Forging a world-leading supply chain
May 4, 2016
Speech given by Harry Brekelmans, Projects & Technology Director at Shell, at the Offshore Technology Conference, Houston, Texas on May 4, 2016.
The fall in crude-oil price has had quite an impact on the cash flow of not only the operators of oil and gas fields but also the companies that provide supplies and services to the operators. It also revealed some “dirty little secrets” of the industry: inefficiencies, overpricing and arbitrary risk allocation in the design, planning and construction of oil and gas projects. Now is the time to redress them, says Harry Brekelmans. Speaking at the Offshore Technology Conference, he points out how an operator can improve its capital efficiency in the scoping, execution and technology of projects. But for the industry to achieve a sustained across-the-board improvement in performance, a much deeper collaboration is required among all links of the supply chain.
Ladies and gentlemen: Good afternoon. I hope you’ve enjoyed your lunch.
You certainly will need plenty of nourishment, if you check out all the goods and services on offer here at the OTC. All the links of the offshore industry’s supply chains are represented in the exhibition arena: service companies, drilling contractors, engineering firms, materials vendors – not to mention the operators of oil and gas fields. I understand that there are more than 2,500 exhibitors this year!
That’s not as many as last year. But then, last year’s sold-out exhibition space was the largest ever at the OTC. Perhaps the industry was still in denial then. This year the consequences of a persistent low oil price cannot be ignored. Major projects have been delayed, and many layoffs have been announced.
But it is not the only tough year our industry has experienced. The oil-price crash of 1986 also led to investment drying up and employment shrinking. Yet oil and gas companies persevered. They adopted new technology. They went after different kinds of petroleum plays. In the end, the industry managed to lift productivity levels high enough for many of our companies to remain profitable throughout the 1990s. In short, we learned to succeed – no matter the market price – by dramatically improving our performance. That took courageous, committed and visionary leaders.
But that was 30 years ago. Most of those leaders have now retired. So now it’s our turn to take on the mantle of leadership – to rally the industry, to make bold decisions, to inspire radical change.
Today’s industry leaders have to re-forge the links of supply chains to hammer out inefficiency, overpricing and arbitrariness. These were picked up over the last decade, when the industry chased oil and gas production on the back of economic expansion. At that time, you may recall, we had our sights set on more barrels rather than higher returns. We were convinced that global demand growth would see us through.
But this has left us today with baggage that drags down our industry’s performance. Our industry must now jettison that baggage in order to survive today’s business environment and emerge reinvigorated from it. And this requires much deeper collaboration among industry players. We’ll have to fundamentally change the way we interact with one another.
Capital and labour intensity
It’s easy to blame our industry’s current malaise on the sunken oil price, which since 2014 has been way below its 10-year average. But frankly, much of what afflicts our industry is of our own doing – and it predates 2014 by more than 10 years.
Over the many years that we’ve been working together, our behaviour – both inside and outside our respective companies – has allowed cost, risk and inefficiency to spread unchecked across the industry’s supply chain. There’s been a vast expansion in project documentation and assurance processes, resulting in a proliferation of company-specific requirements. We have set up too many interfaces within and between companies and fragmented our work packages too much. The cumulative effect of all this largely explains why a barrel of oil today requires between three and four times more capital than a barrel produced in 2004.
Sure, there are factors beyond our control at work here too. The hydrocarbon resources we’re developing today tend to be in more complex geological settings and in deeper water than they were a decade ago. And the economic boom in countries such as China, as well as massive projects in countries such as Australia, have also overheated markets for building materials and construction workers. This has resulted in higher prices and wages.
But those factors don’t explain the increase in the amount of engineering man-hours per piece of equipment. The data show that, over the last 10 years, Shell engineers have become less efficient in designing onshore and downstream projects. And that worries me. A lot.
But it’s not just Shell engineers who have become less productive. It’s the entire oil and gas industry. Averaged around the world, it takes about 15% more people to produce a barrel of oil today than it did 10 years ago.
Now, you could say: “Well, that’s what you get when governments impose more regulations on projects to protect the environment or to source local manpower and materials.” But then how do you explain the fact that other heavy industries have managed to avoid such performance-killing trends?
If you compare the productivity of the automotive industry with that of the oil and gas industry, you’ll see that the trends go in opposite directions. Surely the US automotive industry has also been subject to as much government regulation as the US oil and gas industry!
The uncomfortable truth is that we got ourselves into our current predicament. But so too are we capable of getting ourselves out of it. By deliberately, openly, creatively stripping out waste and creating new sources of value for oil and gas projects, we can secure the continued viability of our industry.
So how do we do that?
We can begin at the beginning – with the scoping of projects. This lies mostly in the hands of the operators, who specify what a project entails. For far too long, we have been satisfied with specifications that were too vague or that were left as a hostage to fortune.
The design and technical specification of a project should – first and foremost – be aimed at assuring a minimum acceptable performance. Scope changes to give a project greater value – say, by increasing its throughput – or to give it greater robustness against risks – say, by increasing its operational flexibility – must then only be accepted with full awareness of the cost trade-off. Above all, the project must be kept competitive vis-à-vis comparable projects. Shell refers to this as “competitive scoping”.
Shell recently built up a competitively scoped project for a mid-size development in the Gulf of Mexico. Although I won’t go into the details, the key point is this: When all scope changes were accepted with eyes wide open as to their cost and value implications, capital-expenditure savings of 15 – 25% were obtained – primarily from the scoping of the offshore platform as well as subsea pipelines and risers.
Shell is also looking at ways to determine when something truly exceptional might be required to guarantee a project’s success. In some cases, simply meeting industry norms may be enough. And the norms don’t necessarily have to be set by the oil and gas industry.
The shipbuilding industry, for example, has come up with its own set of international standards. Couldn’t they be adopted for engineering ship-like parts of a floating LNG facility – the hull and main deck, for example?
When a Shell project team answered “yes” to that question, it managed to reduce the number of requirements from 3,268 to 770 for the case of marine deaerators, which remove dissolved gases from boiler feed water. And that resulted in $50 million savings in shipyard scope. The project team would have faced not only higher costs but also potentially longer delivery times had it applied all of Shell’s Design and Engineering Practices instead.
Of course, in many other areas the oil and gas industry has developed tried-and-tested practices and designs that are fit for purpose. But even there the supply chain can extract further value. That’s why Shell recently joined nine other oil and gas producers to kick off a joint industry project with the aim of harmonising company requirements. Initially, the project will focus on the specification of ball valves, subsea equipment and low-voltage switchgear.
And it’s not only owner-operators who will benefit from such steps towards standardisation. Suppliers also will reap benefits from easier packaging and delivery, simpler bidding processes and economies of scale in fabrication and testing.
No harm, no leaks, no waste
And speaking of project requirements, let’s talk for a moment about safety.
Safety is our top priority. There’s no doubt about that. But safety is about mindfullyreducing risks, not mindlessly adding requirements into a management system. And I think all of us can cite instances where additional imposed requirements have done little to improve a project’s safety but certainly introduced inefficiency.
“Safety is about mindfully reducing risks, not mindlessly adding requirements into a management system.”
I would go even further. In some cases additional requirements have actually detractedfrom safety. There simply are too many requirements to keep track of. Consequently, it’s easy for them to be duplicated – albeit imperfectly. At worst, this can lead to contradiction; at best, to confusion.
Shell operating companies in various countries have piled up a “mountain range” of paperwork into contracts with the best of intentions: to make lifting and hoisting safer. All in all, it consist of nearly 1,000 pages of documents. Would you believe me if I told you that Shell’s functional leadership believes that fewer than two dozen pages are sufficient to this end? The details of implementation should be left to those who are actually doing the lifting and hoisting.
Let me be clear: We should never lose sight of the real goal behind our safety requirements – no harm, no leaks. But through initiatives such as Shell’s Safety Leadership forums, we must dare to address areas where we have added cost and complexity without really reducing HSSE risk.
The crucial question the industry has to answer is how to meet safety’s Goal Zero while cutting out waste, minimising idle time and eliminating duplication of effort. The same applies to the assurance of the quality of a project’s components. In fact, safety and quality performance go hand in hand.
Safety & quality
With that in mind, let me tell you a true story.
At one of Shell’s project sites a work crew was painting some blind flanges for the topsides of a deepwater platform in the Gulf of Mexico. The painters had applied the first layers of primer and top coat when they noticed some pinholes. They probed the holes – literally. They stuck a wire into the holes and were shocked to see the wire go nearly all the way through the flange – almost 10 centimetres. As a result of their intervention, all other flanges were checked. A second flange with the same defect was discovered. The painters had uncovered a serious quality defect in the manufacture of the flanges.
Although the two flawed flanges would have passed a hydrotest, chances are they would have failed in service. Just imagine the impact of that on the platform’s safety.
Because safety and quality are so closely linked, improving one generally improves the other. And the earlier in a project we ensure both, the more the industry stands to gain.
Correcting a serious quality defect after a project has come on stream can easily run up to $100 million in terms of lost production. Needless to say, this is something an owner-operator wants to avoid at any cost. And that cost could be much closer to zero if the defect is detected in the early stages of a project.
More and more control and oversight from owner-operators is not the answer. Rather, every contractor must take on greater individual accountability for the safety and quality of its deliverables. And the efficiency with which that is realised depends on the cumulative effect of many small improvements: better training, better supervision, better planning and better data – all applied with utmost discipline.
This drive for efficiency has to extend from corporate headquarters all the way to the project construction site. In fact, at Shell we’ve seen how labour productivity – and safety – can both be remarkably improved simply through better frontline management.
A recent inspection of work practices at a construction site revealed that hot-insulation workers spent only one-third of their time actually doing their job, which is covering newly built facilities with thermal insulation. The other two-thirds of their time was frittered away because of inefficient planning, ineffective work preparation, a lack of information sharing and limited coaching.
Relatively simple interventions – visible management at the site, active coaching of foremen, setting daily targets and thorough work preparation – resulted in an almost 70% reduction in the number of man-hours required per square meter covered.
IT tools can also help to optimise the activity scheduling, materials management and workface planning for a project – particularly one whose components are made in many locations around the world. Shell ProjectVantage provides several such tools in an integrated engineering environment. They enable a project team to track the installation status of key pieces of equipment, display construction diagrams in 3D and use graphical reporting to overcome the language barriers encountered when dealing with a large, multinational workforce. All the data related to a project – the equipment specifications, the construction schedules, the part numbers – are kept separate in a “cloud” database that is tightly linked to the thousands of documents constituting the execution plans. This helps a project team to have access to up-to-date information all the time.
Shell is using ProjectVantage tools to manage the construction of the Prelude floating LNG facility in South Korea. One of the tools is based on 4D computer-aided design, which adds the dimension of time to the three spatial dimensions. This gives project engineers much greater insight into the concurrent activities at construction sites and helps keep the work safe and on schedule. It also enables them to identify potential scope reductions on the fly. Using the tool, for instance, it became clear that not all of the facility’s water cooling system would need to be soundproofed, as had been specified in the plans.
The Prelude construction team also uses a ProjectVantage tool to schedule the erection and removal of scaffolding – more than 14,000 tonnes of it. The aim is to have the scaffolding set up at the right place and at the right time for multiple concurrent activities at different heights: cleaning, painting and insulating, for example. The project team creates 3D views for each scaffolding level that shows the work teams what exactly has to be done. The extra dimension of time – the “fourth D” – shows when the various tasks will be completed. And that helps to make sure that the scaffolding is not dismantled too early.
Such ProjectVantage tools significantly increase the hands-on-tools time during a project’s construction, increasing the productivity of the workforce. As a result, Shell’s projects are expected to be delivered 10 – 15% quicker.
ProjectVantage is just one example of a technology that can help make up for the bad habits we’ve got ourselves into in the design, planning and execution of oil and gas projects. I believe that technology in general has a lot to offer in this regard.
The key factors here are the speed of its development and the breadth of its deployment. If a technology is to materially increase the value or reduce the cost of projects – or enhance their operational reliability, productivity and profitability, for that matter – then it must be developed quickly and deployed widely.
Of course, in some cases the development can be skipped altogether: the technology can be grabbed straight off the shelf. Shell recently asked its suppliers: “What field-tested technologies have you deployed for others that Shell should also know about?”
Out of the many examples brought forward, 10 third-party technologies were selected for widespread deployment throughout Shell. One of them is a real-time monitoring system for electrical rotating equipment, such as pumps, fans and compressors.
Through sensors fitted around the equipment’s power cables, the system continuously monitors subtle fluctuations in the power input of the electric motors driving the equipment. It then interprets these fluctuations to predict mechanical failure and other potential issues months in advance. This allows operators to more effectively plan and schedule the maintenance needed to avoid an unplanned shutdown. Such a predictive capability is particularly welcome for production equipment whose power cable can be easily reached but whose motor cannot – as with subsea electric submersible pumps. Shell estimates that, over the course of a year, the system could deliver oil volumes worth hundreds of millions of dollars which would otherwise be deferred.
In most cases, however, a new technology will require a period of development before it can be deployed widely on site. And in such a case, two heads can be much better than one – particularly if they belong to people from different companies. Shell certainly is looking for suppliers with which it can “co-innovate” technology that fits nicely into its business strategy.
Here’s an example: For more than a decade now, Shell has been working – with some success – on the application of “swellable elastomers” to shut off the ingress or egress of liquids in wells. Basically, a packer made from a rubber-like material is fixed around tubing that is then lowered into a well. There, the packer expands upon contact with water to seal off the annular space around the tubing.
One extension of that R&D programme is a swellable elastomer in liquid form. This liquid can be brushed on the threaded ends of tubing to prevent the joint from leaking. It was, it turns out, exactly what the Salym Petroleum Development company (SPD) was looking for.
SPD is conducting a water-flooding programme with injection wells operating at 170 bar. Normally, that kind of pressure would require expensive tubing with premium connections. But with the elastomer liquid, standard production tubing could withstand the high pressure. The liquid enabled SPD to save 35% on the cost of tubing for the project.
There may be other operators who could use this technology. But to make it more widely available, Shell recognises that it must leverage its supply chains.
Which brings me to the most important part of my presentation.
New technology, efficient management and competitive scoping – in and of themselves – can certainly help to improve our industry’s performance. Thanks to them, Shell is on course to deliver $4 billion of structural capital-investment savings over 2015 and 2016.
But they alone are not enough. The industry can – and must – deliver more. I’m talking about sustained, multibillion-dollar across-the-board improvements in capital efficiency. To have that kind of impact on the industry as a whole, we have to fundamentally change our behaviours in the supply chain.
The industry faces some harsh realities: capital investment is drying up; thousands of our colleagues are leaving the industry. High costs, low productivity, eroding competence, increasing safety micromanagement and decreasing quality control only add to that toll.
As a consequence, our industry’s supply chain is being stretched to the breaking point. Our situation can only be relieved through healthier, stronger relationships between us. We need to forge new links in our supply chains on the basis of deeper understandings of our respective businesses.
All parties in a supply chain must be willing to speak openly and listen attentively. They must also be willing to be much more transparent. That’s the only way to cement greater trust.
Shell intends to align its internal processes to ensure the capital and labour efficiency of its projects. But for that to be successful, Shell’s contractors need to align their processes, practices and performance incentives to the same end. Will we come up with performance indicators we can all agree on? Do we have the courage to be transparent with those data? Can we admit where profits are being made? Where losses are being incurred?
Interestingly, even where we disagree, talking about it openly at least helps us to understand one another better. We can appreciate how we individually balance risks and rewards. And that’s already a step forward.
Improving capital efficiency
Ladies and gentlemen: These are trying times for our industry. And it is precisely at times like these that true leaders must stand up and act, setting shining examples for others to follow.
Each of our companies is coping with its own troubles. Some of them are cyclical and will pass. But others have regrettably become ingrained in our ways of working. They have become bad habits, as I called them earlier. They will not go away when the oil price goes up or steel prices go down. They have to be eradicated once and for all through a wholesale transformation of the supply chain. And that comes down to us – as industry leaders – linking our supply chains on the basis of a deeper understanding of our respective businesses and a deeper commitment to mutual success.
Like those great industry leaders who brought us through perilous times in the late 80s, let’s pull together to give the oil and gas industry the world-leading supply chain it needs.
Thank you for your attention.