Young (EY) organization or its member firms.
Dr. Andreea Ene is oil and gas advisory leader for EY's Europe, Middle East, India and Africa (EMEIA) area group. She has spent over 20 years in the oil and gas industry. Her extensive experience includes driving digital oilfield analytics teams and energy sector operational efficiency programs. This includes helping oil companies to define operating models, and driving organizational change strategy, through technology-driven change management and restructuring of projects/programs to enhance quality, scheduling and cost. Ene is currently focusing on Supply Chain Strategy for the Nordic market, Digital Strategy for supply chain and bridging emerging technologies that enhance the supply chain effectiveness.