New business models able to handle ongoing volatility in the oil price are set to be the future of the North Sea industry, according to the CEO of Det Norkse.
Karl Johnny Hersvik is set to lead a new company, Aker BP, which has been described as a “super independent.” The company is set to be formed through the merger of BP Norge and Det Norske with Norwegian group Aker owning 40%.
Image: Det Norske's Alvheim asset.
Hersvik told last night’s UTC Bergen conference ice breaker event in Norway that while everyone was discussing cost, the key challenge was to be able to build companies able to handle volatility in the oil market, which he thinks is set to continue into the future in the post-OPEC market controlled world. He also said contract structures – “currently focused on writing letters finding ways not to do business” - needed to change.
He said Aker BP would do things differently, including how it works with the supply chain and having a new project delivery model, using alliances with contractors and incentivized contracts rather than penalty based contracts, he said. Such a contract basis is being tested on the firm’s subsea tiebacks already, using Aker Solutions and Subsea 7, he said.
The deal to create Aker BP had first been discussed in 2008, said Hersvik. “This is a deal that has been in the making a long time. The first test was done in 2008. But for many reasons it didn’t happen,” he said. “The idea is to make an oil and gas company that is a bit different than you normally see. We have set out, between Aker, BP and Det Norske, the nimbleness of an independent, the technical knowledge of an international oil company and the full access to the oil market. I think we have the opportunity to produce something that will be the benchmark not just on the Norwegian Continental Shelf.”
Hersvik said the oil industry needed to get its credibility back. “It’s almost embarrassing that average cost overruns were 36% and average delays were six months. We need robust organizations because volatility is going to be higher.” Productivity in other industries increased 2.6-5% a year, he said. In comparison, the oil and gas industry drilled 129m a day in 2004, dropping to 79m a day in 2012.
He said lean processes were being and had been adopted already at Det Norske, but the firm – and implicitly the wider industry – was still in Kindergarten and was trying to progress to primary when it came to lean. But just by changing processes, the business could save 15-30% in costs, without “changing a nut,” he said. Engineering hours could be reduced by 50% and execution time by 25% by doing things differently, he said. “It isn’t rocket science. Pushing this more into the future we are moving into the realms of digital project execution, taking learnings from industries not necessarily oil and gas. iPhone ISICs are developed using computer algorithms. We could route piping and cabling in 3D models, but we are still doing it manually.”
Automation and big data were also focus areas for Norwegian industry body GCE Subsea. Gisle Nondal, R&D manager at GCE Subsea told a research and development session at UTC yesterday that the phrase Industry 4.0 had been invented in the automotive industry some four years ago. German car manufacturers, BMW, Mercedes and Audi, had also come together to launch a joint research and development facility, under the name Arena2036, to invent the automobile of tomorrow. Could the subsea industry in Norway do that same, he asked. GCE Subsea is also talking to the Kongsberg systems engineering cluster about improving processes to reduce costs.
Odd Egil Haug, Aker Solutions’ head of development, told a markets and investor session at UTC yesterday: “It is a new reality out there these days. It is a challenging market that impacts how we look at research and development,” he said. Many companies are reducing spending on research and development, he said, with increasing focus being put on increasing oil recovery and looking for shorter return on investment. “Yesterday was longer, deeper, harsher, colder. Today is easy oil, standardizing, [reducing] cost, and new business models. The future is smart, connected, unmanned, new frontiers,” he said.
Making processes more efficient, standardizing how we work, had to be done, but, this would only save so much money, he said. “We need to innovate with a view to new technology for total system cost reduction.”
This would and has involved creating alliances, with, for Aker Solutions, the likes of Bakers Hughes and ABB, and increased use of modularization, but efforts on this front so far had been hard to implement. “We need to change mindsets and have modules you can reuse and use within various product groups. We are trying to rethink the entire portfolio so several modules can be used within across the entire product group, some in the some [sub] group and then leave minor interfaces [to individual products]. But customers need the same mindset.”
Modularization would reduce engineering time, enable better stocking, reduce manufacturing time and save costs, he said. Aker Solutions has been implementing this with its Vectus subsea control module, electrical actuator and on its subsea pumps, on which impellor design has been standardized.
The proof of a joint mindset could be borne out through DNV GL’s subsea documentation recommended practise, launched earlier this week and which, it is estimated, could reduce costs significantly, by aligning what documentation needs to be shared between parties.
For those who own vessels, the pain is far from over and likely to get worse in 2017, Mons Aase, CEO of Norway’s DOF Group told the investor session.
In 2007, the firm had 40 boats and 2000 people. “At the top,” (2013-2014) it had 70 boats and 5500 people. “Today, we have sold a few boats and we are just below 70. The tough road has been employees, down 1000 from the top. Are we through the adjustment cycle? I don’t think so. We are going to have a tougher year in 2017 than we are having in 2016. Demand has been reduced. We all built up capacity and all the new capacity isn’t delivered yet. So even in a scenario where demand hadn’t been reduced, we could have had tough markets in some segments.”
Nevertheless, there were areas where work could be won, if you worked for it, says Aase. This included markets where local content concerns meant competition was tougher, but also the likes of Australia, where large new projects are coming online, opening up a market for IRM work.
Tor Espedal, senior partner at Norwegian private equity firm HitecVision, said that for operators the worst of the crisis was in February this year when the oil price was lower than operations costs. Companies had now been through the first cost cutting phase – downmanning. With financial results still not great, however, firms have to look at their operating models, he said – an area where HitecVision could play a role. It recently rolled three small exploration firms into one to create Point Resources. “We will grow that company to be a substantial player,” he said. “We will not tender the same way traditional companies have been doing. There will be a lot of different [equity and ownership] set ups in fields that have been postponed.”
Espedal also sees change coming in the relationship between contractors who charter ships and vessel owners, which could become a “huge issue for the west coast of Norway,” with a fleet looking for work and, according to DOF CEO Mons Aase no sign of consolidation happening in the market any time soon.
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