BY Daniel Canty

What are the secrets of succeeding in today’s challenging E&P landscape? Maersk Oil’s agile response offers some encouraging ways forward.

 

2017 begins with the industry acutely aware of the challenges we continue to face as a result of low and volatile oil prices. What’s encouraging is that Maersk Oil is demonstrating how a brighter, albeit challenging, future is attainable if companies stay agile and optimise costs.

 

At an industry level, the persistently low oil price has had three main impacts. First, it exposed ways of working in the industry that were inefficient. Secondly, FIDs in many basins came to a near-halt – Woodmac estimates that approximately $1 trillion of investment has been cut for the period 2014 to 2020. And thirdly, exploration spend has been removed in favour of retaining capital. In many areas these changes in the market have paved the way for more sustainable business practices. The industry was undoubtedly overheated and value was being eroded even in a better price environment. So companies that have taken decisive action have developed a robustness which means they can remain profitable even with lower commodity prices.

 

Maersk Oil’s response has been to pull on two of the levers we control regardless of the oil price: maximising value from safe and reliable operations, and world-class project execution. In tandem with rigorous cost control, this

is what has paved Maersk Oil’s route to profitability.

Gretchen Watkins

Chief Executive Officer

 

 “I’m optimistic. Maersk Oil loves doing business in the North Sea. We see ourselves as a future owner, operator, consolidator and innovator in the basin – and it’s one where plenty of opportunity remains.”

Morten Kelstrup,

Managing Director

“The outcome goes beyond a solid production performance and extra barrels in the portfolio. It’s led to a growth plan for the area, allowed us to unlock potential in the reservoir, increase reserves and prolong the life of the field, and potentially boost area value.”

WORKING SMARTER

Operating successfully in this new paradigm requires,

first and foremost, flawless execution of the base business. Improving operational efficiency in existing assets is the most cost-effective way of boosting revenue right now – and there are few operators who can say there isn’t room for improvement, especially when those assets are mature.

 

Maersk Oil has a portfolio that includes mature fields and legacy assets, such as the Global Producer III FPSO which operates in the UK North Sea. The FPSO is 20 years old.

 

When Maersk Oil took over the Dumbarton field, just over 15 million barrels had been produced – and thus it was recognised as a maturing area. Since then, another 40 million barrels have been produced from Dumbarton, and two new fields around the installation – Lochranza and  Balloch – have been brought on stream. In total, nearly 60 million barrels of oil have been produced since Maersk Oil took operatorship.

 

“We managed to significantly lift production efficiency and reduce operating expenditure,” says Morten Kelstrup, Managing Director at Maersk Oil UK.

DEEPER CHANGES

Chief amongst the changes which need embedding is bringing cost under control and ensuring those reductions are sustainable. This is the only way to resist the cyclicality which, if allowed to return erodes value from existing operations and potentially kills development projects with marginal economics.

 

We must now create an environment in which transparency across the business increases, and we have a genuinely empowered workforce to enact the changes I believe are fundamental to a healthy – and sustainable base businesses” adds Chief Financial Officer Carsten Sonne-Schmidt.

Carsten Sonne-Schmidt,

Chief Financial Officer

"We have achieved significant cost reductions in both our major project CAPEX and our day-to-day OPEX."

RETHINKING COLLABORATION

Key to this sustainability is the industry’s relationship

with the supply chain – something already showing signs

of change.

 

In the UK, Maersk Oil and its partners in the supply chain have developed a collaborative model called Integrated Technical Services, covering offshore maintenance and brownfield modifications.

 

“It’s delivering sustainable new ways of working and considerable contract savings,” says Morten. “Related spend has reduced by more than 50% since 2014, without a lost time impact. We’ve also reduced our contract coverage by 60%. Another significant benefit is that our contractors have a greater understanding of our assets and people,

and we are finding that translates to safer and more reliable operations.”

 

STRENGTH THROUGH SCALE

Structurally, it’s becoming ever clearer that working at scale across operations or geographical areas will be necessary to give operators valuable additional opportunities and limit exposure to production interruptions or disruption of individual assets.

 

Going forward, Maersk Oil will focus on growth that builds scale in particular regions. At the Maersk Group Capital Markets Day in December, CEO Gretchen Watkins said the company would mainly target lower capital expenditure options, most likely including merger or joint venture activity.

 

RELENTLESS INNOVATION

In allocating capital for growth projects, whether acquisition, merger or seeking project FIDs, the new reality is that companies are going to have to demonstrate extremely robust economics to get to sanction. They will need to demonstrate strong assurance, both technical and non-technical.

 

Projected returns are an important factor, but rather than waiting for commodity prices to make projects economic, the industry has to be innovative, meticulous in planning, and work smarter with suppliers and partners. For Culzean, Maersk Oil has shown the effectiveness of front-end loading to keep a handle on cost. Major long lead items have been ordered well upfront to make sure they’re built to specific requirements and keep the business disciplined and on schedule.

  1. Improve operational efficiency in existing assets.
  2. Ensure cost reductions go deep and remain sustainable.
  3. Collaborate smartly with your supply chain.
  4. Work at scale across opportunities and geographies.
  5. Innovate relentlessly.

5 key steps to thrive against

the odds

“As an industry we have in the past allowed too much value to be eroded in the project execution phase, and today’s project economics simply won’t tolerate such overruns,” points out Martin Rune-Pedersen, Chief Operating Officer. “Excelling at managing project risk is one of the levers we can pull to conserve value.”

 

Another way to improve the economics over the lifecycle of the project is to use affordable technology. In Culzean, again, Maersk Oil has invested in such details as pre-wiring in fibre-optic cables and robust and secure wi-fi networks. These kinds of innovations optimise production efficiency, boost uptime, and run a safer, more reliable plant. And they’re estimated to deliver efficiency savings of at least US$10 million per annum.

 

“The changes necessary to adapt and thrive in this new reality are hard to make and even harder to embed. We are demonstrating that the operating model we have developed is unlocking value in the North Sea despite the serious headwinds we face – and generating value from mature assets across the province,” adds Sonne-Schmidt. “Positive trends in operational and safety performance have enabled us to report to consecutive quarters of profitability, generating a ROIC of 11.4 % – well ahead of our peer group,” he adds.

 

Maersk Oil has had to fine-tune its operational performance to realise value. But the last 24 months have demonstrated those challenges can be overcome while safely delivering profit.

 

BRIGHT FUTURE

CEO Gretchen Watkins recently concluded a keynote address at the Oil & Gas Council’s marquee global conference in London with an upbeat message. The hard work and improved operations in the North Sea are paving a way to a bright and profitable future, in spite of the challenges inherent in a mature basin.

 

“I’m optimistic. Maersk Oil loves doing business in the North Sea. We see ourselves as a future owner, operator, consolidator and innovator in the basin – and it’s one where plenty of opportunity remains.”

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