4.6 Mastering costs
4.6.1 Impact of technological progress
The cost decrease observed in the nineties is a tribute to the efforts made by the petroleum industry to reduce its technical costs. A number of technological advances helped to make this achievement possible.
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Dollars/barrel
2002 2003 2004 2005 2006 2007 2008 Depreciation
Exploration costs Operating costs
Figure 4.25 Technical costs in upstream petroleum industry (Source: Total).
Major strides forward have been made in geoscience as a result of the processing capa-bilities of modern information technology. The systematic use of 3D, for example, has made it possible to reduce the number of exploration wells needed to uncover economically viable deposits of hydrocarbons. It has also allowed the wells to be positioned optimally, thereby limiting the need for further delineation.
Advances in drilling have also helped to cut costs: deviated wells, horizontal and even multiple borehole drilling, to name but a few, have increased the number of objectives which could be reached from a single site (a platform, for example), as well as allowing multiple pay zone access from a single well. These techniques have had a radical impact on the productivity of wells by reducing the number required and, in consequence, significantly simplifying the linking infrastructure needed.
Another notable advance has been the simplification in gathering systems made possible not only by reductions in the numbers of wells, but also to a great extent by advances in multiphase transport. Because the liquid and gas phases no longer have to be separated, it has been possible in some cases to halve the number of pipelines. In addition, separation units have been considerably simplified or even eliminated altogether, particularly in places where these are undesirable, such as in the vicinity of the wellhead. Of course some of these effects are offset by developments at the reception facilities, which have necessarily become more complex. But the overall net effect is substantially positive, a saving of the order of 10–15% of the total cost of a project.
Technological advances have also led to remarkable improvements in production equipment (power generation, instrumentation, piping, rotary drives, etc.), in terms of reli-ability, availreli-ability, and ease-of-use. Other examples include the development and wide-spread use of digital process control systems, the advent of high-performance private telecommunications networks, the emergence at last of really reliable, powerful, light gas turbines, a spin-off from ongoing progress in the aero industry. Other important develop-ments include the advent of the variable-speed electric drive, the contribution made by powerful electronics and technological advances in rail transport.
It is difficult to quantify the effect on costs of all these improvements, but it is certainly considerable.
We have got to the point where diminishing returns are beginning to set in. But further progress is always possible, and there are still many opportunities for making savings in all areas. Some of these opportunities are described below.
4.6.1.1 Mastering drilling costs
In deep offshore work, a mastery of drilling techniques is absolutely essential. There are three main difficulties: the delicate matter of adjusting the weight of the mud, the low tempera-tures which create problems related to the rheology of the mud, and finally the presence of a rigid drilling riser, heavy, cumbersome and fragile. We now have a good understanding of these problems and are reasonably able to deal with them during exploration drilling. They now need to become routine, so that the costs of development drilling can be brought back to an acceptable level, particularly in deep water (in excess of 1 500 m). This process is already taking place, and there is no doubt that the petroleum industry will soon devise tech-nically satisfactory and affordable solutions. But drilling costs are bound to remain high (between $8 and $25 million per well, depending on water depth and drilling distance) unless certain technological breakthroughs are made, such as drilling without a riser and drilling with casing.
Chapter 4Investments and costs
4.6.1.2 Mastering the costs of surface installations
It is impossible to over-emphasise the fact that 90% of the costs are determined in the defi-nition of the object to be built. This underscores the enormous importance of the conceptual studies and the preliminary design, during which potential areas in which the costs can be reduced should be identified (Fig. 4.26). Sufficient time and resources and the best possible skills therefore need to be devoted to these studies to ensure an optimum project definition.
Traditional methods need to be constantly questioned and new ideas systematically considered.
A second way of reducing capital costs is to seek to simplify and standardise the equipment. This is not often possible because projects are usually different from one another.
But duplication pure and simple can sometimes achieve savings —of the order of 40% for structures and 25% for construction and supervision— not counting savings in time, which may be as much as 3–5 months. Even if two installations are not completely identical, it is worth checking whether some of the units in the first installation cannot also be used without modification in the second.
A third way adopted by some companies is to put the contractual arrangements with subcontractors on a different footing. The objective is to harness the skills of both management and workforce as a whole towards common objectives in terms of costs, dead-lines and even production. This approach has spawned alliances, the concept of the target price, ventures involving profit-sharing. There is no doubt that service providers have taken on a broader role, becoming in the process more partners than subcontractors. Many have restructured, growing in the process, and with their technical competence considerably rein-forced. The oil companies have relinquished entire areas which were hitherto very much their preserve. This new modus operandi is undoubtedly acting as a mechanism for the dissemi-nation, spread and acceleration of technological progress, and has led to a division of work propitious to these advances, the service providers building expertise in new areas, and the oil companies taking on the coordinating role in relation to the complex set of tasks requiring inputs from a range of different specialities.
Chapter 4Investments and costs
Conceptual studies
Preliminary
design Basic engineering Cost reduction potential
T i m e Detailed engineering Screening
studies
Figure 4.26 Cost reduction potential during the various study phases.
Quite separate from this antithesis between service providers and oil companies, it is clear that the growing complexity of projects, together with the shortening of the development cycle in the face of economic pressures means that there is an increasing interdependence between the disciplines involved at an increasingly early stage. In other words, the need for a cross-disciplinary approach is making itself keenly felt; this is certainly the case in the field of R&D, where efforts are being directed towards technological innovation which can be used commercially, with attractive economics.
4.6.1.3 Mastering operating costs
Opportunities to reduce the operating costs present themselves in both the design and oper-ating phases.
Design phase
– Make use of modern techniques of installation management;
– Simplify the control systems, concentrate on the instrumentation which is really necessary;
– Allow rapid and easy access to machinery and equipment;
– Minimise the number of machines or equipment installed (number of backup machines corresponding to availability requirements and acceptable risk level, need for multiple bypasses, etc.);
– Select equipment based on criteria of maintainability, reliability, ease of diagnosis, and quality.
Operating phase
– Outsource all or some operating and management functions;
– Increase versatility of some workers;
– Optimise maintenance, plan major maintenance as a function of remaining life of project;
– Limit measures on reservoir to those which are really justified;
– Renegotiate contracts.
It should be said that, in the study phase, operating costs may appear to have little impact on project economics because of the effects of tax and the effect of discounting future cash flows. In the operating phase, however, cost reduction has a permanent effect, and becomes increasingly necessary as declining production results in a rapid increase in the costs per barrel. This trend can make the venture uneconomic, even while there are still substantial reserves remaining. It is therefore important to keep operating costs under close review throughout the life of the project right from its conception.
4.6.1.4 Mastering costs by risk-taking
Companies seek to achieve two objectives simultaneously: to increase production and cut costs. They use all the means at their disposal, although some are bolder than others in this regard. The petroleum industry long had a reputation for conservatism in its technical choices, preferring methods which were tried and tested. Broadly this continues to be the case. However some companies are increasingly demonstrating their capacity to innovate,
Chapter 4Investments and costs
particularly where this leads to significant rewards or where the technical parameters are such that innovation is needed to reach new reserves. Innovation obviously involves risk of greater or lesser magnitude, both financial and in terms of image.
The wide use of multiphase pumps in place of the much heavier and more costly tradi-tional system of compression pumping is an example of the industrial application of an inno-vation resulting from prolonged R&D.
Risk used to be essentially of a geoscientific or geopolitical nature, and if considerable technical risks were sometimes taken, for example in the North Sea in the 1970s, these were not seeking to establish or strengthen the position or competitiveness of a particular company in a given context.
Times have greatly changed in this regard. The oil companies differentiate themselves and promote themselves to the competent authorities in host countries in terms of their capacity to take technological risks and to bear the financial consequences which ensue. There are many reasons for this. For example there is no doubt that the technological “levelling upwards” requires the ability not only to realise an activity at a particular point in time but also to be able to bet on future performance in the short or medium term so as to retain competitiveness. Specifically the willingness is required to take risks at the moment when agreements or contracts are signed, i.e. well before the realisation stage, and to manage these risks subsequently.
In other words, in the past when development opportunities were technology-limited, risk-taking remained fairly low. At present the reverse applies, and technological risk-risk-taking has become a consequence of commercial decisions taken on the basis of considerations of a different nature. The perils are increased further still by the sheer physical size and therefore financial implications of the stakes involved.