Two months ago, I was based in Aberdeen in a role with an E&P operator. Today, I’m speaking to you as Maersk Drilling’s Chief Commercial and Innovation Officer. So, this morning, I’d like to take the opportunity to speak you from both the operator’s and the driller’s perspective.
My main reason for speaking from both these points of view is because I firmly believe that the key to our mutual success is aligning the incentives of operators and contractors, and adequately sharing risk and reward.
Together, we’ve made a great deal of progress on reining in costs since 2014. But with activity increasing and rates expected to rise moderately over the next 12-24 months, we need to lock in another round of productivity gains. Failing to align incentives now risks sowing the seeds of another cycle of boom and bust which the industry cannot afford.
Significant gains to be made
There’s a wide gap between what the operator sees from the perspective of the well, and what the drilling contractor or services provider sees from the perspective of the rig.
Take safety for example. We don’t use the same definitions, which means an LTI for an operator may not be an LTI for the drilling contractor.
Non-productive time is another area where there’s a gap. These days, skilled crews and modern rigs have high operational uptime, close to 100%. But when we look at NPT from the operator’s perspective and include all of the services and activities on the well, we now see 20-25% NPT.
When we dig into this, we find that it takes up to 60 suppliers and 6,000 invoices to drill a typical offshore well. There are significant efficiency gains to be made here.
As an operator, whenever a rig wasn’t working I would call my drilling manager and ask what the problem was. And he would say that the cementing unit, or something else, was not working. All I heard is that right now I'm paying for a well that’s not being drilled.
This reflects a fundamental misalignment of incentives in the day rate model: It is the operator—not the drilling contractor or the oilfield services company—which continues to bear most of the cost of non-productive time.
For both operators and drilling contractors, I believe there is an opportunity to address this over the next 12-24 months with new commercial models that reduce inefficiency and align incentives between the different parties.
But the window to address this is small. With rates expected to rise moderately in the next two years, the window for operators to lock in low costs is closing and their incentives to investigate new types of partnership that share risk and reward are growing. We can see innovative operators like Aker BP getting ahead on this.
But for contractors, rising rates will lower their incentives to share risk and reward. So why not ride the uptick like the previous cycle?
At Maersk Drilling, we don’t believe that’s a sustainable choice for drilling contractors and service providers. This time it’s different—for a number of reasons.
This time it’s different
The first is the changes underway in the energy system. With a lot of uncertainty and more competition, operators are emphasising lower project breakevens, capital discipline and keeping costs down.
We are now in a race to produce the most competitive barrel of oil before demand peaks. That applies whether you’re drilling onshore or offshore, in conventional, shale or deepwater.
The second reason why the traditional cycle is not an option is the disruption that we are likely to see in oil and gas from innovation. New uses of data, digital tools and AI will make drilling safer, more automated and more efficient.
At Maersk Drilling, we’re already using data from thousands of sensors on our rigs that we expect will help us to reduce maintenance downtime and costs by up to 20%. We’re also working on multiple Augmented Reality projects that will drive improvements in safety, quality and performance.
But innovation is not just about technology. When digitalisation is combined with new commercial models, we’ll see real value unlocked.
Smarter Drilling for Better Value is Maersk Drilling’s response to this. It means continuing to deliver operational excellence while pairing innovative technologies with new business models to create value for our customers.
Becoming one team to create value
There are big changes coming for the 60 suppliers and 6,000 invoices that it takes to drill an offshore well.
What will it look like? Maersk Drilling’s alliance with Aker BP provides a glimpse of what is possible:
- It takes a five-year time horizon, rather than a project-to-project view;
- It shares risk and reward and aligns incentives between the parties;
- Teams are integrated, giving the best person the job and avoiding duplication;
- We have a common goal and shared language on safety and operations;
- Simplification and standardisation are the focus;
- And it’s underpinned by digital collaboration.
When done right, this type of alliance can lower the cost per barrel and improve safety while unlocking value for all the parties involved.
The time to act is now
The future of oil and gas is being written right now. The industry needs broad-based structural change across the value chain. Drillers and services companies will need to transform their value propositions and operators will need to reward for quality and the end result, not time spent on the well.
I invite you to lay the ground work for a future based on sustainable growth, rather than another round of boom and bust. The time to act is now.