In January, oil prices dipped below $30 per barrel for the first time since 2003. And while there are many reasons prices have fallen more than 70% since mid-2014, it doesn’t change the fact that we are where we are. The question we have today is: Now what? We know oil and gas operators are adjusting to the new economic realities and rethinking spending plans amid shrinking revenues.
Expectations in the market remain that capital spending programs will be radically curtailed over the coming year, particularly when it comes to any new projects. According to some experts reducing capital expenditure is a natural response to low oil prices, as demonstrated by the oil and gas industry deferring or canceling $200bn worth of planned investments over the past two years. Another $1.5tn of future spending may be uneconomic at current oil prices.
So how do oil and gas operators, and service companies, continue to meet financial targets and shareholder expectations in 2016 and beyond?
One way is for operators and service companies to work collaboratively to squeeze the most out of product margins by reducing costs, increasing production and improving efficiency of existing operations through structured sustaining capital programs. Whether you call it sustaining capital, brownfield work or a maintain potential programme, these typically multi-year agreements to provide engineering and constructions services for plant optimization, debottlenecking, turnaround support and general maintenance engineering support are a key strategy to add capacity and increase efficiency.
So why then, if efficiency and cost savings are the goals, do we continue to have separate contractors for PMC, engineering, and construction services for sustaining capital programs? In a time when margins are so tight, an operator cannot afford the inefficiencies of multiple interfaces, procurement wastage, downtime, or the lost opportunity to utilize contractors that can self-perform the building of the asset as well as the design and procurement stages. When you link the contracts and award to a single contractor, operators can realise many benefits, including:
Costs savings through more streamlined procurement
When the same company that has designed the modification for the facility is also going to be responsible for construction and startup, they will be looking for every opportunity to ensure the right equipment and materials are ordered at the right time. They will also be able to realise savings through standardization of material use across the projects as well as bulk pricing.
Increased revenue through faster time to startup / reduced downtime
Strong project management is just important on several smaller projects as it is on a mega-project but often is neglected. The single contractor has a vested interest from beginning to end when it comes to schedule and cost control and provides consistent leadership throughout the program and reduces the amount of interface required by the operator. The contractor will also be able to identify materials that have long lead times early enough in the schedule so that delivery does not become an issue.
Opportunity to further advance nationalisation efforts
A single contractor approach provides an opportunity to train local engineers in what it takes to build what they have designed and, conversely, educate construction personnel on the various design considerations. Contractors who can self-perform the construction element will be able to cross-train local talent across the full scope of the program, which expands skill sets and makes local hires even more valuable assets on future projects.
Linking overall performance to overall results
A single contractor approach for sustaining capital programs gives operators the opportunity to link the overall operator goal, e.g. time for rig removal to product flow, directly to the contractor’s overall performance. What more incentive does a contractor need?
So isn’t it time we change the way we contract sustaining capital programs so that operators and service companies alike can take advantage of the benefits described here. This contracting approach will not only help operators navigate the low oil price environment, it will set a standard of efficiency for projects and programs when times are good again to realise better delivery and ultimately, more revenue. And who doesn’t want the best service and the best returns?
