Inefficiency has been a key culprit in the increase in operating costs in the oil industry, executives have heard this morning (May 21) in Aberdeen.

McKinsey's Dan Cole told the DEVEX conference in the city that research by the company found that at least a third of the increase in costs in the North Sea can be attributed to greater inefficiency - from low productivity offshore to unnecessary engineering complexity.

Increasing activity, such as inspections, was about 20% of the increase and costs of goods, including raw materials and wages, was 40-50%.

"We, as an industry, need to tackle all three of these levers, particularly inefficiency," says Cole, citing figures which suggest 54% of oil production in the UK North Sea is uneconomic at current costs with oil prices at US$50/bbl (at US$100/bbl it was 88%).

Cole gave examples where inefficiency had impacted both operations (inspection and maintenance) and capital costs. In the capital costs onexample, he cited two platform designs, both for the same water depth, similar capacities and capabilities, one designed in 2000 and one which was pre-final investment decision last year. The more recent example had a price tag 2.5X greater than the earlier project.

Looking at where the increase came from, Cole says 30% was due to rates increases. "But greater inefficiency in the form of unnecessary complexity," was a large contributor to the increase in costs. The first project involved 50 engineering hours per tonne, while the second had increased to 120 hours per tonne - "to do the same thing." He says: "Engineering activity at the front end sky-rocketed." He said the "gold-plating" and standards were higher than regional, global and even the company involved's own standards. The operator in that case is now looking to reassess the project, says Cole.

Others agree with Cole's comments. Seamless tubulars manufacturer Vallourec has been hit by the drop in oil prices, as operators reduce capital spending. During a visit to Aberdeen today, Philippe Crouzet, CEO and president at France-based Vallourec, told OE p that companies have been over designing wells and needed to do more to standardise product to reduce costs.

"They [operators] lose a lot of time designing new solutions for every part. We have been advocating standardisation and we have been doing it in Brazil with Petrobras. We developed a model with Petrobras to make more standardised product. We don't need to reinvent the wheel every time."

Outlining how this happened, Crouzet said, as Petrobras entered the pre-salt reservoirs, some dozens of new tubular connections and steel grades were developed to handle the specific conditions. This created a catalogue amounting to some 40-50 connections. When Vallourec renewed its contract with Petrobras they discussed simplifying that range to the best 15, and this is what happened.

"There's a large tradition of learning curves - lessons learned each time we do something and change a number of things for the next time," he says of the industry broadly. "Originally it was a good idea but it is making things more expensive and I think there's a middle of the road where we can standardise and we can generate value. In areas like FPSO design I think they [operators] now recognise they are reinventing the wheel every time and they are now reorientating their engineering."

Despite the current slump in the market, Crouzet is confident there will be a mid-long term market and that deep offshore projects, especially those already under way, remained robust.

However, he still expects some short-term strain as areas with higher costs are squeezed, including West Africa. Meanwhile areas where development is at a early stage, such as East Africa, are likely to see delays, he says.

"In some areas, the Gulf of Mexico, as well as Brazil, to be honest, they are just break even," he says."But these projects (deep offshore) are very big and difficult and expensive to stop once started."

Source: www.oedigital.com

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