A fundamental change
TOTEX: commercial creativity and the supply chain of the future. By Romain Chambault
For as long as the industry existed, oil and gas has been an attractive investment. Since the first recorded subsea wells were drilled in the late 19th century, subsurface engineering and developments were the pinnacle of a modern-day commercial success.
Today, operators and the supply chain have to adapt to a myriad of variables, including differing client processes, regional regulations and so on. The subsea industry has, however, come up against three significant challenges within the last ten years, which have changed the technical approach to projects, and how they are financed, forever.
An era of change
The first of these factors was the emergence of shale extraction in the US, which grew significantly, and somewhat unexpectedly, lessening the global reliance on subsea drilling to grow reserves and production. Second, the global move to reduce dependence on fossil fuels and third, of course, the biggest oil and gas downturn we’ve seen in many, many years.
Looking at these factors together, it’s no surprise that capital expenditure (CAPEX) and operational expenditure (OPEX) spending by offshore field operators have been squeezed within the last decade, in some instances, by up to 50 per cent. With inevitable reductions in areas such as manpower and spending on production technology development.
Five years on, with prices showing signs of prolonged recovery following the 2014 downturn, producers have found themselves at a cross roads. How does the industry become leaner and more efficient for the future while maximising production in some of the most challenging environments they have ever faced? Fortunately, there is a supply chain behind them which has undergone a significant transformation of its own.
Time for TOTEX
To meet this demand, a total expenditure (TOTEX) approach to managing and operating assets and projects is starting to emerge as an attractive approach to project fiscal management.
In the past, operators have largely used the CAPEX as the main way of sanctioning, or not, large infrastructure developments or re-developments. However, elements of the supply chain are encouraging an alternative look at finances. The TOTEX (CAPEX + OPEX) approach looks at the total cost of expenditure, over the long term. Put simply, an opportunity may be relatively expensive in terms of CAPEX, but under the TOTEX approach, appear to present tangible economic benefits with attractive payback periods.
As the demand for new infrastructure, technology and digital solutions grow, TOTEX has become an option for asset owners to enhance how they manage and mitigate the risk associated with large capital projects, such as developing new fields, or extending the life of existing ones through the use of tie-back technology.
In parallel with TOTEX, commercial collaboration has begun to extend beyond technology development to mutually beneficial commercial agreements.
The concept of collaboration, much discussed some years ago in 2014’s Wood Report has also been critical to the recovery. Across the board the trend is for far closer operatorservice company relationships, encouraged, as much as anything, by the loss of experienced minds in the downturn and the emergence of many new, smaller operators in areas like the United Kingdom Continental Shelf (UKCS).
One of the biggest challenges has been the change of operatorship in this region over the last four to five years. Where there used to be five, six, seven very big operators, today we see a huge diversification of operators, in Europe alone, there now upwards of 45 working in the region. A number of these are relatively small, some with only a handful of personnel who require large scale support from the supply chain in order to function.
The push from these is two-fold, increased reliance on the supply chain for efficiencies of course, but also for industry expertise and commercial feasibility. The technical experience lost from within due to the economic fluctuations in the subsea industry over the last ten years cannot be underestimated.
In this new commercial environment, with a need to sell new technically proficient and cost-efficient solutions, the challenge for service companies is stark. While it has been a challenging period for many companies in this space since the downturn, the market is now seeing a resurgence of the subsea supply chain. It’s a sector that has had to re-evaluate itself and how it operates on almost every level and emerge stronger, more fit for today’s market and bursting with new ideas and initiatives.
Encouragingly, it is happening more and more. With tier one companies, such as Baker Hughes, a GE company (BHGE), launching new operating models, designed to positively address the challenges of recent years. ‘Subsea Connect’, is just one example of the ways in which the supply chain is turning traditional operating models, and operator relationships, on their heads.
Companies like BHGE have gone back to basic fundamentals creating an approach built on four basic pillars: engaging early with customers, delivering fitfor- purpose integrated technology, flexible commercial partnerships and commercial collaboration, and real-time data management, diagnostics and Life of Field (LOF) management.
Central to the idea is the TOTEX and LOF management, and a fundamental re-think as to how they engage with operators. Questioning traditional beliefs and changing basic design assumptions allows engineers and asset teams to better ensure that technology delivered is lower cost and faster cycle than those of the past.
By leveraging these new operational models, the industry will serve as an example to others. Its success will be driven by the mutually beneficial nature of TOTEX, with individuals at all levels delivering value and creating a new generation to act as the new pioneers for field development and asset longevity to the benefit of the whole industry, including the supply chain, for decades to come.
Romain Chambault is Director Europe, Oilfield Equipment, at Baker Hughes, a GE company.
Baker Hughes is an energy technology company that provides solutions for energy and industrial customers worldwide. Built on a century of experience and with operations in over 120 countries, its innovative technologies and services are taking energy forward – making it safer, cleaner and more efficient for people and the planet.
For further information please visit: www.bakerhughes.com