Cost overruns are threatening investment in the oil and gas industry. Does this mean a shift overseas? If companies focus on innovation, collaboration and deepening competitive capabilities, Australia's energy industry can continue to compete globally.
Woodside Petroleum’s recent decision to review its $45 billion Browse Basin liquefied natural gas project has shone a light on what the industry has known for some time: production cost overruns are threatening investment in the oil and gas sector.
ASSOCIATE PROFESSOR JOHN STEEN
An experienced consultant, John is an expert in innovation and strategic management. His risk management skills have helped various blue chip clients to develop business strategies.
DR MARTIE-LOUISE VERREYNNE
A specialist in innovation management, Martie-Louise has won awards and grants for her work. She is currently carrying out research into small firms’ growth and innovation.
JERAD FORD
A research scientist who spent 10 years managing multi-million dollar projects at the world’s largest independent R&D company, Jerad is now a PhD student exploring the collaborative innovation practices of Australian oil and gas companies.
Woodside cited the high Australian dollar and high construction costs as reasons for the reassessment. They will proceed at Browse Basin with less costly Floating Liquefied Natural Gas technology instead of an onshore development. However, the decision was also motivated by cost blowouts of $3.7 billion on the company’s Pluto LNG project in the Carnarvon Basin.
Cost overruns have become the norm for the industry. In 2012, Chevron announced a $9 billion increase on the original $43 billion budget of its Gorgon gas project. In the same year cost overruns in Australia from major oil and gas players totalled $25 billion.
The industry finds itself at a critical turning point. Massive cost blowouts must be addressed before doing business in Australia becomes too difficult and the big money goes elsewhere. The high dollar, skills shortages, industrial relations and wage costs, regulatory complexity, technical challenges and the logistics of operating in remote locations are commonly referred to as the reasons for excessive costs in Australia. However, there are other levers available to managers to hedge against falling productivity.
Research conducted by Associate Professor John Steen, Dr Martie-Louise Verreynne and Jerad Ford of UQ Business School, in conjunction with Ernst & Young and the UQ Centre for Coal Seam Gas, has identified three primary drivers of industry productivity: innovation, collaboration and deepening competitive capabilities.
These factors were found to offer the best opportunities for companies to achieve the returns expected by international capital markets and promote growth in the industry into the future.
The team used world-class methodologies developed by the Centre for Business Research at Cambridge University and adapted them for the oil and gas industry in consultation with industry experts from Ernst & Young and the Australian Petroleum Producers and Exporters Association (APPEA).
Senior executives from 80 of APPEA’s member firms were surveyed, ranging from large multinationals to smaller local companies. Service firms, such as engineering companies and recruiters, were also included. The results show that the companies that displayed improved productivity had three traits in common: innovation, collaboration and deepening competitive capabilities.
Innovation can mean new services, products and ways of working, such as a new design for pipe laying. It also refers to continuous improvement, known as incremental innovation, such as reducing the time it takes to drill a well.
LIQUID NATURAL GAS
Page Maxson, CEO of Asia Pacific LNG
The current growth of LNG in Australia is on a scale as big as anything that’s been seen in the world. The global marketplace for energy is competitive. Australia must bring together its many strengths: the quality of resources, workforce and education system.
It must carefully manage the infrastructure and regulatory systems.
Australia is a relatively high-cost environment, but cost increases on global mega-projects are a risk everywhere. I don’t see, for the most part, that Australia has a differential risk to other parts of the world. Cost blowouts are one of the many things that we must continue to learn about, understand and manage.
At APLNG, we’ve traditionally relied on technological innovation to raise productivity – from fracture stimulation, ultra-deep waters or Arctic challenges.
Now, collaborative initiatives are playing an increasing role; it’s as much about knowledge development and knowledge sharing and how to apply technology as it is about new technologies themselves. It’s about working smarter and getting more out of the resources we put in.
Oil and gas projects are each a combination of characteristics of the specific resource, the location, the infrastructure, the policies of the country, and the markets at a point in time. The industry has, therefore, often struggled to consistently measure productivity across such variables.
INNOVATION
Innovation, the study showed, is the most powerful driver of productivity. Companies that implemented at least one innovation in the past three years were 40 times more likely to increase productivity than those that didn’t.
COLLABORATION
Firms that collaborate were eight times more likely to see an increase in productivity. Sharing project risks, co-developing new processes and sharing infrastructure with other industry players were correlated with productivity gains. And there’s a positive link between collaboration and innovation.
COUNT WHAT YOU CREATE
Bradley Farrell, Ernst & Young
“Industry was very clear on what it sees as the key barriers to productivity growth in the oil and gas industry: lengthy project approvals, closely followed by government regulations and red tape, and environmental regulatory uncertainty.”
“The research is also clear on the messages for oil and gas companies – ensure that productivity is being measured and reported within your organisation, put innovation at the centre of your productivity strategy, deepen your competitive competencies, and lift external collaboration.”
COMPETITIVE CAPABILITIES
Deepening competitive capabilities is about strengthening a firm’s ability to take on its rivals in the marketplace. An oil and gas exploration company might achieve this with a better hit rate on its wells. An engineering company could design better solutions.
MEASURING PRODUCTIVITY
Fifty-five per cent of firms in the oil and gas industry don’t measure productivity. At all. Even though productivity is a critical measure of performance.
Only nine per cent of firms said they measure both capital and labour productivity. Thirty-six per cent of firms track labour productivity. This is surprising given the capital intensity of the industry, with labour costs a relatively small component of many businesses.
The research team was lead by Associate Professor John Steen, who believes that it’s a mistake to focus the productivity debate around labour. “The claims that workers are paid too much and should be grateful to have the work make little sense. The main gain in productivity has always been working smarter, not harder,” he says. “Last century, in the US, GDP per capita increased ten-fold. Did Americans work 10 times harder, or were they 10 times more motivated? No, it’s all about innovation.”
To Ernst & Young, the research shows how much individual organisations can do to lift productivity. “Innovation is the number one driver of organisational productivity. The key action is for leaders to create the right environment for innovation. We saw very different approaches in the study, but when done right, the results were impressive,” says Bradley Farrell, Ernst & Young’s Oceania Advisory Leader for Oil & Gas.
The study found that firms that measure productivity are better able to understand where problems lie and are able to tackle them more quickly than their counterparts. “The thinking is that firms have to work quickly and efficiently in order to preserve margins and make this thing work in Australia,” says Dr Steen, who sees Russia and China as having quickly mobilised to implement new technologies to capitalise on their vast reserves of coal and shale.
“The whole industry must be globally competitive across the whole value chain. That’s what the Norwegians have done with so much success.”
PRODUCTIVITY LEADERS
Origin Energy’s multi-billion dollar Asia Pacific LNG coal seam gas joint venture involves the drilling of thousands of wells throughout regional Queensland.
The company recognised that landowners valued privacy, control over their land and involvement in the day-to-day activities of the CSG industry. They developed the Working Together Program to train local people to deliver field services, giving them greater control, less intrusion, recognised training and an additional income. Origin has benefited via increased productivity and positive long-term relationships with local residents.
Australian mid-cap oil and gas company, Senex, has grown rapidly. Improving efficiency and applying knowledge and expertise in conventional oil and gas drilling and unconventional drilling have been a focus.
Senex has deepened its competitive advantage via three main drivers:
- Including field team members in the design and planning of the drilling program
- Real time reporting of key metrics of drilling performance
- Nurturing ‘one team’ attitude, encouraging everyone to look for innovation opportunities.
RED TAPE, GREEN TAPE
More than half the firms surveyed identified government regulation as an impediment to getting business done. As red tape challenges grow, there’s an 89 per cent chance that productivity will flatline or decline.
However, organisations impacted by green tape reported increased productivity. The Chevron-operated Gorgon Project is being built on Barrow Island, a Class A Nature Reserve, in Western Australia. Stringent environmental conditions to protect the island from non-indigenous species were applied as part of the environmental approvals process. Innovation kicked in and Chevron developed the world’s largest non-government quarantine system, with more than 300 procedures, specifications, checklists and guidelines to protect the biodiversity and surrounding waters of Barrow Island.
The Western Australian Environmental Protection Authority considers the system ‘likely to be world’s best practice’, and the concept can be replicated on any project globally.