Tax relief is not the answer – subsidy might be

As I was driving to Aberdeen last week I wondered what would happen if I considered the export and processing infrastructure in the North Sea was a road network on land.

Why would anyone build a factory in a remote area if they did not have access to roads? The same could be said of remote field developments that hook back into export and distribution systems.

Taking the analogy further, what if there was a road outside your proposed factory but it only led to the M6 Toll Motorway. What if that toll booth could raise its prices whenever it liked and there’s nothing you could do? What if sometimes when you turned up at the toll-booth it was broken, and no-one knew how long it would take to fix. What if, one day, you received a letter to say that they were digging up the motorway and restoring the land back to farming?

As a business man, I would find that unacceptable. I’d be a fool to build my factory at that location. And that, friends, is the situation we have currently have in the UK North Sea.

Not only is that the situation but – because oil prices are down – the probability of bad things happening has increased. Despite this Oil voice reports that MPs do not favour support of the oil and gas industry [Link] their report says that:

‘Tax reliefs and allowances can never fully offset the operational challenges posed by the falling oil price […] Whilst the majority of Government MPs appear to have made up their mind about their position, the latest developments could prompt a rethink. There is a potential opportunity for the industry to engage with undecided Labour MPs to make the case for additional support at this challenging time.’

I agree with the position that this is not about Tax relief. To address this will require restructuring the way that the industry operates. If not outright nationalisation of parts of the network, this – at least – requires more control and probably limited subsidies. 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.

When I talked about this at a networking event, an experienced member of the Bestem Network informed me that decommissioning must be sanctioned by the government. So, in a sense, because you need to apply for permission the assets are indirectly controlled by the government. But, as he then said, there are really no sanctions if you fail to operate assets productively or if they’re closed for maintenance. And, apparently, declaring a safety critical event before shutting in is something no-one has the balls to question. Apparently there is a voluntary “infrastructure code of conduct” [Link] that defines principles for access to other companies infrastructure but how effective this is in practice is something some members of the Bestem Network question.

The oil industry is in a down cycle – now is the time to be investing as a nation to maintain the capability to produce.

I am sure there are macro-economic arguments regarding the value of extracting assets under our control for any price (including opportunity costs for displaced workers and spending within the economy) vs. the export of national treasure in exchange for the import of similar from overseas. I am not qualified to make those arguments – if you are, please comment.

Cross-company integrated planning

A while back I was talking to the CEO of a North Sea operator. He was telling me a tale of one of his assets – it had been off-line for a large proportion of the last year. He was beyond annoyed and had become “resigned” to the situation.

At first the he was off-line because the gas it imported from a nearby platform to power his water injectors was not available due to that operator’s maintenance schedule. Almost as soon as this came on-line his export route into CATS was suspended – again due to maintenance. (Here’s another example of an operator affected by CATS maintenance [Link]). Well blow-me if – when that came on-line – he didn’t face a gas-turbine maintenance problem on his own platform.

This interlinking of assets and reliance on others’ actions is becoming more common – for example here is what Enquest say about the Heather installation: “The Heather installation is designed to accept production fluids from Heather field and Broom field via subsea tieback. The production fluids are processed and separated into oil, gas and water. The processed oil is exported to the Sullom Voe Terminal via Ninian Central platform, while the gas is routed through compression trains for lift gas purpose.” [Link]

For years operators have battled to schedule maintenance on their own platforms so that work can be conducted in the most economic sequence. They aim to maximise capacity, up-time and utilisation. In this new interconnected world of small fields and infrastructure operating beyond its design life, companies must take into account the maintenance schedules of others.

One way is to be ready to work when the unexpected windows occur – that’s true even when you are a lone operator – but planned maintenance is a different matter.

Bob Spence, founder of Capital Project Partners, and member of the Bestem Network says that among the things he would consider are to: establish a common vocabulary across the supply chains of all operators; develop common definitions of how plans are communicated and progress measured and reported; find ways to deliver real-time reporting; and use predictive analytics to generate insight.

Lars Sandbakk, a leading light at Safran Software Solutions and expert in project planning tells me that from a technology perspective the issue boils down to: different software and their embedded methods; different project management philosophies; different terminology; and the lack of sensible data that can be easily exchanged without exposing more about your operation than you want.

He tells me that there is a cross-company initiative called ILAP (Integrated Lifecycle Asset Planning Standard) is being worked on and has been submitted as an ISO Standard.

Of course, while information and technology may be part of the solution, to make this work will require changes to commercial agreements and changes in the ways people actually work. These things are difficult to achieve and, without properly aligned incentives or new regulation and enforcement they are unlikely to take hold.

Learn to share nicely!

I had a number of responses to my comments about the main export pipelines from the North Sea – such as CATS – and the tariffs that are charged. A member of the network (senior SPE member who would rather not be named) pointed out that the “arteries” such as CATS are not such an issue as the “capillaries” – smaller interconnections – used in the gathering networks. Things like pooling of processing capacity (to remove water), compression (to build gas pressure up to enable it to be injected into the export pipes) and power (needed to run equipment) require a series of bi-lateral agreements. Smaller operators are heavily dependent on the reliability of big-players’ infrastructure. Sometimes alignment of incentives to operate effectively are missing and are, apart from oil price forecasts, the biggest economic blockers for marginal development.

The chairman of a large service company, and member of the Bestem Network, pointed me to a story by Robin Pagnamenta of The Times newspaper [Link] (Sept 9th 2015) explaining how the “great and the good” were meeting to discuss a proposal to pool infrastructure including, warehouses, subsea equipment, support vessels and other facilities. What I found interesting was, that while there was agreement that cost could be saved by pooling (non-core) operations, there was no talk about how to share the offshore installations and associated processing capacity.

Sharing bases and logistics will make things more efficient but won’t address the issues surrounding reliance on infrastructure operated by others. I can see how this will delay the inevitable slow down but not how it will facilitate drainage of marginal areas. It will not tackle the thorny area of non-common interest involved in sharing primary core assets nor maintaining shared operational schedules.

Further I can see that implementing shared arrangements for support logistics will take time to sort out, give the impression of progress but ultimately fail to unlock the opportunities that are present. Of course, go ahead and do it, but don’t think that this is all (or even the best) that can be done. Fundamental changes to the operator processes and license management in the UK sector is required, pretending that there is no problem with operator behaviour and narrow commercial interests as the JOA level cannot be avoided if we are to save this opportunity for the nation.

What do you think?

Interview with Short Allerton

Introduction

On the 10th of Sept 2015 I caught up with one of my earliest mentors, Short Allerton. Short is well known in the Oil and Gas industry. For those who have not met him yet I highly recommend you find a way to. Among Short’s many achievements he was BP Exploration’s Planning Manager and their Chief Geophysicist in the 1980’s, he was a co-founder of Dragon Oil and has been an independent advisor to service companies and the boards of various VC backed ventures. He is one of the most inventive people I have had the pleasure to know and he has no fear of telling it like he sees it. I sought out his opinion on what we can do to fix the North Sea basin and below are some of his thoughts.

Gareth: So Short, you’ve forgotten more about the North Sea than most people have ever known. What do you think about my stance that draining the North Sea should be a priority for the nation?

Short: Your article caused me to recall when I first went to work in Russia in the mid-90s for Schlumberger. The oil companies I met had no word for ‘profit’. They only talked about ‘revenue’. After all, who needs to be concerned that producing 100 barrels of fluid to extract 1 barrel of oil was ‘unprofitable’ if the barrel of oil could generate ‘revenue’, and that was what the oil men were measured on, while the means of production (pumps, electricity, separation) was just a ‘cost’ to the centralised ‘command-and-control’ system. You must remember that, to achieve your aim, commercial realities must be met.

Gareth: OK, I understand that we need to be commercial about it. Although we must be careful to consider a national, rather than company, accounting point of view. What do you think is necessary to do this?

Short: I think both perspectives need to be respected. If your vision is to find ‘smart’ ways to extract more hydrocarbons at these low oil prices, it will require more than new technologies. To be commercial will mean more than squeezing the profits of service companies. You seem to imply in your article that the biggest gains (both in production and thus in revenue, even profit) will come from savings made by owners of assets working in a different way to take advantage of each other’s infrastructure. I think you are probably right.

If you are trying to generate momentum behind interested oil companies working together to come up with win-win schemes through cooperation, then I can admire your initiative.

Gareth: OK, thank you for your support. What do you think the keys to success will be?

Short: To do this will need someone with a near total ‘overview’ of what those assets are and how they might work together.

In my experience, most oil company personnel are focused on their own assets, and it’s rare to come across anyone with the wider perspective. It was true back in 1985 and I’m pretty sure it is now. Perhaps the best people to be in that position are the O&G experts or the industry advisers to the Government. Perhaps this is the role of DECC or even the OGA? I know they publish some data on their website about the infrastructure installed, but I am not sure how useful this information is.

Gareth: So, what you are suggesting is what I’ve been taught to call an information gap. You’ve been in this industry for longer than most, do you have any experience in a situation where an overview of information was valuable?

Short: 30 years ago, I happened to be in a position to grasp a reasonably complete picture of the North Sea oil business. I was able to use that grasp to ‘map out’ a future timing of when the various gas discoveries industry-wide would come on stream, based on an analysis of the gas demand growth in the UK, the impact of Norwegian sales to the UK, the decline rate of existing producers, the price per therm to bring on new discoveries etc, etc, etc. This analysis shaped our exploration and production strategy in the North Sea for the next several years.

I was able to do this because I was in charge at the time of the subsurface exploitation of 25 BP fields spread throughout the Southern, Central and Northern North Sea and Western Margins and I had a great team working with me. I’m sure our analysis did not work out as I predicted – that isn’t my point. However, it gave us a ‘direction’ – when and how to invest, and where (and why). I had an overview of the data and could see the connections. I am sure that with all the small discoveries and interdependent satellite sub-sea developments it’s much more complicated now.

Gareth: So what do you think it will take to “make it happen”?

Short: I have the feeling that to get this off the ground, someone has to come up with a ‘killer app’ – a scheme that brings the assets of two companies together in a win-win solution. Once it’s been shown that it can work, hopefully more of the rest will be tempted to follow – or at least to talk, listen and think – and see the potential.

Infrastructure sharing in troubled times

I didn’t go to OE this year. I don’t think I was alone. From the reports I’ve heard things were quite subdued, except there were many people looking for work, apparently we are approaching 70,000 lay-offs in the UK Oil and Gas industry since 2014. Reports in yesterday’s guardian suggest that there is still more job cuts to come. This report in CITY AM – shows how the perception in London is being shaped and the urgency of the situation is being lost. CITY AM quoted job losses of only 5,500, and for many of the casual money men down here, that is all they will read.

The oil price is low. I remember when it was less than 25% of the current price– this report from the independent reminds us of $9 oil. In 1998 we also had the Asian currency crisis which started in 1997, what could a 75% drop in price do? With the recent wobbles in the China market, and talk of the commodity super cycle that wasn’t in the FT, is market perception changing, and perhaps there is further to fall?

I was pleased to see that Andy Samuel was quoted welcoming the efficiency task force – but I fear that these cross-company committees will be slow and ponderous. I also fear that operators will see this as a way to try to squeeze supplier prices and hurt the value chain. In my opinion, urgent structural change will be required to enable us to extract the resources that lie under the North Sea. Urgent because we need to maintain the infrastructure that will enable the extraction. This is a national opportunity and one that requires a national regulated response.

Andy was quoted as saying “The ETF is taking a three pronged approach to drive greater efficiency under the themes: Business Process; Standardisation; and Cooperation, Culture and Behaviours.” – Well frankly I don’t think this will be enough. I think the OGA must act, and use the powers it has (or obtain the ones it needs) to enable this. Of course, action like this is for the brave. Look at the trouble the control of access tariffs had in Norway, with investors suing the state. There must be questions about this with the recent private equity stakes being taken in CATS , FUKA and SIRGE – in one way this simplifies the access rights and can serve the needs of the customer better, but in another it centralises power in a way that only quick regulatory intervention can balance.

Resource nationalism

A colleague whose opinion I respect, had an interesting reaction to my recent article “Can we get the last drop“. He said that perhaps I was being rather nationalistic, perhaps you agree?

Unlike the points made in this Forbes magazine article, when I say that I don’t want to enrich other countries I don’t mean we should act like Venezuela and nationalise assets. I mean that I want any wealth created by the extraction of the resource to be available in this country (as private, taxable profit). I prefer not to see national treasure being exported to other countries in return for a product that we already have. Further, I think if we don’t act soon we won’t be able to act at all.

When I reflected further I realised that every country where I had worked except the UK and main land Europe, there was a general acceptance that energy and resource policy was of national interest. Even the USA has trade policies that govern the export and import of crude oil and refined fuels. Of course, countries like Saudi Arabia and Kuwait have export policies that not only move the commodity price but also are used to generate political power by choosing which countries can receive exports and where downstream investments will be made.

I am no politician nor would I claim to be a student of history. I am not an economist. I am an engineer and a business advisor. To me it is obvious that now we have an opportunity to extract resources from our reservoirs. There is a small time-window before the necessary supporting infrastructure is removed. As a country and an industry we are fiddling while Rome burns. If we do not act quickly then narrowly defined considerations will result in our opportunity being forever lost. I don’t think this is right.

We need to find a way to extract the last drops. Do it in a way that respects commercial reality while protecting the environment. If we don’t then we’ll end up exporting more of our treasure than we need to and all the people who rely on (or contribute to) our state treasury will be poorer.

It’s a challenge but I am sure we’re up to it. What do you think?

(Diagram from slideshare.net with thanks to AngloAmerican reference: http://www.slideshare.net/angloamerican/anglo-american-resource-nationalism )

Can we get the last drop?

North Sea Oil and Gas is the property of the people from the countries that surround it – UK, Norway, Denmark, Holland, Germany. As a citizen of the UK I don’t want any more of my country’s wealth to be transferred to the citizens of other countries than is necessary. I think that this means extracting every last drop from this resource that we economically can.

There seems to be a number of issues that will stop this from happening. I hear many reasons that might account for it including:

  • High cost of production in the basin;
  • Inability for companies to co-operate on problem solving;
  • Individual companies optimising for their goals;
  • Lack of access to shared infrastructure;
  • Environmental impact; and
  • Decommissioning liabilities

I sense that if action is not taken soon, access will be lost to critical shared infrastructure. Should we get the last drops out of the North Sea? What do we need to do to make this happen?