Collaboration on conference agenda
Sir Ian Wood: ‘Oil industry cannot wait for the price to rise’
1pm update: Oil tycoon Sir Ian Wood today said the industry was getting to grips with what needs to be done to sustain the sector in the North Sea but urged the Westminster government to help share the risk of speculative developments.
He also urged the industry to help itself, warning that it cannot wait for the oil price to rise. It may remain at its current level for up to three years, he said. More cost-cutting was inevitable, including job losses, although he believes the worst of these cuts may be over as the new fiscal regime has given the industry a clearer view of the way ahead.
In an interview ahead of a two-day oil and gas conference in Aberdeen, he said: “We have made good progress on the fiscal regime and on regulation. These are two positives.
“The price is negative. The thinking today and tomorrow is that the price will stay at $60 to $65 for possibly two to three years and this accelerates the need for a step change in thinking about cost reductions, greater efficiencies, more collaboration.
“We cannot wait for the price to rise. It isn’t going to rise and we must make the industry viable at this level.
“It is a mature industry. We are into the last third of production and it is a significant challenge. The industry is realistically facing up to this. Four or five months ago most of the industry did not see any daylight with the fiscal regime. It is now there.”
Responding to First Minister Nicola Sturgeon’s expected call at the conference for more help from Westminster, he said “everyone agrees on this. Maybe the government needs to share the risk.
“I feel right now that the price will not recover. Hopefully, in 12 months time the industry will have made progress. I hope the March Budget has slowed down the job losses. The fiscal regime means people are more committed to the North Sea. Of course there will be further job losses because the figures are terrible just now, but you will see some real progress on collaboration and a move to new technologies.”
CEO of Oil & Gas UK urges industry to work together and be ‘part of the solution’
Sir Ian’s comments came ahead of a similar warning at the conference from Oil & Gas UK’s chief executive, Deirdre Michie, who said the offshore oil and gas industry must become sustainable ‘in a world of $60 oil’. She urged all those with an interest in the industry to avoid conflict and work together.
She told 500 delegates: “We have paid more to the Treasury than most other industrial sectors, we generate hundreds of thousands of skilled jobs, we have a vibrant supply chain, at home and abroad, and make a key contribution to the UK’s security of energy supply.
“However, we now face real and present threats that are challenging our future. At $60 oil, 10 per cent of our production is struggling to make money and there is a shortage of capital and a shortage of investors willing to place their money here.
“In relation to our escalating cost base, we know that as an industry we have been part of the problem; now we need to be part of the solution.
“Over the last 20 years, the price has averaged at $62 per barrel and the forward curve is between $65 and $75. Therefore it is not unreasonable for the North Sea to set out its stall at being sustainable in a $60 world. As a target, it’s one that we as a trade association can champion, Government can align with and the regulator can pursue as an enabler, for example, to focus on key infrastructure.”
Ms Michie called for a change in mindset: “To succeed with this approach, we have to be open to change. We must avoid doing the same things in the same way and expecting a different outcome. We have had a decade of escalating costs, so we can be sure that our current approach doesn’t work.
“We need to think about this from an investor’s point of view. Given that we compete for investment dollars on a global basis, we must ensure the UK is a commercially attractive and predictable place in which to invest.
“We must work together to secure the future of this industry – for this country. There is a role for everyone – client, customer, employer and employee. For unions, for governments, for regulators and for trade associations. This is not a time for conflict or entrenched positions.”
PwC calls for greater collaboration to reduce cost and improve efficiency
Earlier, a report from PwC said North Sea oil operators must learn from other sectors and fundamentally change the way they operate if they are to recover from the slump which has left a swathe of job losses and uncertainty in the region.
The report from recommends companies engage in greater collaboration and reduce costs equivalent to 40% of the cost of a barrel of oil.
The authors say the industry should follow “tried and tested” strategies which have been adopted by the likes of Bombardier, Jaguar Land Rover and aerospace engine maker Rolls-Royce.
PwC will launch its efficiency report, produced in conjunction with the Oil & Gas Industry Council, at the Oil and Gas Industry Conference opening in Aberdeen today.
It says the recent drop in oil price from $110 to a low of $45 a barrel, before rallying at $60, has “brutally exposed a substantial escalation in cost base across UK oil and gas operations.
“While some firms are taking action to implement sustainable, long term changes, the concern is that there are still many situations where short-term tactical measures to cut discretionary spend or apply familiar solutions from previous down turns are the norm. The reality is that making long term, structural change takes time and is not easy. “
The authors say there is a “route map that could help hasten this much-needed industrial transformation across the UKCS, enhancing collaboration, increasing trust with partners and across the supply chain, and delivering widespread efficiencies.”
They have set out seven fundamental steps that they say “could turn the tide and secure a brighter future for the industry”
Gordon Colborn, consulting leader, PwC in Scotland, said: “There is no one silver bullet that can solve the range of issues currently facing the oil and gas industry – instead there are seven that we believe can transform, modernise and re-energise operations across the UKCS.
“These seven fundamental steps are pragmatic lessons that have been transformational in other major industries and are highly relevant to those firms working in the North Sea. The alternative approach is the status quo – acknowledging a short lifespan of the UKCS and an acceleration towards decommissioning.
“I believe this industry can have a sustainable future, but we need to take a more strategic and integrated view if we are to extend the life of the North Sea for everyone involved and for future generations. It’s time to act.”
Stephen Marcos Jones, business development director, Oil and Gas UK, added: “As this basin is faced with being competitive in a global marketplace, it is essential industry acts quickly and determinedly to address its cost and efficiencies challenges.
“Work is already under way to address this, and our conference is the ideal forum to encourage greater collaboration and set out an industry-wide strategy for improvement. We can learn a lot of other successful UK industries, to support both operations on the UK continental shelf, and Britain’s world-class supply chain.
“If this sector is to thrive for decades ahead, cooperation and relationship optimisation will be key.”
Other industries have collaborated
In the 1980s to 2000s, four heavy engineering based industry sectors – aerospace, automotive, chemical, and rail – dealt with a similar range of challenges, such as: significant safety requirements; extended periods of considerable cost pressure; economic downturns impacting trade; and increasing international competition for investment.
Their responses were transformational and this report’s seven fundamental steps capture the key tactics used to dramatically cut their cost base and more effectively manage performance. These include:
· Building leadership teams with a strong, compelling vision for cultural and operational change that can engender trust inside and out.
· Treating operations as a strategic asset that can provide the basis of competitive advantage rather than simply a cost of doing business.
· Addressing the core/non-core dilemma – defining and building world-class capability across core competencies and collaborating with organisations better placed to deliver those that are non-core.
· Boosting performance management by understanding and measuring what is important and using the data to drive change and improvement.
· Developing an innovation culture and managing change effectively – constantly looking for better ways of doing things, and innovating across technology and processes.
PwC says the seven fundamentals will go a long way to helping firms secure sustained efficiencies of up to 30-40% – the guideline target set by the regulator. However, the report authors do not believe they are sufficient on their own. and that two other factors are crucial to maximising improvement potential and delivering the step change needed across the North Sea:
· Encouraging sector wide collaboration between firms and across the supply chain will not only eliminate duplication, create scale and reduce costs, but will ensure the industry is able to swiftly react to future opportunities as they present themselves.
· The report also highlights the influential role of a progressive regulator in helping firms implement best practice and successfully address market shifts, something that has been prevalent in driving change within the automotive, aeronautic, chemical and rail industries.