As I write this post crude Oil is trading a shade under $30 and Iran is set to re-enter the market. When I was in Kuwait I thought that the ramp-up of Iraqi production would swing the market – I had not counted Shale or Iran. In some ways a price drop was inevitable in a cyclical industry but the effect of this drop is painful for many good friends in Aberdeen and Stavanger – and other oil-centric towns and cities around the world.
What will the up-shot of this price crash be? Perhaps there are lessons from history?
Price crash of 1986
The chart here (from the FT [Link]) – shows the oil price from 1983-88.
What changed after the crash of the mid-eighties? In my view, the most significant change in Upstream came in Exploration. New techniques and rapid advances in computing power reshaped whole departments of geologists, petrophysicists, geophysicists and started the movement towards integrated sub-surface modelling and simulation which we have today. What happened was a rapid reduction in finding costs and increases in certainty (pre-drilling) – leading to tools that provide deep understanding of deposits and accurate ways to manage reservoir dynamics.
This article in Computer World, May 1987 (page 89) [Link] is subtitled “Cost-cutting prompts Sohio to centralize and integrate systems” – this is the world I remember joining as PDP-11/34’s were being replaced by VAX 11/785 and Micro-Vax’s and sun microsystems 4/330’s, and if you didn’t know how to configure a Versatech plotter and UNIRAS libraries you weren’t much use. That was the start of, and without any research, I’d estimate that the cost on a job-by-job basis has fallen 90% and enabled far more technical reservoirs to be identified and quantified – leading to access to new territories, new financing mechanisms and new development concepts.
The imperative in this period was reservoir optimisation which quickly came to the fore with all manner of rapidly applied innovations in complex drilling, remote sensing and reservoir simulation. Exploration took a back seat for a while with lots of analysis and “banking” of reserves which were not really developed until the mid-noughties.
Price crash of 2015
So what’s going to happen this time around? Like 30 years ago I see that there will be a rush to take cost-reduction actions now, and there will be a period of reflection where new design patterns and new dominant designs will emerge ready for the next upswing.
Low-cost operational interventions
I think we will see the case for low-cost operational interventions. More temporary fixes for failing plant with minimum workable solutions applied to prolong life until shut-down (either permanent shut-down, or a large overhaul). This will include various forms of integrity management solutions – this might be an interesting year for companies like Wood Group, Intertek, ICR, AIBEL etc.
New design pattern for operations
Rapid cost reduction in the North Sea must now be centred on reducing operations costs. This means increasing the throughput of existing plant and reducing production-loss due to outages. This will mean accurate measurement and control, real-time plant-simulation and low-cost approaches to maintenance. Like we saw consolidation of exploration departments and the emergence of integrated geoscience teams we will see the rise of joint operations teams (concepts that have existed for a while but never fully had their impact). We will also see the rise of computer simulation and integration of data across domains – with predictive scheduling of parts and preparation of work-orders so that crews will be able to prioritise work and maximise the value generated from each shut-in period.
The impact of this will be a reduction in lower skilled workers and an increase in on-shore data-savvy planners. There will need to be more instrumentation and remote sensing, data communication and integrated dash-boarding of data. Emerging from this will be discovery of key, high-impact monitoring and intervention techniques and dominant designs for way-of-working will emerge. Much of this work will rely on enabling technology which closely resembles “The Internet of Things” [Link] [Link]
Unlike the many previous attempts at “field of the future” and “intelligent operations” – and a hundred other buzz-words – this time there is real imperative to make this change.
New dominant designs for development
After the 1986 price crash lots of back-office work was undertaken in exploration but drilling was at much lower levels for more than a decade. This time it’s going to be field development that takes the pause. According to the FT, WoodMac reports that over $400bln of projects are now delayed or cancelled. [Link]
I’ve talked to a number of operators this year and no-one is worried about designs taking longer. Everyone wants projects to cost less so that they can have a better chance of attaining FID. I predict that the dominant designs emerging from new design patterns and the remote sensing and operations will be incorporated into these designs in an integrated way. Taking asset data streams (and interpretation of them) into the integrity and barrier models from day one. This will lead to substantially lower cost operations.
With the retirement of the old-guard in both operations and development I expect to see younger engineers who embrace new technologies take major decisions. These are engineers that “get” the bigger picture and are frustrated by the pace of change. Their intervention will lead to more computerised monitoring, more adoption of technology like sub-sea processing, differing materials and techniques and wider acceptance of what were – five years ago – things not considered “proven” – or at least, not proven to the satisfaction of the old-guard.
One thought on “Crash of 2016 and rise of internet of things”
Good article 🙂
Comments are closed.