With the offshore oil business now five years into the largest downturn in living memory, we have seen all manner of corporate restructuring: mergers, acquisitions, disposals, bankruptcies and new entrants. As a consequence, since many oil company functions are outsourced, the supply chain has taken the brunt of the downsizing pain.
At other times of offshore oil and gas industry crisis, various contracting models such as CRINE have been developed and subsequently faded away. What is different this time is that the “crash” has come at a time when the industry has been at a historic high and historic size. The impact has therefore been much more profound and impactful than any time in the past. Therefore, in my view, the future regime addressing the industry’s contracting models and cost base has to be structural in nature and built for the long term.
There are encouraging signs from both the super-majors and smaller independents that they “get it” and that the solutions to developing capex projects in the future cannot be a simple SCM-led bidding race to the bottom-dollar floor. This works of course in the short term but is not sustainable and will not serve the industry well. Our industry is much smaller than five years ago and oversupplied with tonnage, but exceptional expertise and talent is needed to deliver exceptional projects, and those are never oversupplied.
The industry crash of the 1980s took 15 years to recover in oil price terms, but that did not stop the industry finding new ways of working, to be much more efficient, innovative, and profitable. The exceptionally high oil price we have become too familiar with created conditions for low efficiency and performance. Going forward we should see much better capital efficiency and a recovery driven by better performance rather than simply higher prices. To do so requires new ways of working: more intelligent ways of working where there is alignment in business objectives coupled with performance incentives to drive exceptional performance.
Global contractors are quickly reshaping their service offering with far more integrated project capabilities. These concepts and strategies are not new, but for the first time in our industry it looks as though it could be the preferred model for many leading oil companies. Contractors today have vastly more capabilities in both the software of people, talent and expertise, and the hardware of sophisticated ships and equipment, than in bygone eras. Successful offshore capex projects are driven by engineering and project management solutions rather than day-rates, and those will be the key differentiators in an oversupplied market. Going forward, those traits will likely build repeat business for the successful contractors and further differentiation.
We should not forget that oil companies have gone through the same pain as contractors, they are much leaner than before and have outsourced so much that a mature and symbiotic relationship with the supply chain will be essential. The term ‘collaboration’ is oft quoted but is in fact difficult to achieve and runs counter to competitive instincts. However, as the industry experiments and develops new ways of working we are seeing that progress is being made with impressive project performance in exceptional circumstances.
While the situation we find ourselves in is not exactly new – as this always has been a cyclical market – but like before there are opportunities and ways for rescoping the working models. Much of which will depend upon finding successful ways of sharing risk and rewards.
IMCA’s forthcoming Annual Seminar is very much targeted at the ways in which our industry is getting back to business – with leading oil companies and contractors debating the strategic issues and finding new ways of working. It promises to be a fascinating event.