Is there any future on NCS for the major front-runners? Senior consultant and adviser Mr. Hهkon Brydّy of PricewaterhouseCoopers DA gives us a perspective look at the current situation on the NCS and draws some scenarios for the upcoming changes in this industry forecast.
Further reference to Scandinavian Oil & Gas Magazine 11/12 1999 to be found at www.scandoil.com for a complete project pipeline and to White Paper 39 1999-2000 in general.
The Situation:
Suddenly the Norwegian Continental shelf (NCS) changed from being a marked mainly in a maintenance and modifications modus - OPEX (Operation Expenditure) to a more CAPEX (Capital Expenditure), and everybody, well at least some of the large offshore contractors, served the standard cream cake to celebrate new contracts.
But looking in the pipeline, I would not recommend anyone using of his or her savings buying shares in bakeries with a frame agreement with offshore suppliers. The NCS is maturing and the future is on the international arena.
The Norsk Hydro Grane platform is to be constructed by Kvوrner Oil & Gas and the drilling module by Aker Maritime.
Statoil’s Kvitebjّrn went to Umoe Olje & Gass – later acquired by ABB Offshore Technology. The BP Ringhorn platform and Kvitebjّrn drilling module are to be constructed by Hereema Tّnsberg, the ‘busy bee’ on the eats coast which is giving the lager competitors an irritating sting again and again.
And as rumours increased, pertaining to the BP Valhall contract award, particularly when BP announced that this would be taken on businesslike decisions only, Aker and NOPEF started sabre-rattling in the event that Hereema got the contract and planned to executed most of the work in the Netherlands.
But as we know, the latest BP Contract award to Aker Maritime confirmed that Norwegian companies are competitive and can operate on the international arena.
This giving a period of 1.5 to 2 years from full yard utilisation (Hereema) to a reasonable work load for the “big brothers” in the fabrication yard division.
Lots of Man-hours – But Not Yet:
Looking into the effect of the rate of employment it is supported by between 8 and 10 million man-hours pr. year in the period 2001-2004 for the CAPEX. For the OPEX approximately 5-6 millions man-hours per year in modifications and maintenance.
As the current contract awards are fuelling up the yards to approximately 60- 80 percent utilisation of their own capacity, the yards supports the predictions that changes will arise, for some of them quite dramatically as we know that full utilisation is 30-40 percent over own capability.
But dark clouds are visible in the horizon. Kvوrner, Aker and ABB will not, despite all brave tender opportunities, internal resource analysis and courses, avoid heavily redundancy notices and massive lay-offs. The construction work starts mid 2001.
The process have started and the scenarios are dramatic, not only for the persons involved and their families. The evaporation of knowledge and expertise for the industry in general might become a future threat, students are avoiding petroleum related subjects.
Within Statoil approximately 700 persons will be effected by the internal change programmes and made redundant.
Good signals for recruiting? Change of decision models for field development? We know there is a correlation between CAPEX and general investment fluctuation.
In a bullish market the capacities are often burst and the Contractors must hire in personnel who often are less qualified, more expensive and in some occasions they jeopardises the HSE work (Health, Safety & Environment) by neglecting procedures.
The control becomes less intense as more projects in a portfolio require follow-up and lack of resources, competence and experience becomes a normal situation.
So why does it seem so difficult to level the development activities? There are complex explanations. Firstly the reservoir characteristics will determine the time for development, secondly production (gas) are often sold before the construction development starts, thirdly existing infra structure might impact the schedule.
And finally let us not forget the oil and gas prices.
Determining the oil price carries lots of risks. Decision models incorporating today’s prices as the future level indicator might give some negative surprises.
It seems logical to develop fields during high oil price – and the oil price is vital for strategic decision making. High oil prices also contribute to self-financing projects in a risky business. The oil companies will also balance exploration and development towards the existing production portfolio.
The latter element affected by low price on oil and gas. Low prices give cheaper licenses and stock prices and support propitious investments compared to new field developments.
Levelling and co-ordinating the development activity on the NCS will contribute to a more profitable business for all parties involved. Further another advantage, the CAPEX graph will no longer be a rolling forward camel-hunch back profile.
Do we Really Understand the Risk in the Business?
The different projects will have profiles which to some extent will level each other; further the risk exposure will determine the hedging.
The most important risk drivers are the oil prices and the field development costs (CAPEX). The latest overruns might support the statement that development costs also de facto is classified as systematic risk.
But these two main risk drivers will neutralise each other as stacking of field developments and potential cost overruns usually happens in periods with high oil price (currently at USD 31, at USD 9,56 for Brent Blend).
Any reason for Contractor Frustration :
It must be, at least for the Kvوrner Oil & Gas, which ended up with a marginal profit on the Jotun FPSO and the إsgard B. The investment cost the Jotun field already is at brake-even.
Payback of the development costs (included major over-runs) for the إsgard field will be during 2003 assuming an oil price of $25. Then follows a production period of 30 years. So is it anyone that really takes a bite of the big apple?
The cost development of the new fields (Kvitebjّrn, Ringhorn and Tambar) should be an interesting case as they also are decided on low prices. The future level of oil is in the range USD 20 to USD 25.
Risks in the Oil Price : As the oil price is such an important factor for the Norwegian economy and field development in general lets take a brief look into the mechanism that determine our economical wealth.
The price determination as a process follows a geometrical Brownian motion (random walk). The most important parameter of the model is the `volatility' , which is the standard deviation of the market price's relative fluctuations – in other words today’s price is the best estimate for future prices.
But some questions are raised pertaining to the model’s validation on commodities and stated that the oil price setting is supported more by a mean reverting process plus random jumps (i.e. war, OPEC surprises, etc.).
The process is describes by the fact that the oil price will converge to a mean value after been exposed for shock in the supply or demand. We have confirmed that low prices reduces the exploration and development, whilst high prices increases exploration and development.
Also OPEC is strengthen by low prices and weakened by high prices (i.e. pressure from US, Europe, diversified internal focus). Usage of mean reversion reduces the down side potential and will reduce the risk related to the random walk, as the oil price will move within a corridor.
Our Challenge:
Over the latest years the development cost in NCS have been significantly reduced either by wrong estimates (contractors supports the oil companies) or technological development. I will not repeat the findings in NOU 1999:11 (www.odin.no).
The NTK 2000 (www.tbl.no) is a new EPCI contract, which will be updated as the experience on Grane and Kvitebjّrn commences.
The financial strength is weak for most of the suppliers after the latest cost over-runs. Hopefully the findings in NOU 11 and overoptimistic expectation to the NORSOK process were bad luck and not bad management.
New technology involves lots of uncertainty. Unique projects eliminate effective knowledge and experience transferee.
So why is it higher probability for overrun than cost cuts? Mainly two factors - firstly strong competition causing favouring the lowest estimate and that the pessimists quickly are peeled off, secondly tender selection criteria still focus strongly on price.
The future for Norwegian offshore industry is pending some important factors. Recruitment requires predictability, contractors need profitable projects, risk must be shared between the parties, CAPEX must be stabilised, and short-term adjustments must be reduced.
Internal reorganisation has brought the cost of production down to the level as in the Gulf of Mexico and the UK sector.
With further realistic cost cutting scenarios and a maturing NCS the importance of looking abroad requires stronger focus and success stories.
Further will we over the next period discuss the restructuring of the States Direct Financial Interests (SDFI/SDطE), and again postpone the decisions and damage the process seriously.
There is a new taxation system due, recently stated in the published White Paper on Oil (Storting White Paper No. 39, 1999-2000). The debate will harden as various analysis disfavours the NCS with increased taxes, extended depreciation time from six years (ref. NoU 2000:18; chp.1.6.4’).
The Norwegian Oil Industry Association (OLF) believes that the report is in conflict with the Government's signals heralding improved framework conditions for the oil and gas industry.
The Norwegian part of international products and service delivery is only 1,5 percent of 1600 bill NOK per year.
A Driving Solution - Focus on the Project Success Drivers Model© : The industry is no stranger to advanced project management but still objectives are not met, planning is not adequate, there is a lack of political support, mismanagement of uncertainty, poor supplier management, unreliable and inappropriate information, ineffective management of quality and programme management.
We can improve and review the causes of programme and project failures.
This calls for a more common model for project execution.
The offshore industry must set a stronger focus on a world –class project supportive environment recognised by:
· Good strategic clarity
· Excellent projects understanding
· Forward looking project performance measures
· Comprehensive accountability model
· Appropriate behavioural patterns
· Excellent quality of information
· Common project process standards (inc. methods & tools)
· Sound resourcing policies
· Good people practices
· Motivational reward structures
· Continuous improvement programme
· Effective independent assurance an integral part of project governance
With reference to the complex project world PricewaterhouseCoopers DA has constructed a generic model.
The Project Success Drivers Model (sometimes known as “The Wheel”) is a chart that depicts those factors that have the greatest bearing on the success of any business project or group of projects and on the general capability of an organisation to manage business projects successfully over time.
It is useful for demonstrating the complex range of factors that have a bearing on an organisation’s competence to manage business projects of all types successfully. The tool has a graphical interface for decision making and analysis.
The Model can be used to depict the factors that bear on an organisation’s general capability to manage projects or it can be used to depict factors relevant to one particular division, group of projects, type of project or specific project.
The various segments can also be coloured to indicate strengths and weaknesses in relation to each particular factor or driver.
The Wheel: The Wheel consists of an inner circle, which shows the principal criteria that determine whether or not a project can be regarded as successful. These criteria are:
· appropriate objectives that are sufficiently ambitious and aligned to the strategic objectives of the organisation
· meeting those objectives
· delivering planned business benefits
· achieving an acceptable return on investment
· satisfying all the key stakeholders
· managing risks effectively, so that the achievement of objectives is not a matter of good fortune
· managing expectations effectively throughout, so that the path to the achievement of objectives was not strewn with missed targets and broken promises leading to unnecessary stress at all levels
· morale maintained, so that as far as possible the project experience is rewarding for the project team
· necessary changes are accommodated. Major projects are learning experiences and many require some changes of scope or requirements along the way in order to take account of changing circumstances
· other business programmes and projects are reasonably supported.
Projects do not occur in a vacuum and although a very strong focus is usually needed for success, this should not necessarily be at the expense of other possibly equally important projects Note that very few projects succeed in all of the above respects. Strictly the above could be condensed to just ‘meeting objectives’, assuming that objectives are expressed in terms of the other criteria.
The middle circle:
The middle circle addresses the Project Capabilities of the organisation, which may be those generally applicable across all of the organisation’s projects if the Model is being used to depict this, or only to a group of projects or to a single project.
These are addressed by Level 2 of the PSD process. An organisation’s project capabilities can be divided into its Project Culture, Project Processes, Project Skills and Project Structures.
The first capability is the Project Culture further sub-divides as follows
· Openness
· Degree of challenge
· Teamwork orientation
· Risk aversion
· Goal direction
· Quality consciousness
· Achievement recognition
· Service focus
Secondly we assess the Project Processes by further sub-dividing as follows
· Strategic alignment
· Prioritisation
· Objectives setting
· Risk management
· Project planning
· Resource planning and management
· Progress tracking
· Quality control
· Change
· Change management
· Benefits management
· Financial control
· Communications
· Issues management
Thirdly we investigate the Project Skills on the following items
· Leadership
· Programme management
· Project management
· Planning
· Quality management
· Technical
· Communications
The final quadrant of the middle circle addresses the Project Structures and is sub-divided into
· Political facilitators
· Resource controllers
· Change targets
· Project planners
· Solution deliverers
· Benefit deliverers
· Change management
· Project office
· Contract controllers
· HR
· Independent assurers
· Deliverables/responsibilities alignment
· Balance of control/empowerment
The outer circle:
The outer circle addresses the key drivers of organisational performance in business project management. These are in effect the levers available to top management by which they can influence project management performance across the organisation. They are the primary focus of the PSD Level 1 review process. There are 12 major drivers, as follows
· Strategic Clarity
· Top Management Understanding
· Performance Measures
· Accountability Model
· Behavioural Patterns
· Quality of Information
· Project Process Standards
· Resourcing Policies
· People Practices
· Reward Structures
· Benchmarking/Continuous Improvement Programme
· Independent assurance
We can assist to develop the project capability by fostering the right culture, implementing sound project processes, ensuring that the projects have the right skills set and finally define the roles clearly. The above is a general description of the Wheel with topic listing. Each element is subject for further analysis and description.
So looking at the international arena, there are more than enough prospects for good business, also for the coming generations as we have gas for over 100 years and oil for the next 30- 40 years.
But why does not the high oil price increase the focus on non-fossil fuel?
By: Hهkon Brydّy, PricewaterhouseCoopers DA. Hهkon Brydّy (40) M.Sc. in General Business/B.Sc. Mech. Eng. is a senior consultant at PricewaterhouseCoopers – Global Risk Management Solutions. With several years experience from the oil and gas industry he offers strategic and operational risk management to the oil & gas industry.
source : (scandoil)
© 2001 Mena Report (www.menareport.com)
