We saw what happened when the last downturn hit in 2014. At the time, Maersk Drilling had been operating successfully in Angola for a couple of years, contributing to the country’s budding oil industry. But when the oil price dropped, projects simply stopped dead in their tracks because the much lower oil price could not sustain the higher costs of deepwater exploration and production.
West Africa back on the map
With the current rise in oil price, optimism is returning to the West African industry. It is no surprise that local authorities are eager to restart projects and introduce new licensing rounds, with all the benefits they could bring to their countries. Oil equals revenue at the national level, but it also brings an influx of skills and competencies when we include and train local content, and an additional boost to the local economy when supplies and services are procured locally, as we in Maersk Drilling prefer to do whenever possible.
However, it would be a mistake to simply roll back the clock and start all over as if the downturn never happened. The lesson learned must be that West African deepwater is quite vulnerable to the traditional boom-bust cycle. This challenge is not smaller in a world with renewables on the rise, where oil and gas must compete with alternative energy sources on near-equal terms.
The answer to this can only be to establish a more sustainable foundation for the projects to decrease the risk that recurring bust-cycles mean they never really get off the ground. To do that, we at Maersk Drilling firmly believe that we need to cooperate closer across the value chain and pursue innovation in both technology and business models.
Aligned incentives will drive efficiency
As an industry, we are traditionally great at leveraging new technology but not as great at rethinking our approach to a value chain which we all know masks significant amounts of inefficiency. We are still at a point where it requires up to 60 suppliers and 6,000 invoices to drill a single well, and the net non-productive time across all services on the well is 20-25% from the oil company’s perspective, even when the individual service providers can claim uptimes close to 100%. To fix this, we need to work closer together and make sure that incentives are aligned across the board.
Much progress has been made in recent years in terms of cost-cutting. Hard times have forced many to take a harder look at their cost base. But it is important to realise that not all these cost-savings are sustainable in the long term. At the Africa Oil Week panel, my colleague from BP estimated that 70% of their realised savings can be implemented permanently – which would be an impressive share. My bold assumption would be that 70% is near the top of the class in this respect.
For the improvements to be sustainable, I believe we should attack the issue from a mindset of driving efficiency, not only saving costs. It is evident that some costs can be saved, but if we simply continue to squeeze out costs from all parts of the value chain, it will inevitably result in higher risk and impaired performances. There is more to be gained from collaboration and coordination, making sure that the goals of all parties are aligned, and in that way focusing on faster and better delivery, not only cheaper. If we do it right, we can make the cake bigger for everyone involved.
New business models to ensure long-term viability
As anyone who has ever been part of a drilling campaign will know, coordination is easier said than done. As mentioned above, 60 suppliers and 6,000 invoices can be involved when we drill a single well. But this is where the industry needs to evolve and agree upon new business models which can establish smoother interfaces between all parties involved. That is exactly what we are targeting in the alliance between Aker BP, Maersk Drilling and Halliburton where Maersk Integrator next year will become the first rig to work fully under the alliance’s incentive structure, sharing the pain and gain on the well between the alliance partners.
If we are able to transport this way of thinking to the emerging West African markets, with local governments and regulators as important enablers, a similar focus on collaboration and alignment can become a key component on the way to confirm West African deepwater as a strong long-term proposition. And most importantly, this will require operators and contractors to establish close and mutually beneficial relationships with local vendors and suppliers. Such relationships make it easier to run a safe and efficient operation, which again will ensure that business and society cooperate for better value.