Transforming the Upstream Service Industry To Increase Operator Margins
- Jeff Spath (Texas Oil and Gas Institute, University of Texas System)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- May 2016
- Document Type
- Journal Paper
- 54 - 57
- 2016. Copyright is retained by the author. This document is distributed by SPE with the permission of the author. Contact the author for permission to use material from this document.
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From organizational structures to procurement strategies to engineer staffing and development, the upstream exploration and production (E&P) industry is undergoing a transformation. Operators and service providers alike are not just tweaking, altering, and fine-tuning in this most recent downturn, they are completely rethinking the way they work. Our business of finding, developing, and producing oil and gas profitably, dependably, and in an environmentally responsible manner is facing unparalleled challenges.
In conversations with many chief executive officers during my term as president of SPE, the most common concern I heard expressed was cost control. And that was before the downturn. In fact, it has been a concern for management for most of the past decade.
The combination of escalating finding and development costs, relatively flat global oil production, and a steep decline in commodity prices has put significant pressure on profitability and free cash flow throughout the entire E&P value chain. Part of the reason for this is an extended period of underinvestment in the previous 3 decades. More importantly, the aging production base requires more investment to fight decline, and the newer resources such as pre-salt and unconventionals are more complex and expensive in terms of cost per barrel. Eighty percent of the global upstream research and development (R&D) spend is devoted to maintaining existing production— arresting decline.
One additional statistic that powerfully summarizes the situation is that over the past 10 years, global upstream spend has increased more than 400% while production has increased a mere 15%. Much of this production increase came from relatively expensive new frontiers such as shale oil and deep water. However, there have been significant cost increases throughout the upstream industry due to such factors as labor costs, material costs, inefficiencies in supply chains and logistics, as well as the complexity of project design, customization, decreases in equipment reliability, and the misuse or nonuse of appropriate technology.
One of the overarching objectives of my term as SPE president was to increase the extent with which our industry collaborates with other industries. We have much in common with and much to learn from industries such as the automotive, aerospace, and biomedical industries— to name just a few. It is clear that adopting technologies and processes from these “sister” industries is one way in which we can improve our own technical and financial performance.
In this article, I describe several additional areas of focus, primarily within the service provider’s domain, which when taken individually or collectively, can significantly reduce costs and improve efficiency levels and operating company returns.
|File Size||5 MB||Number of Pages||3|