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By James Downie, Partner and Ewan Neilson, Partner

As we write today (11 September) Brent crude futures stand at $48.52 and WTI futures at $45.13. Where prices will stand when this edition is published, no-one can guess. What we do know is that low prices and high operating costs have driven operators to seek efficiencies and to drive down operating costs whenever it’s safe and possible.

We have entered a new world where a focus on efficiency, cost, the rigorous assessment of investment alternatives and collaboration are of crucial importance.

“Collaboration” has been hailed as one of the ways to achieve cost and operating efficiencies and the maximisation of economic recovery expounded by the Wood Review and supported by industry. The Wood Review pointed out that a “lack of cooperation and collaboration across industry has increased costs, caused delays and led to poorer recovery”. In reality there has been collaboration in the industry for years. Examples include:

  • the very act of co-venturing with other companies in applying for licences or concessions and in carrying out development is a prime instance of collaboration;
  • organisations such as Oil & Gas UK exist because members want to collaborate: when dealing with safety issues; when engaging with government and regulators; in respect of contract forms and in the development of commercial practices;
  • the development of new technology is funded through joint industry projects where upstream companies provide funding because they want to deploy cutting edge technology once it is operational;

Collaboration almost always results from the commercial upside which can be achieved, rather than altruism. In the absence of strong regulation directing or mandating behaviour, companies tend to collaborate only when it is in their own interests to do so. Financial pressures force greater collaboration.

However, to quote one of the speakers at Oil & Gas UK’s recent Economic Report 2015 briefing: “The main barrier to collaboration is ourselves.”

It is perhaps the case that focus ought to be shifted to the underlying concept of human behavioural change, rather than changes to the purely financial and economic models that have shaped the industry up to this point. It is clear that the nature of any global marketplace will see companies competing for available capital however, in this new cost-focused world, companies operating on the UKCS must find additional, sometimes more inventive ways to work together to create efficiencies.

We expect to see increased investment in new technology which will reduce costs, and increases in sharing of key materials, equipment infrastructure and other logistics. There will be increased cooperation in decommissioning where co-ordinated campaigns could reduce costs dramatically.

On 2 September, Oil & Gas UK launched the “Efficiency Task Force”, one of the aims of which is to encourage such collaboration. All of this will require a fundamental behavioural change at human level. Conflict ultimately destroys trust, erodes the value chain and leads to poor allocation of capital.

If the UKCS is to successfully adopt MER UK, we need to accept our duty to cooperate and move away from a legalistic interpretation of our rights and obligations. In order to achieve this it may be necessary for industry to run workshops focusing on making changes to our behaviour, not only in the way we run our businesses but the way in which we treat each other. This applies not only to lawyers and commercial negotiators but to those who instruct them, and large contractors as well as operators.

There may in fact need to be a whole new evaluation of contracting philosophy, where we see a shift away from the use of master service agreements in favour of a less monopolistic approach. The field of engineering must also move away from over-specification and over-pricing towards standardisation.

We must ultimately get back to efficiency through cooperation. The alternative to this is simply reducing the cost base by firing people now and hiring people later at lower rates however, this would be to miss the point entirely.

The question remains: what if the benefit of collaborating is not high enough for you to want to do so? The Wood Review stated it had found “more than 20 instances in the last three years where the inability of operators to agree terms for access to processing and transport infrastructure has led to sub-optimal (more expensive / lower recovery) developments, significant delays or in some cases stranded assets”. Clearly in those cases at least one party didn’t want to collaborate! Government, industry and the Wood Review recognise the age of light touch regulation is at an end.

With financial pressures making collaboration a necessity, the establishment of the Oil & Gas Authority, the passing of the Infrastructure Act 2015, the passage of the Energy Bill through parliament and implementation of the MER UK strategy we suspect there will soon be instances where collaboration is effectively forced upon companies.

It is clear that companies who want to will work best together, and it is essential that industry takes action now to rid itself of the overly monocratic and aggressive contracting philosophy that has played a major role in leading us to the situation we now find ourselves in.

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