Value creation and partnership in a challenging business environment
Feb 1, 2016
Speech given by Harry Brekelmans, Projects & Technology Director at Shell, at the GE Oil & Gas 2016 Annual Meeting, Florence, Italy, on February 1, 2016.
Low oil prices have increased pressure on the oil and gas industry to improve the capital efficiency of major projects.
In this speech, Harry Brekelmans argues that a project team should, therefore, focus on: applying greater scrutiny to the project’s scope; ensuring its efficient execution; deploying affordable technology; and transforming the project’s supply chain.
He says these areas are not only important in the current economic climate. They are essential to the sustainable future of the industry.
Ladies and gentlemen, good morning.
It’s a pleasure to be with you today.It’s also exciting that this conference is taking place in Florence – birthplace of the Renaissance. A time of exploration. Of discovery. Of great inventions.
The oil and gas industry is in need of its own Renaissance. This will be how we collectively respond to the tough business environment we find ourselves in.
I realise this all sounds like a rather classical ‘change by exhortation’ method. And the obvious question that this critical audience will ask me is: ‘How exactly do you expect us all to do this?’
In the next 20 minutes or so, I’ll give my answer, focusing on how we can use the period of sustained low oil prices to really step up and work better together.
Shell’s global Projects & Technology organisation
But before I get ahead of myself, first a bit of background on my team at Shell.
I’m in charge of the global Projects and Technology organisation, which designs and delivers Shell’s capital projects, and ensures that all of Shell’s activities have the necessary technological capabilities.
Just like everyone in the room, my team’s work is rooted in addressing the major longterm challenges and opportunities facing our planet and our industry.
Renewables are undeniably growing. But what’s also clear is that future global demand for energy will require us to continue producing crude oil and natural gas for decades to come. This, in turn, means the need for significant capital investment in major oil and gas projects.
To excel in this space, Shell put its projects and technology capabilities in one focused delivery organisation – the one I currently lead.
Shell has a proud track record of delivering important capital projects – spanning many decades. Since Projects and Technology was consolidated under one roof back in 2009, we have seen a significant further improvement in that delivery.
Over the last five years, we’ve started up 75 material projects. These include the Mars B project in the Gulf of Mexico, in the deepwater sector of our Upstream Business, and Pearl GTL in Qatar – the world’s largest source of gas-to-liquids products – as part of our Integrated Gas Business. Both these projects are great examples of how many years of continuous innovation culminate in differentiated, competitive products and assets.
We’ve put in hard work to deliver those projects on time and on budget. Around 75% of Shell’s major operated projects are delivered with less than 10% cost overrun versus their original P50 investment promise.
By way of contrast, a 2014 World Economic Forum study covering 100 major projects in the oil and gas industry showed that only 18% of projects were delivered on budget versus final investment decision.
I’m proud of Shell’s record. But at the same time, Shell – indeed the whole industry –needs to do much more in the face of current realities.
Decreasing productivity and increasing costs
Why? Well, compared to a decade ago, it typically takes the industry twice as long to draw up detailed development plans for an oil or gas field and nearly 50% longer to drill the wells and build the facilities called for by such plans.
And according to the consultancy Independent Project Analysis, between 2000 and 2014 well costs almost tripled, pipe-lay costs increased by around 60%, and the cost of subsea kit has tripled. At the same time, we have seen a shocking decline in engineering and construction productivity.
Construction productivity in both Europe and the US declined by more than 20% between 1990 and 2009. Whereas, with all other businesses, productivity increased by more than 40%. A stark contrast.
All of these factors have led to an enormous cost increase in the oil and gas industry. The IPA has also analysed capital cost per barrel. Between 1996 and 2014 costs have increased by a factor of four.
So what’s behind all of this?
It’s fair to say that external factors haven’t helped. Think of ever tighter regulations regarding local content and the environment. Think of the increasing geological and political complexity of the resources our projects tap.
Also think of the growth wave in countries like China, and the resulting commodities boom in countries like Australia and Canada. This has increased the price of construction materials, as well as driven the overall rise of salaries in the oil and gas industry.
But there are many factors that we can control. And we – as an industry – haven’t been doing so very well.
First of all, there’s been a vast expansion in required project documentation and assurance processes.
Ever accumulating specifications – informed by sometimes unique incidents as well as individual engineering preferences – have resulted in a proliferation of companyspecific requirements. This is on top of a multitude of industry standards for virtually any piece of equipment.
Did you know there are hundreds of industry “standards” for valves alone? As a result, we are defeating the purpose of an industry standard, as suppliers and service providers strive to meet the needs of their customers through bespoke solutions. At our project sites and in our processes, we see many examples of “waste” such as rework throughout the supply chain and low time on tools, caused by a large number of interfaces, fragmentation, less experience workforce and unwieldy owner-team set-ups.
Other industries have successfully reversed the trend
Other industries, such as the aerospace and automotive industries, have managed to put together much more systematic and rigorous ways of managing requirements through the supply chain.
But in our own industry, we haven’t got to grips with the steady upward trend in cost and delivery time.
This is the world we now find ourselves in. It’s not all doom and gloom, though – even with the price of oil where it is. In fact, it’s this low oil price where we can find some hope. It compels us to make our companies more efficient and competitive. In so doing, we’ll secure our places in this industry for many decades to come.
I believe it comes down to focusing on four areas. Applying greater scrutiny to a project’s scope. Focusing on the efficient execution of a project. Deploying affordable technology. And – underpinning all of them – the wholesale transformation of the supply chain.
I’ll run through each of these areas in turn.
First, the scoping of a project. The design and technical specification of a project should – first and foremost – be aimed at assuring a minimum acceptable performance. No more, no less – at least to begin with.
For example, with Shell’s Stones Deepwater project in the Gulf of Mexico, we fundamentally redesigned our wells using practices developed in our onshore unconventionals business. In the process, we reduced the planned capital cost of the wells by more than 30 percent, as we used less materials, reduced installation costs and also reduced overall delivery risk given these wells are now much simpler to drill and complete.
In future more truly standard and “off the shelf” components will have to be used. In Shell’s case, for example, greater standardisation and simplification of the wells connected to the Mars and Ursa offshore platforms in the Gulf of Mexico was responsible for $95 million savings in 2015.
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 only be accepted with full transparency of their cost and value tradeoff. But above all, the project must be kept competitive vis-à-vis comparable projects. That’s why we call this ‘competitive scoping.’
Moving on to efficient project execution. Cutting out waste, minimising idle time, eliminating duplication of effort – all of these have to be ruthlessly enforced, but never at the expense of safety.
Improving productivity during the construction phase can offer huge benefits. Let’s take the example of installing hot insulation in a construction yard.
During yard walkthroughs it was observed that frontline workers only spent one third of their time on real value-adding work. The other two thirds was frittered away because of inefficient planning, ineffective work preparation, a lack of information sharing and limited coaching.
Relatively simple interventions – visible management on the work floor, active coaching of foremen, setting daily targets and thorough work preparation – resulted in an almost 70 percent reduction in the number of manhours required per square meter covered by insulation.
When it comes to efficient execution, there is no silver bullet. The secret here is the sum of many small things. Better planning. Better use of IT tools. And better trained, more competent staff, with a lower turnover. All these things we know we need. But they will only come about with the utmost discipline and application – not something our industry is renowned for.
The third area of improvement is affordable technology. This must be deployed quickly to increase the value or reduce the cost of projects and to enhance their operational reliability, productivity and profitability. One Shell example comes to mind.
ProjectVantage is a suite of IT applications that we in Shell are using to deliver safer, faster, better projects. It does this by adopting a data-centric point of view instead of the usual document-centric approach. In other words, all the data related to a project – the equipment specifications, the construction schedules, the part numbers – are kept in a “cloud” database that is tightly linked to the thousands of documents constituting the execution plans. This enables the data to be kept evergreen.
One of the applications developed under ProjectVantage is based on 4D computeraided design. We added the dimension of time to the three spatial dimensions. This gave our engineers much greater insight into the concurrent activities going on at the
construction sites. That helps keep the work safe and efficient. It also helps keep the project on track.
The 4D design quickly reveals if there are incompatible activities taking place at the same time in the same place. For instance, if welding on an overhead structure is scheduled for the same week that workmen are painting nearby, then those activities can be rescheduled.
And as scheduling has to be ever more tightly integrated into our planning, the industry will go further – from “4D” to “5D” – adding the availability of materials to the three physical dimensions plus time.
Supply chain transformation
The fourth theme I want to focus on is supply chain transformation. It underpins the success of the three themes I talked about earlier.
In the supply chain, Shell sees three routes to extract more value: improving our own demand management, simplifying our specifications, and negotiating lower prices. We’re making savings across all three areas. Here are two quick examples.
One of the things we’re doing is critically reviewing the way we’re ordering and delivering materials and maintenance supplies. In the Gulf of Mexico, we recently saved $60 million by optimising the use of our marine and other logistics assets.
We’re also using Enterprise Framework Agreements to leverage our scale and allow suppliers to do the same.
In the past year, on some of our big projects, we’ve adopted an integrated approach, combining all of these improvement themes – Competitive Scoping, Efficient Execution, Affordable Technology and Supply Chain Transformation. And we’re seeing positive results.
The Appomattox deepwater project in the Gulf of Mexico is a good example. Although this project had already progressed well through the design phase, we nonetheless reduced the total estimated cost of the project by 20%, compared to the original concept. This enabled us to secure a final investment decision last year.
This integrated approach is only successful if we collaborate in novel and bold ways with our supply chain partners along the entire value chain, united by a strong collective will and purpose.
Improving the industry’s safety performance
To those who think such a unity of purpose can’t ever be achieved, have a look at how our industry came together to improve its safety performance.
According to the International Association of Oil and Gas Producers, there has been a significant downward trend in the oil and gas industry fatality rate, at the same time as a huge increase in the amount of hours worked.
People still get injured. And tragically, people in our industry die every year. This is unacceptable. A lot more work still needs to be done.
But when I look back at where we were as an industry, and where we are now, we’ve been on a tremendous journey together.
I believe it came down to us – as industry leaders – collectively taking a stance and saying: “Enough is enough. This industry should – and will – become incident and injury free.”
This wasn’t easy. I remember the difficult conversations, and the understandable selfdoubt: “It’s a great ambition to have, but surely we will never get there.” “We’ve tried that before.” And so on.
Nevertheless, the feeling and compulsion to act gained momentum and swept through the industry. And look what we achieved.
We worked together in new and different ways to do it. We showed care for one another and the overall health and reputation of the industry. We also learned that a safe business is the foundation for a robust commercial business.
Improving performance through collaboration
Such effective collaboration doesn’t happen overnight. It requires a common long-term commitment from the parties involved.
What I’ve learned from partnerships which have stood the test of time is that they have a common sense of purpose that’s aligned with the long-term business interests of all the companies involved.
A few months ago, I was invited to speak with the top executives of one of Shell’s valued suppliers. We talked about the widespread and systemic issues in our industry – the poor productivity, the cost escalation, the deteriorating returns and so on.
We agreed on the need for a fundamental transformation of the way we work together. The company’s CEO and I now directly sponsor a joint team whose purpose is to eliminate duplication and waste across all interfaces, radically optimise specification and demand, align interests, and ensure a sustainable and replicable model.
Both Shell and our partner agreed that risk should be managed by the party best equipped to control it. The upside will be shared accordingly in a way that aligns the interests of both Shell and the supplier to the business objectives. In short, both parties are striving for what’s best for the project.
This is a great example of how we transform the way we collaborate. But it’s far from the only one out there. There are plenty of other cases of effective partnerships involving the many different companies represented here today. The point is we need to make them more systematic and more structural. This will ensure we overcome the realities facing our industry, as outlined earlier.
This conference is the embodiment of the kind of collaboration that needs to happen the whole time. I encourage everyone to keep exchanging ideas. To harness the same level of creativity and desire to challenge and transform the status quo which was prevalent in the great minds who lived in Florence during the Renaissance.
Think bold and work together
On that note I’ll wrap up. I’m all too aware that boosting collaboration has been talked about ad nauseam over the years. It’s met with responses like “We’ve tried that before and it came to nothing”. And “No need to act. We all know the oil price will come back up.” At which point transformation once again becomes transaction. And strategic becomes tactical. And “us” and “the industry” becomes “you versus me”.
But there have been cases where the industry as a whole has collaborated with a united purpose. Remember our safety journey. Why then, shouldn’t we do the same again, but this time, with an eye on capital efficiency and overall industry costs?
Such an effort is not only important given today’s low oil price. It’s essential to the sustainable future of the oil and gas industry.
Let’s think bold, work together and create our own Renaissance.