50 Shades Of Yellow or How To Cut Costs By 40%
News from the oil and gas industry have not been jolly reading the last years.
But, at the ONS 2016 Conference in Stavanger, we heard some very good news. Statoil published a statement saying they, together with their partners, had managed to reduce the cost of building first phase of the giant field Johan Sverdrup substantially.
The development of the project is now priced to 99 Billion NOK (approximately US $12.5 billion)(Ref Aftenposten). This would give them profit with an oil price on US $25 per barrel. How can it be that Statoil suddenly now can produce oil and gas at 20-40 per cent lower cost that a couple of years ago?
A survey the Norwegian Petroleum Directorate has done on eight of the upcoming projects in Norway shows the cost has fallen 40 per cent in the last two years.
There are mainly four reasons for this reduction:
- Reduced activity due to cancellation or postponed implementation of new projects.
- Lower prices from suppliers. Lower demand for services have pushed prices down and we lower margins and cost thorough the value chain.
- Changed cost and income calculations. Companies are cutting costs that are reasonable at higher oil prices, but is not cost-effective at low prices.
- Permanent changes in processes and technology enhancements. The industry has been forced to rethink their working processes and see if there are smarter ways to do the work. According to Statoil’s CEO, it is the simplification and standardization of the processes that is the reason for the drastic reduction of cost we now see. Such standardisation will force its way through the whole industry.
The last point is something what we see around other companies in the industry as well. Old processes and outdated technology need replacement. There are often barriers between the different departments who makes up the value chain from exploration, production and all the way to decommissioning/shutdown. Often the processes does not align and the information is kept in silos, duplicated and not easily available. Standards for what and how much you need of documentation have been absent.
The increased documentation requirements are one of the areas suppliers have claimed the reason for the increasing cost of projects. DNV GL together with a number of leading actors in subsea oil and gas started in January 2014 a Joint Industry Project to halt the boom in subsea documentation shows that implementing a standardized approach can significantly reduce engineering hours. The two-year collaboration led by DNV GL has concluded in a publicly available Recommended Practice, which can reduce the amount of subsea documentation and enable documentation reuse in a typical subsea field development project.
Customer-case showed potential for a 40% reduction in engineering hours on subsea paperwork, and up to 80% less documentation. As Statoil CEO said at ONS 2016: “We do not need special valves for each individual christmas tree and we do not need 50 shades of subsea yellow”.
The savings that have resulted in this case demonstrate that it’s possible to find profitability by improving internal processes and focusing on operational excellence – even in very challenging market conditions. In my next blog I will dive deeper into this recommended prectise that helped drive these impressive results, DNVGL-RP-O101 ‘Technical documentation for subsea projects’.
Rune Olsen, Senior System Engineer, EMC