By Mariana Somensi
Collaboration has become a key asset to successful oil and gas business. Considering the complexity of the sector and its high competitiveness, the petroleum industry has come to realize that all the parts involved in the oil and gas exploration and production must be connected in order to build a reliable and efficient chain.
Accordingly, integrative and dynamic business models are no longer only differentiators, but also a requirement to promote cost-saving activities and launch innovative schemes. For that, international oil companies (IOCs), national oil companies (NOCs), and service companies must be ready to provide quick responses to the new challenges imposed by industry collaboration and overcome its relationship barriers.
Collaborative Business Models
The combination of high risks and intensive capital investments in the oil and gas sector characterizes projects development in the industry as very sensitive. According to David Rabley and Muqsit Ashraf’s analysis, titled Ushering in Collaboration and Integration to the Accenture Strategy, the linear model applied by petroleum companies in the past decade to promote shot-term cost-savings has not proven to be effective in a market that is in constant change.
“This model does not allow for the significantly improved returns achievable through collaboration to tackle the systemic challenges of complexity and inefficiency faced by the industry,” Rabley and Ashraf noted.
As suggested in their analysis, performance can be improved by the creation of a Joint Efficiency Team (JET), which connects the operator with its service company. “The JET can carry out a holistic assessment of efficiency from planning through execution, put in place the required enablers, and use a structured combination of lean methodologies to shrink the critical path, adopting best practices from within and outside, as well as implementing a mechanism to synchronize operator service company interaction and decision making,” they added.
The JET scheme showed successful results to an American operator and its service company that worked with Accenture Strategy. The application of the new business model resulted in the establishment of a performance pacesetter, which broke activities into their component parts and measured the best approaches for each one of them.
“When aggregated, the pacesetter proved that a 200%-plus overall improvement was possible – a far greater prize than envisioned by either party at the start of the program,” Rabley and Muqsit explained.
The collaboration between operator and the service provider enabled both companies to achieve a 40% improvement in frack stage, and a 25% reduction in the time and cost to drill and complete a well. As the analysis pointed out, subsequent benefits were also noticed.
“The JET was able to improve safety in the field by ensuring that effective safety meetings and dialogues were built into the critical operations path at the right points, and by tracking safety outcomes alongside performance outcomes to ensure they improved in tandem,” Rabley and Muqsit added.
Furthermore, the JET also enabled considerable improvements in structural changes, such as collaboratively planning work, optimizing job design, and transforming operating and maintenance practices.
In his report – How to Maximize Supplies Recovery in the UK Continental Shelf (UKCS), published in 2013, Sir Ian Wood underpinned the importance of enhanced integration in the United Kingdom’s offshore oil and gas recovery and its regulations. He argued that integrated practices can, in effect, bring in and boost economic benefits.
According to Wood’s final report published in 2014, the lack of collaboration is a significant driver of increased costs, caused delays, and poorer recovery. Accordingly, the UKCS’ new Regulator would have to remove dispute barriers in order to be effective, and play “a vital role in facilitating, coordinating, mediating, promoting and catalyzing collaboration.”
One of Woods recommendations was the creation of an independent regulatory body entitled to supervise licensing process and maximize economic recovery of UK’s reserves in the short, medium and long-terms.
The Role of Technology
Although the establishment of a business model is independent from technology, both are closely related, and technology plays an important role to ensure efficiency in the oil and gas activities.
Charles Baden-Fuller and Stefan Haefliger explained in their paper “Business Models and Technological Innovation”, published through the Cass Business School of the City University London, how technology development can facilitate new business models. “The most obvious historical example is the way the invention and development of steam power facilitated the mass production business model,” they noted.
Baden-Fuller and Haefliger observed that the choice of a certain business scheme influences how technology is monetized. Additionally, they noticed that the project frames also determine the way in which technology is developed, which means that modeling the link between technology development and firm performance is highly required when a business model is taken into account.
“The business model may have to change in order to appropriate features of a technology that create customer value, and elements of the model may change in order to allow technology to be developed that fits customer needs or that emerges from the customer directly,” they wrote.
Considering the mutual influence between technology and business models, the collaborative work among IOCs, NOCs, and service companies are even more important to assure that all parties acknowledge the technical innovations being implements on each one’s side and, subsequently, build a scheme that perfectly matches the strategies being implemented by each company.
Collaboration between Industry and Academia
When the integration strategy to improve the petroleum sector is under discussion, it is also inevitable to put the collaboration between the industry and universities into consideration. Unarguably, the joint activities of oil and gas companies and the academic field provide the sector with high caliber executives and competent professionals. As stated by Oil&Gas Skills’ Marketing Manager, Osama El-Saadawy, during EOG’s People Development Roundtable in December 2016, “the government needs to communicate with external bodies, one of them being universities, in order to solidify manpower planning.”
At the same occasion, Schulumberger’s Vice-President and General Manager, Hussein Fouad el-Ghazzawy, noted that “there is a lot of engagement of private companies, joint ventures (JVs), and service providers to cooperate with universities in setting selection criteria for the industry’s employees.”
The University Professor and Management Consultant, Michael Jünger, stated in an interview to Tefen Management Consulting that “the main benefit for companies from this cooperation [industry and universities] is the access to the latest research results and innovative new methodologies. It is a mutual approach: the companies offer business insights and the students contribute proven methodology and expertise. It is a win-win situation for both parties.”
According to Jünger, the interests and business models of both parties differ. While universities focus on educating people, the industry’s main concern is overcoming the market challenges and promoting a profitable environment.
Still, “companies which do not have a close relationship to the academic community are expected to advance slower. They miss out on early access to the latest research results and methodologies and then need more time to put these methods into practice,” he added.
Hence, integrating the academic field to the industry schemes adds up to the construction of more efficient, innovative, and profitable business models.
Barriers of Joint Activities
The enormous scope of benefits from collaborative moves in the petroleum industry is evident; however, some challenges must be overcome to prevent it from failure. According to Lloyd’s Register, “in many cases, industry partners are likely to operate in the same competitive sandbox, which creates significant commercial risk that may not offset the benefits of working together.”
Furthermore, during EOG’s “Challenge Opportunities of IOC/NOC & Service Companies Relationship Roundtable”, held on May 18, prominent experts of the petroleum industry pointed out that the barriers imposed by NOCs at contracting and the cycling discussions over public tenders impose a problem when it comes to developing a collaborative scheme.
Baker Hughes’ Director Sales and Marketing NAF, Mahmoud Shawkat, stated at the occasion, “If we do not spend time discussing tenders, the operators can act on the project quickly.”
Nevertheless, the strong impact of governmental entities on the tenders’ pace is not consensual. According to the Egyptian Ministry of Petroleum’s First Undersecretary for Gas Affairs, Mohamed Moenes, who also spoke at the Roundtable, simplifying contracts’ data is not an exclusive role of state-owned companies.
“Adding clear information to tenders does not depend on the Egyptian General Petroleum Corporation (EGPC) only, but on everybody. How to reduce the time in the discussions is up to the companies involved, it does not require EGPC to modify its tenders,” he explained, mentioning Egypt’s NOC.
Additionally, in order to enable collaboration in business models, the companies should look at a joint data base to enable a clear view of the project’s development to all the parties involved, as suggested at the IDEA Group Publishing’s publication “Supply Chain Management: Issues in the New Era of Collaboration and Competition”.
As stated at the article, the companies must be keen to sustain “an effective dialogue with all interested parties at the industry R&D institutes and authorities to enhance communication to clarify industrial standpoints in relation to major challenges and critical issues.”
Although enhancing transparency and sharing business strategies with other companies in the market may seem quite a challenge in a high-competitive atmosphere, the status of the petroleum industry has turned centralized business models into an obsolete maneuver.
In other words, depending on a conventional working structure amid an era of a supply glut and low oil prices, withholds an inability to function in today’s market certainties. As a point of fact, “a world of resource abundance is leading to sustained lower oil prices and a focus on cost, efficiency, and speed, “stated Mickinsey & Company’s article – The Oil & Gas Organization of the Future.
With this at hand, developing innovative strategies and modernized schemes are required to sustain profitability in a today’s energy market.
As a matter of consideration, the demanding nature of the energy industry for competent workers further prompts oil and gas leaders to revisit the existing work schemes and introduce novel approaches, to be able to attract the rising generations. Affirmatively, McKinsey & Company said that “oil and gas companies may need more profound changes to meet demands for meaningful work and social responsibility to attract the next generation of top engineering and leadership talent.”
In principle, it is time for the oil and gas sector to embrace the new era and abandon its traditional business making. Betting the cards on collaboration is the “fountain of youth” that the industry needs to revitalize its projects and bring additional strength to avoid time and economic losses in a sector whose technology is in constant evolvement and business conditions in continued change.