Rising costs 'biggest industry threat'

Costs challenge: Statoil's Helge Lund highlights increasing pressure on margins

Skyrocketing project costs are perhaps the single biggest threat to the long-term sustainability of the global oil and gas industry, two leading chief executives said on Tuesday.

Statoil’s Helge Lund and Samir Brikho, head of UK-based services company Amec, told the 21st World Petroleum Congress that industry needs to devote more effort to finding solutions to drive costs down, such as using standardised project designs.

“This is absolutely one of the biggest challenges this industry has. I do not think it is a fight between suppliers and operators, I think we have a common challenge we have to solve together,” Lund said in press briefing following a speech on day-two of the event taking place in Moscow.

Delegates heard that increasingly complex engineering and drilling requirements as the search for oil goes into tougher environments, such as deep water, were factors behind spiralling project overruns.

Lund pointed out that return on capital for major oil companies had decreased by a third in the last decade even though the oil price had tripled in the same timeframe.

Last year, he said, that for more than half the companies in the Norwegian company’s peer group, it slipped to below 10%.

“In a highly risk-based industry, that is simply not sustainable,” he said.

Brikho said that, of the 15 “mega-projects” costing $10 billion or above,“almost none” were on budget or schedule.

“That is a big challenge for the whole industry to take on, to be more predictable in its delivery,” he said.

Lund referred to Statoil’s recently launched project aimed at making annual cash flow savings of $1.3 billion from 2016.

Eight smaller fields on the Norwegian continental shelf have been fast-tracked in production using standard designs instead of bespoke development solutions, reaping 80,000 barrels per day in new production.

“We can respond to these challenges by prioritising harder and reducing capex, but projects do not become more profitable just by being put on the shelf,” he said.

“We therefore need to tackle the root causes to improve our predictability.”

He added: “My thinking is this industry has for decades solved many problems by adding more people and more complexity. So I think we need to turn that trend now and look for simpler solutions, be better at building the experience we have, standardise more, re-use technology and concepts we have used with success before.

“I think this is the only we can secure the sustainability of this industry.”

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