Ushering in collaboration and integrationReturning the oil and gas industry to the eraof superior returns

By David Rabley and Muqsit Ashraf

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Even by its own standards, the oil and gas industry would regard the past 10 years as an eventful period. On the supply side, an array of asset classes came into play globally, in particular unconventional gas, ultra-deepwater and pre-salt, oil sands, and most recently, liquids in North America. The center of gravity for demand shifted rapidly toward developing countries, and prices vacillated over time and between regions. The role and influence of the industry—both in terms of economics and geopolitics—was amplified.

Most of this was good news for the industry. However, operators’ financial metrics—be it operating margin, return on capital, or free cash flow—actually deteriorated (see figure 1). In effect, the increase in the cost of finding, developing, and producing new hydrocarbons outpaced commodity price gains, causing a cash and returns squeeze. Upstream costs per barrel rose by more than 10% a year, while operating income and returns fell by 40-50% in this period. The shortfall between cash earnings from operations and expenditure has widened from less than $20bn to more than $100bn since 2011. The ongoing commodity price meltdown can push the industry to the edge.

Needless to say, the industry has not been making the most of the resources with which it has been endowed—and it must now turn a corner—and quickly.

Collaboration, not cost squeezing, is the keyOne reaction to the industry’s current position, and the oil price collapse, would be to seek blanket cost reductions—in particular targeting suppliers. This would be a mistake. The model adopted over the past 10 years of “service demander” on one side and “service supplier” on the other, with the objective of squeezing out short-term cost, has not proven to be effective. Fundamentally, this model does not allow for the significantly improved returns achievable through collaboration to tackle the systemic challenges of complexity and inefficiency faced by the industry.

Based on our experience and learning from firms in other industries —such as Toyota in the automotive sector (see sidebar on page 11)—the upstream model needs to transform along three paths:

1. Improved efficiency through joint operator supplier cooperation

2. Technology collaboration and integrated design

3. Performance alignment

FIGURE 1: WORSENING FINANCIAL UPSTREAM METRICS SINCE 2006Average values from group of 6 majors, 12 NOCs, and 22 independent E&P companies

SOURCE: ACCENTURE STRATEGY ENERGY (FORMERLY SBC)

Upstream Operating Margin% of gross revenue

2006

25

35 34

2007

23

32

2008

19

2009

15

17

2010

17

20

2011

23

19

2012

16

19

Return on capital Operating margin

3

Baseline Job productivity Unproductive time Non-job time Pacesetter

100

100

60

40300

200%Improvement

World-class efficiency using joint operator-supplier teamsThe operational intensity of oil and gas development has multiplied over the years, driven by the complexity of the operating environment and the types of resources (such as oil sands and tight oil that require manufacturing type operations). As a result, efficiency has become paramount for operators who must reduce cycle time to de-risk basins and expedite production, as well as lower working capital and full-cycle costs. (See “Evolving Contracting Models in Capital Projects”.)

For example, in North America, operators drilling and completing complex horizontal wells are using several supply-side innovations such as shifting from single well pads to multi-well pads, from 12- to 24-hour crews, and more recently, to “zipper” fracs, whereby two or more wells can be stimulated at the same time to drive efficiencies. However, even a “factory” model like this is plagued with inefficiencies—the gap between what operators have managed to achieve and what the theoretical maximum is can be staggering—up to 200% improvement potential (see figure 2). Accenture Strategy Energy (formerly SBC) work shows that closing this gap is largely dependent on collaboration between operators and suppliers.

Such collaboration can create value from elements such as reduced spread cost—for example, if the operator pays for the rental of some key equipment and personnel at the well site—and the ability of the service company to improve utilization of high cost equipment and engineers.

To improve performance, the operator and its service company can form a Joint Efficiency Team (JET). The JET can carry out a holistic assessment of efficiency from planning through execution, put in place the required enablers, and use a structured combination of lean methodologies to shrink the critical path, as well as adopting best practices from within and outside, and implementing a mechanism to synchronize operator service company interaction and decision making (see figure 3, page 4).

Collaboration can create value from elements such as reduced spread cost and the ability of the service company to improve utilization of high-cost equipment and engineers.

FIGURE 2: EFFICIENCY DRIVEN PERFORMANCE IMPROVEMENT POTENTIALSOURCES: CREW ACTIVITY LOGS, ACCENTURE STRATEGY ENERGY (FORMERLY SBC)

Long-Term Efficiency Potential Indexed efficiency performance per month

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Case study: Creating a joint efficiency teamIn 2013, a large North American operator and its service company worked with Accenture Strategy Energy (formerly SBC) to form a Joint Efficiency Team (JET) with a mandate to enhance efficiency and performance. The team was led by senior executives from both companies. The JET was tasked with defining the potential opportunities for both companies and to launch implementation of the actions needed to achieve performance improvements.Through a methodical diagnostic comprising site visits, interviews, time log analysis, and expert input, the JET established a performance pacesetter. The pacesetter broke activities into their component parts and measured the best performance so far demonstrated for each component. When aggregated, the pacesetter proved that a 200%-plus overall improvement was possible—a far greater prize than envisioned by either party at the start of the program.

Work teams then reviewed in detail what it would take to consistently achieve the performance of the pacesetter, which knowledge from the best operations could be shared, and where new best practices could be deployed. After six weeks, senior executives reviewed, challenged, and approved the actions needed to close the gap with the pacesetter performance.

The JET’s focus then switched to driving the change management required to get buy-in on the ground and ensure that implementation was happening at the required pace—a fundamental step that can be overlooked. Within a few months, the operator managed to achieve roughly a 40% improvement in frac stage count and a 25% reduction in time and cost to drill and complete a well. At the same time, the JET was able to improve safety in the field by ensuring that effective safety meetings and dialogues were built into the critical operations path at the right points, and by tracking safety outcomes alongside performance outcomes to ensure they improved in tandem. Further improvements were realized through structural changes, such as collaboratively planning work, optimizing job design, and transforming operating and maintenance practices, as well as improving the common performance dialogue through enhanced reporting and focus on critical metrics.

Diagnosticand Pacesetter

Joint Steering CommitteeExecutives from both Operator and Service Companies

Joint E�ciency TeamJoint E�ciency Team

Best PracticeAction Development

ImplementationPMO

FIGURE 3: THE JOINT EFFICIENCY TEAM COLLABORATION MODEL SOURCE: ACCENTURE STRATEGY ENERGY (FORMERLY SBC)

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Accenture Strategy Energy (formerly SBC) work to date in forming these JETs suggests there are several key elements that shape a successful effort:

1. Forming a thorough fact base and performance baseline through data collection and analytics, field visits and interviews—this identifies bottlenecks holding back performance improvements and creates transparency.

2. Shifting focus from solely non-productive time to the entire well delivery cycle time—a lot of gains can be made during “productive” or revenue-generating time (see figure 4).

3. Establishing cross-functional work groups, bringing together stakeholders and implementers in the planning and delivery of a well. These groups include, on the operator’s side, the engineering, drilling, and completions teams, as well as asset management. On the supplier side, they include technical, operations, and planning staff across the various services (ideally integrated) such as pressure pumping, wireline plugging, and perforation and coiled tubing (as is the case in a well stimulation operation).

4. Changing the relationship focus to “how can we jointly drive efficiency and share gains.” Collaborating to ensure that the improvements identified are supported, implemented, and sustained.

5. Creating a performance dashboard to drive accountability and ensure transparency over actual and potential opportunities, as well as to maintain dialogue between operator and supplier.

The JET model is applicable in varying forms across all regions and most resource types.

It can be particularly relevant and impactful in terms of improving field economics in the unconventionals sector. For example, in a frontier region such as the Vaca Muerta in Argentina, higher input costs, geological and surface challenges, and a lack of critical mass may otherwise make development unfeasible.

FIGURE 4: EFFICIENCY EFFORT TARGETED AT ENTIRE WELL DELIVERY LIFE CYCLESOURCES: CREW ACTIVITY LOGS, ACCENTURE STRATEGY

ENERGY (FORMERLY SBC)

100% Activity Time Breakdown

56%Productive time

including maintenance

27%Mob/Demob

9%Operator

NPT8%FracNPT

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A whole greater than the sum of its parts through technology integration and collaborative designThe development and growth of the oil and gas industry have been inextricably linked to advances in technology through its history. This is an enabler that has shaped the industry’s dynamics. The critical role played by technology in hydrocarbons development will only increase in importance—unconventionals and pre-salt provide clear examples of how improved technology translates resources to reserves today.

What has changed over the years, though, is that more innovation is coming from service companies. Operators are focusing more on coordinating, buying, and applying technology, so they are upgrading their procurement organizations to access technologies no longer being developed inhouse. The challenge is to make sure they use strategies that maximize value.

Often breakthrough technologies make the most impact in an integrated workflow—on a stand-alone basis they work partially at best. Well completion technologies need to be based on reservoir characteristics. Even the best subsurface measurements are not valuable if they are not used in determining the optimal well design. Taking a piecemeal approach to procuring these services may drive down upfront investment, but also risk the real prize of improved production and higher ultimate recovery (see figure 5, page 7). Taking cues from other industries, a North American operator, aiming to accelerate adoption of new technology to support higher well production, formed an integrated design and decision-makingteam with its service company.

A joint executive committee was formed to make quarterly assessments of field trials and make decisions on technology adoption and integration requirements. Combining this information with increased investment in technical basin studies and systematic performance assessment, the operator was able to fast track evaluation of 15 new technologies within 12 months, accelerating trials and developing basin-level integrated technology playbooks.

As a result, the operator achieved well production rates 30% higher than its peers within the same basin and at the same time reduced its dollar spend per expected ultimate recovery ($/EUR) by nearly 40%.

The collaborative approach adopted by this operator remains an exception in the oil and gas industry. It nonetheless offers several relevant lessons:

1. Integration should not be confused with bundling—the latter is simply about pushing through multiple services, while integration is about “scientifically” achieving designated performance objectives by working in concert, using technology and expertise from both inhouse and service providers.

2. Integration works only if alignment is achieved across the operator’s organization, in particular between asset teams and functions (drilling, completions, production operations). The partner service company can help create a balance in decision making between a function (often incentivized by cost and cycle time) and the asset (typically more focused on longer-term performance and production) through objective evaluations of the impact on various parameters (reference lesson number three).

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3. Central to success are clear, jointly defined metrics, alongside a consistent, data-driven, and mutually acceptable evaluation approach. In lesson number two, a stage-gate methodology for capital project delivery, partnered data collection and interpretation, and senior leadership reviews were used together to assess the value captured from applying technology.

4. For design teams, knowing when to use a technology is as important as its effectiveness. By judiciously applying various flavors of integrated workflows, operators can avoid paying for all or part of a technology package for wells where the impact is limited. This, for example, drove the creation of a completion technology playbook offering applications by scenario for the operator highlighted in lesson number two.

Creating a win-win partnership through performance alignmentThe industry’s periods of boom and bust have led operators and their suppliers to develop an arm’s-length relationship. As the industry braces itself for continued cyclicality, such as the one triggered by the commodity price erosion recently, exacerbated by greater complexity and service intensity of hydrocarbon developments, this transactional relationship is becoming the single biggest barrier to performance improvement. The realization is dawning that a partnership model based on an aligned set of objectives is needed, but progress has been patchy so far.

FIGURE 5: IMPACT OF INTEGRATED TECHNOLOGIES1. DUE TO HIGH ACTIVITY LEVELS IN THE REGION, THE OPERATOR WAS ABLE TO REALIZE ECONOMIES OF SCALE, PREVENTING INCREASE IN WELL COSTS DESPITE SIGNIFICANT INCREASE IN PROPANT CONSUMPION

SOURCE: OPERATOR’S INVESTOR PRESENTATION, URTEC 2014

TECHNOLOGIES APPLIED

• Distributed acoustic sensing

• Distributed temperature sensing

• Microseismic monitoring

• Microdeformation monitoring

• DFIT (injection testing)

• Fracture modeling

30-day initial production

+36%

Expected ultimaterecovery

+21%

Completionscost per well

no change

PREVIOUS DESIGN

• 10 frac stages: 40 perf clusters

• Sand: 3.5 MM lbs

• Fluid: 130k Bbls

REVISED DESIGN

• 20 frac stages: 80 perf clusters

• Sand: 6.0 MM lbs

• Fluid: 140k Bbls

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One relevant example is the partnership between Ecuador and its service company partner in the Shushufindi field, a mature conventional oilfield. In 2010, Ecuador embarked on a revitalization strategy for its oil and gas industry, which culminated in establishing a different type of contract with its service provider through the 15-year “Consorcio Shushufindi” contract. Shushufindi is considered Ecuador’s jewel, holding its largest reserves and currently producing 10% of the country’s oil output. The field’s production peaked in 1992 at 110,000 barrels a day (b/d), but declined to 42,000 b/d by 2011.

The service company provides all subsurface engineering, well engineering, well drilling, and well workover activity for a payment that is linked to incremental production. This performance-based collaboration enabled an unprecedented level of investment including 72 additional wells and a water flood campaign. Within 24 months, 40,000 b/d were added to baseline volumes, effectively doubling production from the field.

In addition, the service company was able to coordinate these activities internally far more efficiently than relying on operator input at every stage. Lower costs and higher efficiency resulted, especially due to the implementation of a structural multi-skilling program that led to smaller total crew sizes for teams executing the work.

Achieving such an outcome, in our view, requires three fundamental steps:

1. Agree on the right objective(s) and metric(s). In principle, this should be straightforward since, in oil and gas, it boils down to unit cost ($/barrel of oil equivalent) or productivity (boe/$). However, too often, the focus is solely on the pricing part of the equation. The nature of the discussion needs to evolve toward achieving the desired production target by exercising options available to drive cost savings and improve recovery. For example, engineered completions in unconventionals have been able to drive up well recovery and production by 25 - 50% or more, but may require an upfront additional capital spend of 5 - 10%. The outcome in this case can be a step improvement in unit cost and productivity (through higher production), and consequently well economics and asset returns. Ultimately, creating a balanced, shared scorecard of metrics provides the best foundation. This includes the primary objective, such as unit cost, as well as extra measures that will enable a successful outcome and drive appropriate behavior—for example, efficiency measures, such as feet drilled per minute or wells stimulated per month, and safety measures, expressed through a lost-time incident rate.

Too often, the focus is solely on the pricing part of the equation. The nature of the discussion needs to evolve toward achieving the desired production target by exercising options available to drive cost savings and improve recovery.

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2. Create transparency through open information sharing. Collaboration of any form generally requires extensive information sharing—in this case between operators and suppliers—on plans, designs, objectives, and performance. The concept of Collaborative Planning Forecasting and Replenishment (CPFR), a holistic approach to combining intelligence to plan for and fulfill demand, is one example of how it is handled in industries such as consumer products and retail. Within the oil and gas industry, however, the flow of information between stakeholders is remarkably constrained—the mindset of “share only what you absolutely need to share” pervades the industry. For example, operators can introduce adhoc engineering changes and pilots, while a continuous operation, such as that in oil sands or tight oil, is underway. This severely limits the productivity of service crews. Similarly, there are cases where a supplier shifts resources across clients without enough notice, causing downtime at the well site, with a knock-on impact across the operator’s well delivery chain.

Aligning performance requires transparency across the board—from field development planning to job design, and from operational scheduling to post-delivery performance assessment and course corrections. Operators can serve their interests best by bringing their service company into the mix, as it is the service company that determines the placement of wells on a pad. Together, they can carve out a plan that minimizes move times and enhances reservoir drainage. In essence, the ecosystem functions optimally, if data flows seamlessly across all participants. The paradox is that while the improvements from doing this are obvious, the appetite for enabling such beneficial symbiotic relationships is hardly evident.

3. Define incentives and/or a value-sharing framework. For the vast majority of activities, operators and service companies have shied away from entering into performance-based commercial arrangements, partly because of their arm’s-length relationship and partly because of uncertainties, such as the subsurface aspects of hydrocarbon recovery. But advances in measurements and evaluation technology, as well as in data sciences and predictive analytics, are mitigating those subsurface uncertainties. This means it is easier to use pilots to establish a baseline and a view on performance upside. As a result, operators and service companies can develop an incentive mechanism that meets their desired objectives.

For example, a leading operator agreed with its service company that its primary objective would be efficiency of the service crews. The award of the next phase of the contract was structured around this and the price schedule adjusted depending on the efficiency delivered each month. With this arrangement in place, the operator experienced its best quarter of well delivery cost performance.

If incentives are tied to improved well recovery, then technology integration shines, if optimally designed and applied. The trick is to find an acceptable balance of risk and reward. However, the extent of cultural change required to do this may be unnerving until the industry adapts further to this new environment.

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Reversal in fortunes—a realistic objectiveWithout a rethink of its operating model, the oil and gas industry should not expect a transformative change in its fortunes. The type of change needed is logical: establish common goals around efficiency and technology deployment, and reward them with incentives that enable such an outcome. However, implementing that change is proving far from easy. It represents a fundamental shift in mindset from one that has been entrenched for decades, requiring a recalibration of the operator-supplier relationship from a zero-sum game to a symbiotic one, and a change in operating methods to provide greater information flows and produce more effective joint developments.

For marginal plays—and more of them will fall in this category in a low oil price environment—such a shift will not be easy, even if necessary for success. The shift will be easier to implement in other operating contexts—for example, those where there is a higher degree of repetition, including unconventionals, offshore tie-backs on the Norwegian shelf, or parts of pre-salt Brazil. Fortunately, the industry can draw on numerous precedents in other industries, which demonstrate that collaboration across the supply chain can unleash enormous value, as well as providing analogues on how to put it to work.

Accenture Strategy Energy’s (formerly SBC) experience and analysis suggest that less than 50% of total available performance potential can be achieved when the operator and service company work alone. Our studies show that harnessing the rest requires collaboration and integration, which, if achieved properly, can translate into hundreds of billions of dollars of incremental margin. Doing so would put the industry on course to achieve the returns once prevalent in its glory days—it is too big an opportunity to ignore.

The oil and gas industry can draw on numerous precedents in other industries, which demonstrate that collaboration across the supply chain can unleash enormous value, as well as providing analogues on how to put it to work.

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Toyota shows oil and gas the way forwardThe oil and gas industry can take lessons from other industries that have encountered a similar landscape of increasing complexity and systemic inefficiencies, and, consequently, receding returns. Let’s take the example of Toyota from the automotive industry. About half a century ago, Toyota faced a capital crunch exacerbated by suboptimal throughput. The company came to the realization that it needed to reverse the arm’s-length relationship that prevailed with its suppliers and start to operate as a single, integrated system. Thus was born Toyota’s breakthrough lean “pull” business system—the “keritsu” model of organizing vertical supply chains, originally through cross-holdings, but later through deep, business-driven partnerships.

Toyota also established “obeya” meetings— obeya literally means a big room—for cross-functional discussions involving suppliers, as well as executives from several functions including procurement, production, engineering, and quality. By having cross-functional interaction with suppliers on technology and design rather than relying on the procurement function only, Toyota ensured that new component specifications and technological innovations were successfully adopted and not rejected somewhere down the line, and that the delivered product represented the best ideas and best-in-class performance.

These “vertical partnerships” drove a step change in margins and performance for Toyota. They led to significant improvements in product development cycle time, through leveraging suppliers’ R&D capacity. Also, by collaborating with them and applying “heijunka”—literally, to make smooth and level—Toyota improved its working capital and throughput, leveling demand peaks and troughs, and minimizing intermediate inventories and waste.

The collaborative model put Toyota at the favorable end of the cost curve, allowing it to achieve industry-leading quality and reliability, and resulted in a 50% reduction in development time for new vehicles.

Toyota Motor Corporation Headquarters,Toyota City, Japan*

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* This Wikipedia and Wikimedia commons image is from the user chris 73 and is freely available at https://commons.wikimedia.org/wiki/File:Toyota_headquarter_toyota_city.jpg under the creative commons cc-by-sa 3.0 license.

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Contact the Authors

Muqsit Ashrafmuqsit.ashraf@accenture.com

David Rableydavid.rabley@accenture.com

About Accenture

Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions—underpinned by the world’s largest delivery network—Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With approximately 358,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com.

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