Author: Gareth Davies

Innovation Expert with 30+ years of experience living and working across the world. I apply an engineering approach to helping companies innovate and achieve commercial success.

ITF Aberdeen: Oil 2.5 vs. Industry 4.0

I was at the ITF Showcase in Aberdeen last week. It was an interesting event, if mildly concerning in some ways. Here is the link to the presentations [Link]. The encouraging notes were that there appeared to be some money being made available and that the industry had focussed on key themes around the MER UK forum [link]. Less encouragingly for me is the speed, energy and sense of urgency that was lacking.

I noted that the room consisted of 90% men (often in grey suits) and I reckon 75% were older than 50. So where are all the young people?

I have always been impressed with the approach of Colette Cohen [Link] from Centrica, a strong proponent of adopting technologies from other industries. Despite being a fully-fledged, dyed-in-the-wool oil and gas executive she retains an energy of purpose, nurturing of young people and a curiosity needed to drive innovation. She was on fine form and provided a welcome boost to the enthusiasm of the room while being the voice of reason when asked why wire-guided rockets couldn’t be tested on Centrica wells. Can we have more pioneers like her please?

I am based in London and the innovation and technology events I attend (and the informal networks I am part of here) feel very different. There is an energy and drive in the FinTech and internet sector that appears missing in Oil. Also when I go to events I find plenty of trendy young people brimming with ideas, and there are plenty of women there too (still not 50% but still way better than last week by a country mile). Diversity will be important for innovation. To be successful we must learn to harness the view-points that come from all sorts of diversity: racial, sexual, age, experience, industry, education – and find ways to encourage and shape ideas.

My next post is going to cover some thoughts on innovation, the fourth industrial revolution and what will drive productivity in the next 20 years. But suffice to say it will rely on data and automation, but many speakers [I’ll name no names] took great pleasure in informing the audience that they didn’t believe in the cloud and that they had piles of paper on their desk. When describing new tech there were plenty of references to “if you don’t understand this tech, then ask your kids”. It reminds me of ancient bankers who use fountain pens and a paper diary. It’s not cool it’s deliberately Luddite and crusty and an attitude that will kill our industry. Perhaps it’s time to get with the program or step aside.

One thing that stood out was the problem of accessing markets and testing new product. In my experience operators are generally not too interested in experimenting with new tech, and often their operating philosophy revolves around large frame contracts which means that they don’t really control access to the supply chain. The consolidation of suppliers, the integrated nature of their offerings and the point-nature of new technology development does appear to lead lock-outs and stifle innovation.

The Graph above is from Colette’s presentation. It’s an SPE graph, it shows that Oil and Gas has been great on innovation in the past, and we haven’t had a breakthrough for a while. What strikes me is that since 1946 all the innovation has been in finding or developing fields. My money is on operations and maintenance to join the party. And that will be driven by what the cool kids call “Industry 4.0” [link].

031716_1806_ITFAberdeen2.jpg

Headline image Link

Energy security and geopolitics

This big topic was brought to mind during a recent breakfast with Capt. Mike Paterson (Royal Navy retired). In the oil and gas industry we are often at the mercy of large political forces playing out. This shows up in both commodity prices and physical security. Employees of few other businesses are as acutely aware of this as they are in Oil and Gas.

You don’t need me to tell you the current oil price nor the speculate about the reasons, but it is clear that there are national interests at play. Is Saudi Arabia waging a price-war to drive unconventional sources of production out of business? Is there some form of cross-state agreement to undermine the Russian position? Are there ulterior motives for allowing Iran back into the market? What will be the effect on South America and African politics? What will the destabilisation of Iraq and the Levant states mean?

Here is interesting view: CNBC saudi’s and Russians game of bluff.

CBBNIboW4AAAbKs

While it is interesting to ruminate on what the price will be, there is really nothing that I (and probably you) can do about it, and predicting which factors will combine with global economic growth and low-carbon technologies to influence Oil prices is something I’m not qualified to talk about. When I need to find an opinion my first port of call is my friend Delia Morris who is now with RigZone.

There were many theories around why OPEC (namely Saudi Arabia) would [refuse to cut production]. I am of the opinion that it was to make better sense/better predict the behavior of the US shale players (force them to consolidate, not necessarily to put them out of business). Frontier plays (like the Arctic and ultra-deepwater plays) and Canadian oil sands (which require huge upfront capital costs) I think were targets (by OPEC) to forcibly put them out of business. And we are seeing that play out now. Delia Morris quoted in Vice.Com [Link]

 

When Mike Paterson gave a talk on security at one of last year’s networking dinners, he provided a simple framework that every business can use to structure their thinking about emerging threats.

Where this really matters is for security of workers and assets within countries. That’s where the Oil and Gas industry and national security agencies start to align interests. There is are very intriguing analysis sets available from the military which provides many insights, this for instance:

The Baltic Sea is one of the busiest shipping areas in the world; the volume of maritime transportation navigating it has doubled in the last 20 years. Energy shipments from Russia are particularly important and the entrance to the Sea, through the Danish Straits, is one of the world’s eight strategic oil transit chokepoints. The Nord Stream gas undersea pipelines from Russia to Germany are also an important strategic element in the BSR. Energy dependencies within the BSR vary, with nations having different strategies, and most importantly, varying degrees of dependence on Russia. It should be remembered that the Russian economy is reliant on the energy market. Significant reductions in demand may, therefore, have a major effect on its economy, and potentially have a destabilising effect on regional security. “Future Security Challenges in the Baltic Sea Region” [Link]

There is a very thoughtful piece by Anusar written under the pen-name PolicyTensor which is available here [Link]. In this piece written in 2012 concerned why prices were so high, interesting to re-read this in the light of the current prices.

Oil prices will be volatile but your business may not be directly driven by them, you might be driven by the response of your customers – their response may be driven by technical or revenue-maximisation considerations – or, quite likely, financial constraints which drive decisions that do not maximise economic recovery, but do protect equity value in the face of debt covenants.

Watch out though – Mike Paterson alerted us to the correlation between grain prices and the Arab Spring. Perhaps low petroleum-state revenues will lead to reduced public spending which might lead to popular uprisings and increased instability. Unstable times ahead.

 

Schumpter’s Cayman Island holiday

Schumpter was an economist who theorised on the creative destruction of capital, replacing activity in old industries with activity in new ones. I’m not an economist, but to me it is an interesting time now because it all seems to be a bit broken – the oil industry is being knocked down by external (temporary) market distortions and governments are unable to enact public policies that might help because they don’t have access to the tax base they once had – and have been busy expanding the spending of what they do have on other things.

Today’s FT was a classic issue – with stories exploring some hot topics:

Accelerated Decommissioning in an article titled – “North Sea fields face end of production” [Link]

A piece examining the dynamics of adjusting to low oil prices – “Oil Producers retool for lower prices” [link]

A call for support and regulatory intervention into the North Sea shared infrastructure – “Premier Oil urges action to maintain North Sea fields” [link]

A story about BP’s accounting profit – “BP Shares tumble after $2.2Bn fourth-quarter loss” [link]

The WoodMac analysis says that 50 North Sea fields could cease production this year. Of course they will need to apply for COP (Cessation of Production) agreement from the government:

Prior to permanently ceasing production from a field, Licensees will have to satisfy the department that all economic development opportunities have been pursued. To ensure that all issues are addressed thoroughly before agreement to CoP is required [link].

The article goes on to speculate that some of the lost revenues for exploration service companies might be replaced by decommissioning revenues. While this might be true on an aggregate revenue basis, it’s unlikely that you can use a seismic survey vessel in this process so there will be capital assets that become worth a lot less, even if employment has some life-lines.

The dynamics of low price adjustments are explored by Amrita Sen and Virendra Chauhan from Energy Aspects [link] – they make a great point that one of the cause of high costs in the last up-cycle was shortage of skilled labour (sometimes referred to as the big crew change [link] ). Many of the current workforce (upwards of 250,000 people [link]) have been laid off and many will leave the industry permanently. This may set-up a cost-dynamic that will increase input prices and damp capacity for the inevitable upturn, potentially leading to even larger commodity price spikes and surges in service company profits?

The call from Tony Durrant, Premier CEO asking the regulator to step in to protect shared infrastructure in the North Sea is one that I’ve supported on this site for a while. It’s not just power that they need (the CoP mechanism may already mean they have it) it is one of public policy, subsidy and – ultimately – courage. We saw David Cameron promise £250m to Aberdeen (aiming it in entirely the wrong direction). But that is really small potatoes, which – to mix a metaphor, and pay homage to John Major – will butter no parsnips.

This is not really subsidising or investing in infrastructure: For instance if we look at Indonesia:

The government’s plan includes constructing power plants that would supply 20,000 megawatts of electricity in the next 10 years and 1,095 kilometers of new toll roads to move goods faster across the vast archipelago. The projects will be concentrated in six “economic corridors” or growth centers: Sumatra, Java, Kalimantan, Sulawesi, Bali-Nusa Tenggara, and Papua- Maluku. The price tag: $150 billion over the next five years. But the government can only finance 30 percent of the cost; the rest would have to come from the private sector. [link]

If we look at Cross-Rail, a train to move people slightly faster from Maidenhead to Lewisham has a budget of around £15Bn [link] (which is 60x the subsidy for the North Sea)

In the 1970’s the Oil industry was seen as a way of providing tax revenues to the UK – you might argue that much of the Thatcher-era economic achievement was predicated on Britain becoming a net exporter of oil which, combined with the sell-off state industries, increased the tax take and enabled the unwinding of the debt accumulated by previous governments.

Most people don’t realise that Oil companies don’t pay just normal corporation tax – PRT is charged on “super-profits” arising from the exploitation of oil and gas in the UK and the UK’s continental shelf. After certain allowances, PRT is charged at a rate of 50% (falling to 35% from 1 Jan 2016) on profits from oil extraction. PRT is charged by reference to individual oil and gas fields, so the costs related to developing and running one field cannot be set off against the profits generated by another field. PRT was abolished on 16 March 1993 for all fields given development consent on or after that date. [Link]

Corporation tax supplementary charge manual here [link]

It’s perhaps as well that these sort of measures are in place because Oil companies (and service companies) are very well practiced in the art of reducing corporation tax – either by legitimately moving costs to high tax areas and profits to low-tax ones, or by – as BP has done today – booking as big a loss as they can (when it’s expected – a practice called “taking a bath”). They do this to provide a shield for future profits against tax. A practice similar to that used by the banks to shield their current earnings from the losses of the financial crash of 2008 [link]. Many of today’s tax “dodges” have been heavily utilised by our industry.

We’re seeing a situation where an industry (one of our few industrial and engineering success stories of scale left in the UK) being decimated by a temporary market swing and there is nothing that the government can do about it because the new industries which are very profitable pay little tax and where disruptive industries are supported by the “subsidy” from investor’s tax free cash piles sitting offshore.

Take for example UBER and it’s disruption of local tax-optimising (sorry mate only cash) taxi drivers:

A recent article in The Information, a tech news site, suggests that during the first three quarters of 2015 Uber lost $1.7bn while booking $1.2bn in revenue. The company has so much money that, in at least some North American locations, it has been offering rides at rates so low that they didn’t even cover the combined cost of fuel and vehicle depreciation.

An obvious but rarely asked question is: whose cash is Uber burning? With investors like Google, Amazon’s Jeff Bezos and Goldman Sachs behind it, Uber is a perfect example of a company whose global expansion has been facilitated by the inability of governments to tax profits made by hi-tech and financial giants.

To put it bluntly: the reason why Uber has so much cash is because, well, governments no longer do. Instead, this money is parked in the offshore accounts of Silicon Valley and Wall Street firms. Look at Apple, which has recently announced that it sits on $200bn of potentially taxable overseas cash, or Facebook, which has just posted record profits of $3.69bn for 2015.

[Link]

Interesting times indeed.

Subsidy on the agenda?

Last year I suggested that there were strategic reasons to maintain North Sea production. The system of interconnected assets and their cross-reliance on each other means that it will be in the common good for “UK PLC” to maintain key infrastructure despite it being a poor proposition for individual operators.

For goodness sake – we subsidise the tracks that our trains run on, I can’t see any argument for the creation of economic value there that does not apply to our North Sea processing and export network. [Link]

So I was heartened to see that David Cameron is in Aberdeen with what the FT called an emergency investment package. I was less pleased to see what the promised £250m investment was to be spent on:

The prime minister will promise a new “oil and gas technology centre” in Aberdeen to fund future research, including into innovative ways to extract oil and gas.

The package will also help expand the harbour and support the city’s pharmaceutical and agri-food industries to try to help Aberdeen diversify from its reliance on oil and gas. [Link]

Well that’s not exactly the response I was thinking about – seems to be a rather poor investment case for UK PLC. Luckily we’ve formed another task force.

His visit coincides with the first meeting of a new task force of senior ministers set up to deal with the issue, chaired by Amber Rudd, energy secretary. The group will include Anna Soubry, business minister, and David Mundell, the Scotland secretary.

Together with the OGA there seems to be plenty of civil servants looking at the issue.

True to form – the FT actually got to the nub of the issue with its parting shot:

Many in the industry are also urging George Osborne, the chancellor, to relax the rules around who pays to decommission oil platforms when they reach the end of their lifespan. Many argue that the strict laws making anybody who has ever owned a particular platform potentially liable for its eventual dismantling are discouraging companies from buying up ageing assets and investing in them.

One energy banker said: “One of the things that could really help is if we see more takeover activity, with companies buying either struggling rivals or older rigs.”But the main thing stopping that right now is that nobody wants to take on potentially massive decommissioning liabilities.”

The BBC covers his visit here [Link]

Despite the decline in oil prices there is risk capital available but to take this opportunity irequires a few critical pivots. They are:

  1. Decommissioning liabilities stopping the trade in assets to lower-cost operators
  2. Un-certainty surrounding enabling infrastructure operated by others
  3. Mis-alignment of interests between partners meaning operating committees stopping development plans

Perhaps rather than expanding Aberdeen Harbour we could change the rules and use this £250m to help sort these out? At least it would be a start.

What do you think, is the proposed disbursement the best use of the money?

Digitally disrupted operations

I have already said that I believe the time is now for O&G operations to become digital. Radically different cost models are going to be needed and digital is one way they will be achieved.

“When assessing the implications, consider the fact that that new digital business models are the principal reason why just over half of the names of companies on the Fortune 500 have disappeared since the year 2000. And yet, we are only at the beginning of what the World Economic Forum calls the “Fourth Industrial Revolution,” characterized not only by mass adoption of digital technologies but by innovations in everything from energy to biosciences.” Pierre Nanterme – Accenture CEO [Link]

For me this revolution started with a computer programme called Mosaic, the first internet browser – which I discovered in 1993 while goofing around using Kermit, WAIS, Gopher, FTP and downloading cool stuff from GNU. I was being paid to generally muck-about and call it work. Since that moment I have witnessed a massive rise in computing power, information storage and interconnectivity that has left me gawping in awe. The chart below, from The New Machine Age, illustrates the trend.

Five Phases of Disruption

I model this disruption in 4 overlapping phases that are well established (each relying on the ones before it to progress) – and we’re about to see the fifth phase make itself felt.

Phase 1: Pure Information Industries

This was the first to be disrupted. It started with libraries, newspapers and advertising. As technology progressed this then disrupted industries requiring higher information capacity (bandwidth & storage) such as music and radio, and is now doing the same for television and cable companies. Bi-directional communication led to the X-Factor, the Huffington Post and any number of citizen journalists and bloggers.

Phase 2: Customer Engagement

As more people started to have access to and use the internet it was a small extension to make commercial transactions and shopping. As this ramped up customer experience of retail, customer-service departments and opened up access to a vast array of diverse products that could never be held in stock on the high-street. Now there are very few consumer engagements that do not have to integrate a digital channel into their offerings. Coffee and haircuts can’t be online – just about everything else can. Even there Starbucks is integrating a digital offering into their coffee order-to-pay process.

Phase 3: Co-ordination and logistics

It started with on-line parcel tracking, cross-docking and behind-the-scenes scheduling algorithms. Adding mobile GPS and mobile data allowed supply chain and logistics to start its transformation. Firstly on the containerisation and automatic freight and now down to warehouse location, stock control and soon perhaps delivery by dedicated drones [Link]. Phases 1, 2 & 3 have combined to give me my Occado delivery today at 12:30 (sharp).

Phase 4: Asset and resource sharing

This phase is still young and we’re seeing it play out in the consumer space first – a reversal I’ll elaborate on later. Companies like AirBNB, Uber, ZIPCar and others. In general this is the idea that Assets are not fully utilised by their owners all the time, and spare capacity can be made available through a brokering and booking service – and then scheduled and delivered.

Phase 5: Machine-optimised operations

Remote sensing, predictive algorithms, human-machine teaming – integrated with maintenance planning (plus all the attributes in phases 1-3) should lead to more reliable plant constantly optimised and operated by fewer people. This phase is being referred to as The Internet of Things.

“The Internet of Things (IoT) is changing manufacturing as we know it. Factories and plants that are connected to the Internet are more efficient, productive and smarter than their non-connected counterparts. In a marketplace where companies increasingly need to do whatever they can to survive, those that don’t take advantage of connectivity are lagging behind.”  Forbes Magazine [Link]

The reversing order of adoption

Sometime between 1992 and now a reversal in adoption sequence occurred. Prior to Mosaic the sequence of adoption was: Military, Big Business, Small Business, and Consumer. There was also a geographic sequence that meant technologies emerging in California took a few years (5+?) to make it to Europe and the same again to make it to Asia. The order has now reversed and the spread of ideas is both bi-directional and super-fast. For instance we’re going to see individuals install HIVE before most plant install remote operations. So I think we can already see the new technologies and ways-of working being successfully deployed for consumers – the question is how will the Oil and Gas industry adapt them for its use?

How could real-time sharing of Oil and Gas assets and equipment be made to work? How could we create an “Oil-Uber” for self-employed drilling engineers? How can we scale-up technology like HIVE, algorithms for maintenance diagnostics, combined with the GPS on a tag like that in my £100 Garmin watch attached to and despatch the most available uber-spare-part.

Of course, innovations will sneak up on us through lots, and lots, of small changes but the effect will dramatic – looking back we will see the change, but it will happen gradually with the companies that use more efficient technologies buying assets from those that don’t – or, more accurately, buying assets from their officially appointed receivers.

Crash of 2016 and rise of internet of things

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.

Break your business CIA style

So Ian Stewart at Deloitte comes to my rescue today with a pointer to an excellent piece of research.

During the Second World War the CIA published a how-to-guide for citizen saboteurs living in occupied countries. Among various ways to disrupt machinery etc. were some excellent examples of how people were advised to prevent the smooth running of business and stopping progress. Many of the pieces of advice remind me of the practices I have witnessed first-hand being business as usual at oil and gas operators.

Including advice for Strategic Management:

(1): Insist on doing everything through “channels”. Never permit short-cuts to be taken in order to expedite decisions.

(2): Make “speeches”. Talk as frequently as possible and at great length. Illustrate your “points” by long anecdotes and accounts of personal experiences. Never hesitate to make a few appropriate “patriotic” comments.

(3): When possible, refer all matters to committees, for “further study and consideration”. Attempt to make the committees as large as possible – never less than five.

…..

(5): Haggle of precise wordings of communications, minutes and resolutions.

….

(7): Advocate “caution”. Be “reasonable” and urge fellow conferees to be” reasonable” and advoid haste which might result in embarrassments or difficulties later on.

And Advice for Operations

(1): Demand written orders

….

(4): Don’t order new materials until your current stocks have been virtually exhausted, so that the slightest delay in filling your order will mean a shutdown.

(5): Order high quality materials which are hard to get. If you don’t get them argue about it. Warn that inferior materials will mean inferior work.

….

See more and gasp in admiration of the foresight here: [Link] – the full manual is available direct from the CIA here: [Link]

Working Hours Vary by Country

An interesting update came my way today courtesy of the Deloitte Monday briefing from Ian Stewart.  In my post about starting your own consultancy  [Link] I said that a consultancy would normally expect you to account for 2000 hours a year.  Below are some of the average worker stats by country. Just interesting I thought, I must work too hard !

In 2014 the average Mexican worker put in 2,228 hours, equivalent to a 43-hour working week with no holidays. The average German worked 1,371 hours in 2014, 39% less than the average Mexican. French workers worked 1,473 hours. Contrary to popular perceptions, Greece features among the countries where people work long hours (2,042 hours). By-and-large people in nations with higher levels of productivity work fewer hours, enabling Germans – who have among the highest productivity in the world – to produce more in a relatively short working week.

Collaboration reduces costs?

There has been a lot of hand-wringing around collaboration recently. For instance Paul Goodfellow Manager of UK Upstream at Shell said companies working in the North Sea need to learn from other industries on how to work together [Link]. Quite which industries he is talking about I’m not sure, also I am not sure what type of collaboration he’s looking for.

Worryingly for me there seems to be a focus on input costs. For instance one quote in the article stands out: “work with the supply chain on how to collaborate and get common purpose whilst driving waste from the system and driving unit costs down”.

When I analyse situations like this with clients I encourage them to take a view on both industry and supply chain, and be clear about the distinction. In Shell’s case their industry consists of other oil and gas operators. MMO companies, Scaffolding providers, helicopter operators and a myriad of other companies are part of the supply chain. They belong their own set of industries. Of course many companies supply services in more than one industry – so I need to consider them both in relation to their “competitors” and their own internal structure.

Here are three ways that cost can be removed:

  1. Industry collaboration between operators – to increase standardisation or share resources
  2. Adoption of new technology and methods
  3. Drive new processes to reduce unnecessary steps

These actions can increase efficiency which I define as the ratio of units of output to units of input. Assuming that output remains constant then efficiency comes from reducing system costs by removing labour or materials. This will increase the profit available for distribution among companies within the supply chain.

Reducing costs within the supply chain does not necessarily mean that Shell will see their input prices reduce – the location in the value-chain where profits are captured is subject to other factors. One model to explain how profit is captured was described by Michael Porter [Link]. Supply chain collaboration is, of course, important to organisations such as Achilles backed by my friends at Hg Capital [Link]. They set out some of their views on the issue here [Link].

In a commodity industry – like crude Oil and Gas production – there is little that producers such as Shell can do to change the selling price of their product (of course OPEC might have a different opinion [Link]). To protect profits producers need to reduce cost. At the moment operators seem to be forming committees to squeeze the supply chain. They are also laying off employees to cut overhead. I don’t see any action from Operators to collaborate with each other to reduce their own structural costs. Claims that they are seem to be a joint-ganging-up to encourage the supply chain to collaborate and reduce prices. That’s different.

Oil and Gas UK have stated that the North Sea needs to reduce costs by 40% within 5 Years or face very tough times indeed. Stephen Marcos Jones, Oil & Gas UK’s business development director, said: “Companies are having to make tough decisions on their capacity during the downturn and are individually taking measures to improve efficiency. However, co-operative working across the industry … can also help deliver the cost and efficiency improvements required to secure a long-term future for the UKCS.” [Link]

This quote from the Shell article highlights the inefficiency in buying within a single operator:

“One very enterprising supplier came forward and said we’ve got a great piece of quick erecting scaffolding, but we don’t understand why you haven’t been picking it up. The reason was because they were trying to work at various front-line levels of the organisation and it wasn’t important to one individual, because they didn’t know the totality of what we were spending on that service. When they came in through the strategic contracting team and demonstrated to the facility managers and made the decision there and then and we’re in the process of deploying it across every facility and rig we have in the UK sector.”

I feel this is an example of an operator missing new technologies due to their internal bureaucracy and inefficiency. My clients can tell me about literally hundreds of examples of this type of behaviour. The reality of course is more complex. When I ran the technology investment process at a major operator I found that the cost (and risk) of scaled change was such that it can easily outweigh the demonstrable benefits delivered from a new technology. Therefore this type of change can be slow and the results can be counter intuitive.

So in summary to drive out costs we must answer the following:

  1. What time scale and magnitude do we need to work to (some are long-term structural and will take many years to deliver, other are tactical and can reduce Op-Costs quickly)
  2. What can we do to reduce the cost within the supply chain, and how will we ensure that those costs flow to the prices we are charged?
  3. What can we do to reduce costs within our industry by collaboration and standardisation
  4. What can we do to reduce our individual costs by simplifying what we do, eliminate unneeded activity and increase work-rates?

Of course, as you would expect, the professional services firms have opinions on this. Their approach and advice is nuanced and reflects many of the same themes. Some of what they are thinking can be found here: PWC [Link], Deloitte [Link] and [Link], EY [Link], Bain [Link] and KPMG [Link].

Incidentally the word-cloud image at the top of this post contains many of the words I’d expect to elicit from a group of oil executives. It comes from VOTE – an organisation based in New Orleans – the Voice of the Ex-Offender. It is a grassroots, membership based organization founded and run by Formerly Incarcerated Persons (FIPs) in partnership with allies dedicated to ending the disenfranchisement and discrimination against of FIPs. [Link]. Goes to show that many of the issues that surround collaboration are human ones and not things specific to our industry.

Want to be a consultant?

Introduction

A bit of a topic departure today, rather than write about the Oil and Gas industry I thought I would share some more insights about how I work and why I do it this way – I intend to expand on this topic in future articles. This is quite a long article but there are a lot of points to introduce, so please stick with me. Please let me know what you think either by commenting here or emailing me directly.

So you want to be a consultant, do you?

I have been an independent consultant and an entrepreneur for around 7 years on-and-off and I find that, while  It’s not perfect it works for me.

Many people are curious about what I do, and often will tell me that they are considering becoming an independent consultant. The next question is normally “what’s it like” or “why do you do it?” Most of the people who ask me are disappointed with the position they find themselves in. Many are employees who feel frustrated with their role, some are disillusioned senior staff or partners in consulting firms. Increasingly I get the question from friends in the Oil and Gas industry who feel that their jobs are at risk, or are already seeking new opportunities.

Well the short answer is that a career as an independent consultant is not for everyone. There are some questions that I recommend exploring to see if it’s for you:

  • What’s motivating your research?
  • Is the world of work changing?
  • What is a consultant, really?
  • What skills are needed to be make a living?
  • What will it be like?
  • What does success look like for you?

What’s motivating your research?

If your questions are only from curiosity that’s great – but if you don’t want to become a consultant (or a client) please consider that time is my product. If you are considering becoming one then here is something to consider:

I don’t have a wage, I essentially sell my time. There are 8500 hours in a year. I’ll be asleep for 3000 of them and I’ll spend 1,500, eating, buying groceries, showering, driving places, doing laundry and generally faffing about. That gives me 4000 hours to do things that really matter to me (including work). Traditional consulting firms expect you to account for 2000 billable hours. (They do this because that’s what they have bought this from you in return for a wage).

So if it’s just curiosity that makes you ask about consulting then perhaps we’re wasting time that we could do something more interesting together with instead – like go for a cycle, cook dinner or swap stories.

If, however, you’re seriously interested in this and we enjoy each other’s company then I am delighted spend time with you.

My first advice is – that if you are considering independent consulting as a “stop-gap” until something else comes along – you’d be better looking for a contract position (see later) and spend time tracking down what you really want instead. Consulting is hard and time consuming. It is a profession and requires dedication and a willingness to hone your craft. Don’t start unless you really want to make it work.

Is the world of work changing?

Well of course it is. It always changes. When was the last time you saw a typing pool or an elevator operator. Perhaps this time it really is fundamentally different. I don’t know.

There’s this phenomenon called confirmation bias. This refers to our tendency to instinctively seek out information that supports our view of the world rather than challenge it. You will have experienced comments like “It’s not only me that thinks this – look so does [fill in name of authority figure here]”. So while risking confirmation bias, here are number of articles that I’ve read, most recently in the Economist, exploring how the world of work and how the idea of a company may be changing. Lynda Gratton writes a lot about this and so does Charles Handy and Rob Goffee. My favourite book of the last couple of years “The Second Machine Age” has some views on this too.

But there is a counter argument – if you are building and operating large capital assets then a freelance model is unlikely to work. For some people the psychological strain (not to mention the difficulty in getting a mortgage these days) means they’d rather be an employee. Some people really want someone else to order their day for them. Too much choice in what to do in a day can be overwhelming just as too much choice in a super market can be. Joining a company can (if it is a well-run one) be a way to minimise the decisions needed. Limiting them to just the ones that matter for a role adds clarity. Often an employee can go home at 5 O’Clock. Top that off with an argument around public participation in stock markets that really require a joint enterprise to function, then I think we’re seeing a rise of alternatives not a wholesale destruction of the traditional company and place of work.

In short then – there will be plenty of “jobs” available if you want one, and you can convince someone to choose you to do it. You don’t have to be independent – but, if you choose to be – things have never been better. I am also often approached by organisations claiming that they are “Disrupting the consulting model” and would like me to be part of their new model, in a networked mode I have nothing against this but I don’t go exclusive and certainly am not willing to sell my time as an employee of one.

What is a consultant really?

In my simple view of the world (short of winning the lottery) there are only three ways to make an income. I don’t know about you, but I need an income, so here are the methods I know of.

  1. Own shares in a business or other income producing asset
  2. Lend money to someone who then pays you back with interest
  3. Sell your endeavours by becoming:
    1. an employee;
    2. a contractor;
    3. a freelancer; or
    4. a consultant

I’m only going to deal with 3.

Employees’ time is sold by contract by their employer. Employees do as they are told and the fruits of their labour are owned by their employer. Often banned from working for other people, they can be expected to be loyal to their employer. They may have security of tenure for the length of their notice period and there are laws that stipulate fairness in their treatment.

Contractors are more convenient employees. Hired on a fixed-period basis, usually to fill a temporary gap or provide additional short-term labour. Staffing agencies help broker deals and some consulting companies will hire in temporary contract workers as a way to deliver projects that require additional resources. Tend to work for only one customer at a time. Responsible for making own arrangements and sorting out the interface with the government. Contractors normally assigned specific work to undertake and will have some relationship to line management.

Freelancers undertake specialist work in which they are experts. Tend to deliver a specific piece of work and under their own direction, often building on their prior work. Ownership of output is negotiable, tend to work for more than one client at any one time. Tend not to work under the management control from their clients.

An independent consultant never takes a line-role, and does not perform tasks that should be taken care of within the line. Work is more complex and consists of being paid for opinions, advice and influence. Results through influence (internal and external) and not control. Success comes from coaching an organisation to perform better by itself after you are gone. Work is transitory and comes to a natural conclusion once you are successful –don’t get too attached to a client or expect to stay. It’s worth noting that an independent consultant is not an employee of a firm – in this case income of the firm may be generated from consulting-like activities but he “consultant’s” income won’ be.

What skills are needed to make a living?

Consultants need to achieve results through influence. That means you need to build opportunities and develop the skills to add value for your client.

Creating opportunity relies on building a powerful network, the ability to identify opportunities to help and the wherewithal to generate an invitation to help on a commercial basis.

Influencing relies on persuasion, establishing trust and the ability to work outside normal line management constraints.

In addition to client-facings skills there is an important set of internally focussed skills which relate to structuring your work, maintaining motivation, developing new skills and coping with the psychological pressure of the independent consultant life-style.

I find that the most important action for me is to spend my time with people who make a positive difference. People who create time for me, and people who energise me. This relies on a skill of knowing who these people are and the inner strength to maintain discipline in who I choose to spend time with.

What will it be like?

In short it will be a roller-coaster. The greatest highs and the greatest lows of your working life can be found in this approach. What successful consultants find is that – though they cannot control many of the circumstances in which they operate – they can influence them and they can control their reaction to them. It’s a subtle distinction bear it in mind and it will continue to make more and more sense as your consulting career develops.

What does success look like for you?

This is the most complex of all. Knowing what success is for you – is it to spend more time with your family, to do more cycling (a favourite of mine at the moment), to think deep thoughts, to live in a location you select, choose how much you travel and to where. In short will money make you happy, or will being happy make you money [Link]?

This is complex because as an employee it is a question rarely asked, so you may have little experience answering it. Employees tend to be told what good looks like and rewarded with money, perks or praise when they achieve it (I realise that often the goal-reward structure is misaligned in some companies, but that’s how it should work). As an employee you are, by definition, not meant to consider what time you commit to activities. You are expected to apply your time effectively to the goals of your employer. If you are senior you are expected to spend your time thinking of goals that your employer should consider and then direct others to achieve those that were selected. In none of the normal employee situations is your working identity explicitly tied to your own personal goals.

One exercise I undertake with people who are considering a change is to point them to the definition of wealth proffered by Buckminster Fuller, and then ask them what they would do if money were not a constraint. Start from there and define your own definition of success – until you have it you can’t value anything and therefore you can’t price your work in a meaningful way.