cost reduction in this...

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Why explorers want drillers to go bust

What can we learn from CRINE

Using costs to predict the oil price

Knowledge process outsourcing –viable for oil and gas?

Outsourcing the exploration department

The plight of young professionals

Event Report, Cost Reduction in This Era, Friday, June 5, 2015, London

Official publication of Finding Petroleum

Special report

Cost Reduction in This EraFriday, June 5, 2015, London

This special edition of Digital Energy Journal is an Event Report from our forum in London on June 5, 2015, "Cost Reduction in This Era".

Having a Better Understanding of Asset Integrity

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Event websitehttp://www.findingpetroleum.com/event/03df9.aspxReport written by Karl Jeffery, editor of Digital Energy [email protected] Tel 44 208 150 5292

Sales manager Richard [email protected] Tel 44 208 150 5291

Conference produced by David Bamford

Layout by Laura Jones, Very Vermilion Ltd

Cover art by Alexandra Mckenzie

Digital Energy Journalwww.d-e-j.com

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Drilling rig rental costs (‘day rates’) have kepthigh probably longer than they should havedone, given that the oil price started droppingin June 2014, and you would expect thedrilling rig rates to go down in step with theoil price.

But by the day of the conference (June 52015), “day rates are plummeting for all sortsof rigs especially deepwater rigs,” said DavidBamford, chairman and producer of the Find-ing Petroleum “Cost Reduction in This Era”conference in London on June 5 (and a non-executive director of Premier Oil) .

“My comment is, 'at last, hoorah'”.

“I hope a couple of drilling companies go bustto encourage the others.”

This is not vindictiveness, the problem withhigh drilling rates is that they have made itimpossible for operators to consider deepwa-ter wells, which means a large amount ofprospective parts of the world become off lim-its, he said.

“Deepwater wells had become uneconomic.When a company drills a well [costing]$250m offshore North West Africa in deepishwater, that is not an economic proposition foranybody.”

If drilling costs go down, it will “bring deep-water drilling back into the frame and makedrilling deepwater wells viable again, they arenot at the moment,” he said.

How bad is it?

You can get a sense of how bad this oil pricecrash is, by comparing the current crash withthe last three (1985-86, 1997-98, 2008-2009),with graphs published by BP showing the per-centage drop in price over time, from 1 monthto 21 months after the previous peak.

The graph shows that the 1997-98 crash wasactually the least severe, in terms of how lowand how fast the price dropped. However thismight have been the crash with the biggestimpact on the industry.

Mr Bamford said that this was the crash “I re-member best, because I was most immersedin it,” he said. “That led to the demise ofAmoco, Arco, Texaco, Fina, and Elf.”

“[From] where we are now, you cannot pre-dict where we're going to finish up. So there’sa lot of uncertainty in several time scales.”

High costs

The oil and gas industry had problems withreturn on investment before the oil pricestarted to sink. “Investors have become exceedingly sceptical about our sector be-cause they lost money,” he said.

“The North Sea was and is threatened by highcosts. Exploration success is failing aroundthe world,

With oil and gas development projects, “over-runs and lateness are almost mandatory,” hesaid.

“The low oil price presents the need and op-portunity to fix some of these things.”

With subsurface costs. One rule of thumb isthat half of your money should be spent ondrilling, a quarter on data (mainly seismic),and a quarter on people costs, known in theindustry as ‘G&A’ (general and administra-tive), which includes salaries, travel expenses,training and “all that sort of stuff”.

This 50:25:25 ratio “works pretty well,” hesaid. If a company has a budget which goesout of line with that, it’s “a warning sign”.

The industry should look at is its habit ofmaking a massive reduction in staff when theoil price goes down, and then a massive hiringwhen the price goes up.

Perhaps the oil and gas industry would be better if the oil companies were flatter, withless senior executives, and more use of outsourcing, he said.

Watch David’s talk on video herehttp://bit.ly/dbcrite

I hope a couple of drilling companies go bustI hope a couple of drilling companies go bust to encourage the others,” said Dr David Bamford, conference chairman and a non-executive director of Premier Oil

Finding Petroleum’s conference in London on June 5 2015, “Cost Reduction In This Era”, stole its title from a UK initiative to reduceoperations costs of the 1990s, “Cost Reduction In the New Era” (CRINE).

Dr Rex Gaisford, who started the CRINE project in the 1990s, also spoke at the 2015 conference. He said that when he came up with the name, people said “that’s awful we can’t have that”, to which Dr Gaisford agreed and said “It’s so awful, people will remember it.”

Finding Petroleum’s conference in June 2015 started with an introduction from conference chairman David Bamford, a non-executivedirector of Premier Oil and former head of BP’s global exploration program.

It included Dr Gaisford’s story about CRINE and how the learning on cost reduction could be applied to this era; an update from RFCAmbrian on where they think the oil price is going and the factors driving it; two talks on outsourcing, including knowledge processoutsourcing from DDC and exploration outsourcing from PDF Limited; and finally a talk from Deirdre O’Donnell of recruitmentconsultancy Working Smart on how the workforce is affected, particularly young professionals.

Digital Energy Journal - Special report, Cost Reduction in This Era, June 5 2015

Cost Reduction in This Era

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The CRINE “Cost Reduction in the New Era”initiative of the early 1990s led to a reductionin costs of new projects of 30 per cent, accord-ing to Wood Mackenzie calculations.

Dr Rex Gaisford, whostarted and led“CRINE”, said that thebenefits probably cameas much from a changein attitudes and willing-ness to standardise, asfrom anything specificwhich was done,speaking at the FindingPetroleum forum onJune 5 2015, “Cost Re-duction in This Era”.

It is perhaps a natural human inclination to al-ways want to do a task differently rather thanthe same way that it was done last time, but thisinclination can make projects much more ex-pensive, he said. CRINE aimed to discouragethis inclination.

The main intention behind CRINE was stan-dardisation, “which should put quality up be-cause you're not experimenting all the time,you're using tried and tested equipment. [work-ing with] people who’ve been through theprocesses before,” he said.

CRINE focussed on mainly project develop-ments and drilling to a lesser extent.

Following his work, Dr Gaisford was awardeda CBE (Commander of the British Empire) in1995.

Project managers

The inspiration for CRINE came from Dr Gais-ford’s experiences in the mid-1980s, working inAberdeen as a project manager for oil companyAmerada Hess. “I was determined I was goingto change the way things were done, there wasno other way to get costs under control,” hesaid.

“I completely and utterly failed. The job cameout on time and on cost, but it wasn't done inany different way than the way it was done be-fore, by beating people to get things done ontime, which is an exhausting process and not arepeatable one.”

“In that process I learned in quite a lot of depthwhy things in the industry were going wrong.”

“The reason I failed to change the mould wascultural. The oil and gas industry has an amaz-ingly robust culture. I was the project manager,and I couldn't change anything. I couldn'tchange the way things were being done because

‘that's the way it’s done, boss.’ You can havemeetings and argue and insist, then nothing hap-pens.”

“To test this hypothesis, on the next project Itook on the entire personal responsibility, foroff-shore cranes. Why? Because the simplestsystem we put on a platform in operationalterms are the cranes. They sit there, lift stuff,swivel, drop stuff. It’s the same whichever plat-form you are on. Therefore they should be stan-dard.”

“I bought the cranes on a very clear require-ment, but according to the manufacturer’s spec-ification.”

“I went through hell with my engineering con-tractor, my engineering team on the project, theconstruction people, the operations people,everybody you can think of wanted to changethings. I refused to let anybody near it, no-onewas allowed to interfere. They all predicted fail-ure, ‘it won't work.’”

“At the end of the day, those cranes were boughtas a manufacturer's standard piece of equip-ment. They were landed and installed on theplatform, operated successfully and as far as Iknow still going today.”

A luncheon

“When I got to the next project I thought, ‘therehas to be a better way of achieving this’.”

“I invited all the project managers in the NorthSea to a luncheon. Rather than discussing de-tailed current issues as we often did. I sug-gested, that we examine the whole N Seaproblem and see if there was a way that we, thepeople supposedly in charge, could fundamen-tally affect the outcome.’”

“I wasn't confident we could, but I thought I'dgot the right people together to discuss it.”

“We peeled out of the hotel finally at 8.30 in theevening having been discussing it the entireday.”

“I said, ‘if we're going to get this going, this isn'tjust a business of working out a few new waysof doing things, this is a matter of winninghearts and minds, this is a cultural change.’”

“I suggested that to make a step change of thissort, it would have to have a “name” - peoplehave got to be able to talk about it as being“something”. I told them that I had decided tocall it ‘Cost Reduction Initiative in the New Era’CRINE.

“Everyone present thought, it awful. I agreed,but pointed out that it was so awful people

would remember it and that as ‘we were all proj-ect people, we know that if we're going toachieve anything, what we're trying to achievehas got to be clearly specified and there's got tobe a clear date and a clear deliverable.

“I suggested that the deliverable is a CRINE re-port with recommendations, and a conferenceto launch the report in December next year.’”

“They all fell about laughing and said, ‘there'sno way that can be achieved.’”

“I said, ‘well actually I’ve booked the QueenElizabeth II Conference Centre in ParliamentSquare (London) for December 1993.’”

Report

The ‘CRINE Report’ was published in Decem-ber 1993, on the day of the London conference.

“The content is, I think, fairly good, all thethings suggested in these 50 pages, they all addvalue,” he said. “But the fact that the whole in-dustry was involved in their production was theimportant thing.”

“It didn't stop at just the initial bunch of projectmanagers, but involved all the people that oper-ated, owned and interacted with those and futureprojects. This included all the non-operatingpartners of those companies and all the othermyriad of companies working in the North Seaincluding the contractors, service companies,the suppliers, manufacturers, engineering com-panies.”

“We built a CRINE structure comprising overallco-ordination through a steering group and thenindividual elements addressing each of the is-sues we discerned were necessary. They all con-tained members from each of these segments ofthe industry.”

Conference

The conference to launch the report “was almosta religious occasion, we had 1500 people in thehall, they were all CEOs of major oil companiesfrom all over the world, ministers of energyfrom all over the world. The place was ab-solutely packed,” he said.

“It was so overbooked that I had to book anotherconference the week after in Aberdeen for an-other 1500 people, who all wished they hadbeen able to get a seat on the first one. We'd wonthe hearts and minds.”

Practise

Putting CRINE into practise was another matter.

What can we learn from CRINE?The “CRINE” initiative of the early 1990s to reduce costs of North Sea operations, led to a reduction in newproject costs of 30 per cent, according to Wood Mackenzie, but the benefits did not last forever. Is thissomething we can learn from now?


Dr Rex Gaisford

Using costs to predict the oil pricePeople usually predict the future oil price starting with an estimate of what OPEC wants the price to be, saidStuart Amor of RFC Ambrian. But it might be better to start by looking at industry costs.

Microeconomics sug-gests that over thelong term, the oil priceshould cycle aroundthe marginal full costof oil supply. The fullcost of oil supply in-cludes all capitalcosts, operating costs,taxes and the requiredreturn on capital.

Stuart Amor. Head of Oil and Gas Researchwith corporate advisory company RFC Ambrianexplored this theory in his talk at Finding Petro-leum’s forum on June 5 2015, “Cost Reductionin This Era”.

Upstream capital costs doubled from 2004 to2008, according to IHS Cera’s Upstream CapitalCost Index. From 2000 to 2004, and after 2008,they were fairly flat.

You can see a similar shape in the graph of longdated Brent oil prices (which reflect the mar-ginal cost of oil supply), fairly flat until 2004,then a big jump to 2008, and fairly flat after that,he said.

RFC Ambrian defines the marginal cost as thecost of the most expensive 10% of global non-OPEC production.

Looking over back over 20 years, you can see

quite a close correlation between the Brent oilprice for 3 years in the future, and the supplycosts for the most expensive 10% of production,he said.

“The long dated price is the market's best guessat the marginal cost of oil supply, this is the longterm structural component of oil prices,” hesaid.

Many market commentators work on the basisthat the price will end up where OPEC wants itto be, he said.

But if you work on the basis that the long termoil price will be equal to the marginal full costof production, it means that OPEC actually hasvery little influence in the long term, becausemost OPEC production is low cost. By effectingthe short term supply/ demand balance OPEChas significant influence over whether the spotprice trades at a premium or discount to the longdated contract, he said.

RFC Ambrian estimates that the marginal fullcost of oil supply is around US$80/bbl and theyforecast that the oil price will be between$70/bbl and $90/bbl in the long term, he said.

The long dated Brent contract is down toaround US$75/bbl from US$100/bbl just 12months ago. This is because some high costprojects have been delayed or cancelled and be-cause oil service costs are lower than they were.

Current overcapacity in the oil service sector, isnow putting downward pressure on the rates theservice sector can charge upstream companies.

Short term

Over the shorter term, the market focus has beenon how fast US shale oil producers will reduceproduction. “We thought US tight oil wouldpeak in June 2015 but it actually peaked inApril.”

Shale operators have been leaving drilled wellsuncompleted. “Operators are hoping for lowercompletion costs later in the year. And theydon’t want to lock in a loss,” he said.

If OPEC’s main short term aim is stopping UStight oil, it will probably wait a little longer, per-haps until early 2016, before reducing produc-tion, he said.

OPEC has a track record of being slow to react.“In 1985 – 1986, OPEC didn't act until 13months after the cycle [started]. We are only 10months into this cycle” he said.

OPEC

Mr Amor was asked if he thinks Iranian produc-tion could change the numbers.

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Dr Gaisford was reminded of Machiavelli’squote, “There's nothing more difficult or uncer-tain in its success than to take the lead in intro-ducing of a new order of things because theinnovator has for enemies all those who havedone well under the old conditions and luke-warm defenders in those who may do wellunder the new.”

“We had to defeat the enemies and win overlukewarm defenders,” he said.

12 months after

We were fighting all the time an uphill battle toget the ideas understood and accepted. Everysingle thing we tried to do was a battle. That isexhausting,” he said.We were talking to people of repute, peopleacross our industry. A lot of them older than Iwas in those days. “I remember one guy, at aconference toward the end of my involvementwith CRINE, he said "it’s all rubbish, you'll

never get it to work because people won't playball."

“I said, ‘you come back in two years and ifyou've still got that attitude you won't be in ourindustry any longer, because the world haschanged, everyone is onside’”.

Dr Gaisford stood down from the Chair ofCRINE in 1994 to become an Exec VP WesternHemisphere for his company and spent the next5 years building business opportunities for hiscompany including a new role in Brazil.

For CRINE, I was right for the next few yearsbut sadly, slowly over time things in the UKCShave reverted to where they were before.

“If the UKCS industry is going to do a similarthing again, I advocate that it follows a similartrack to CRINE, but it has to be more carefulabout guarding the result it achieves. “Thepolicing of CRINE afterwards, we didn't do wellenough.”

There was a successful effort to develop stan-dard construction contracts, but even this hasnow reverted to old ways with eachproject/company having its pet “standard”.

Do it today?

The conditions which led to CRINE were “ex-actly the same as we’re facing today. Priceswere going sky high, organisations were gettingfat, and people were doing things in rote fash-ion because it had always been done thatway,” he said.

The industry could get a lot out of repeatingthis process, but it must “just be tighter onpolicing it afterwards,” he said.

Watch Rex’s talk on video and downloadslides herehttp://www.findingpetroleum.com/video/RCM-Consulting-Ltd/Rex-Gaisford/1350.aspx

Stuart Amor

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Mr Amor replied that they model on the basisthat all OPEC production (including Iran) willbe steady, so if Iran starts producing more, allother OPEC members will reduce production tomake space. This is not too hard. “There are afew other OPEC countries that I think willstruggle to meet their quota levels,” he said.

For example, “crude coming out of Iraq willstruggle in the near term. Iraq isn't paying oilcompanies what it needs to pay them. For everycountry that might come up, there’s always onethat might come down.”

Mr Amor was asked how accurate he thoughtproduction data actually is, considering thatsome commentators believe that Middle Eastcountries lie about their production.

“There are people counting ships in and out andmaking assumptions of how much oil is there,”Mr Amor replied. “It is probably reasonably ac-curate.”

How low can it go?

RFC Ambrian’s estimate of the ‘marginal cashcost of oil’, how much it costs to keep produc-tion going (not including exploration and devel-opment expenses) is roughly $30, he said.

However oil and gas companies could takesome comfort from knowing that the oil and gasprice did not approach this cash cost in previouscrashes, except for 1998.

Investors

Mr Amor was asked about the current invest-ment attitudes in Wall Street, who seem to pre-fer US onshore operations over deepwater.

“Investors are investing in growth. Shale hasbeen a growth story and that's what they are in-vesting in,” he replied. “But the growth hascome from debt. It is not generating enoughcash flow to grow itself at the rate it’s beengrowing.”

Watch Stuart’s talk on video and downloadslides atwww.findingpetroleum.com/video/1302.aspx

Outsourcing work to a lower cost country isnormally only considered for simple, routinetasks. But some companies are outsourcingmore knowledge intensive tasks as well, saidSimon Bates, Project Manager and Advisorwith outsourcing company DDC Group,speaking at the Finding Petroleum forum onJune 5 2015, “Cost Reduction in This Era”.

The term ‘knowledge process outsourcing’(KPO) is used when the outsource workers aredeveloping and using specialist knowledge aspart of their work, he said.

Examples of more knowledge intensive workthat can be outsourced are research, indexing,compliance checking, data collection, man-agement and cleansing, he said.

Meanwhile you keep all your company’s coreexpertise and creative work at home, he said.

The cost of doing outsourced work is typically30 to 75 per cent of doing it in-house, he said.

“KPO doesn't directly solve industry prob-lems, but it does have a significant impact onoperational cost and ability to do new things,”he said. “It releases time for in house expertsto do more on what drives the business for-ward.”

As part of the process of outsourcing, you canalso re-organise the way the task is done, hesaid.

And of course you won’t need to provide of-fice space, training and employment benefitsfor your own staff, he said.

Examples of KPO

DDC offers a KPO service for an oil and gasdrilling service company.

This company receives reports about drillingbit performance, provided in many differentdata formats, often including differentacronyms in the text.

They are not easy to enter into a computer, butit is vital that the data in them is kept, to keeptrack of how different bits perform and whathas been used in each well. The data is alsoimportant for future sales.

Before working with DDC, the companywould usually input reports into the databaseselectively and do it in a rush job. Therewould be a stack of reports with the data nevercaptured.

Converting a report sent from someonearound the world (perhaps also in a rush) intoa standard structured format is not good useof an engineer’s time or mental energy. It isnot particularly difficult work but not very re-warding either.

Now the reports are sent daily to a KnowledgeProcess Outsourcing (KPO) team in thePhilippines, via a secure server. They are tran-scribed and input into the central knowledgedatabase with a guarantee of accuracy andshort turnaround time. “Nothing gets left asideor rushed,” he said.

If something is missing from the data, or doesn’t seem to match, the outsourcing com-pany staff can contact the person who sent thereport and request further information.

“They are applying a great deal of understand-ing to the process, which they receive throughtraining from the customer,” he said.

DDC also works with a global academic pub-lisher, to check and index medical researchpapers before they are added to its “Embase”database, and check and index geological papers for its “Geobase” database.

For the work on the Embase medical database,DDC Group employs around 40-50 people

Knowledge process outsourcing – viable foroil and gas?We all understand that it is possible to outsource simple tasks to lower cost countries and save money, butcompanies usually think that tasks involving more knowledge work are better kept in-house. Simon Bates ofDDC Group believes outsourcing knowledge work is also worth considering.



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with medical expertise (some of which aredoctors), to index peer reviewed articles.“This team's job is to read through conceptswithin the articles and then index or applyindex terms to the articles so when they aremade available from the publisher's websitethey can be retrieved by global industry pro-fessionals,” Mr Bates said.

For the work on Geobase, the geological data-base, DCC has recruited a team of engineersand people with a geological background toindex articles.

If you consider the amount of technical ex-pertise required to check technical papers, thisshould answer concerns that you can't out-source complex technical tasks, as many peo-ple believe, he said.

The service is also offered to a US freightcompany, where the knowledge team providedocument compliance checking services.

Other work which could be outsourced in-clude paper document scanning (includingwell logs) and digitisation, which could bedone by a team of geophysicists, who would

know (for example) how to get the projectionright. You could also outsource personal assistance.“An engineer could say, I spend half my timepulling together data from various sources be-fore I can even start to do my job!”" The nat-ural answer is to get a research assistant. Butit doesn't have to be someone sitting next toyou,” Mr Bates said.

“The assistant can communicate with the en-gineer, the engineer is able to train them.”

You could outsource data analytics tasks,which can be better performed by someoneobjective rather than in-house experts whomight already have expectations of what re-sults they will see.

Setting it up

The pathway of setting up outsourcing startsby working out which tasks you want to out-source and documenting how the tasks shouldbe done. The outsourcing company can pro-vide assistance with this.

When it comes to the level of guidance givenby clients, “some businesses can come to us

with a manual already written, some cus-tomers come to us with nothing, and say, ‘thisis what we do, can you help,’” Mr Bates said.

“I've been involved in teasing out informationso I can write instructions to get the processgoing, which we then refine over time,” hesaid.

The KPO company finds suitable people,trains them and sets up the software systemsto do the work. This is followed by testing andpiloting until everybody is happy.

KPO solutions can have anything from oneperson to thousands, he said.

Companies continue as they have done before,but technical data capture is given to an out-sourced team.

Watch Simon’s talk on video and downloadslides atwww.findingpetroleum.com/video/1259.aspx



PDF Limited - Outsourcing the explorationdepartment Dr. Mark Enfield, Managing Director and Founder of PDF, speaking at the Finding Petroleum “Cost Reduction inThis Era” event on June 5, discussed how outsourcing oil and gas exploration can work. PDF has been providingan outsourced exploration function to oil and gas exploration companies for 21 years.

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With the recent fall inoil price, real pres-sures are being placedon the exploration in-dustry to reduce costsand gain efficiencies,all in a climate of in-creasingly hard-to-find reserves andrequirement for tech-nical innovation.

While outsourcing is generally considered asbeing a means to reduce costs, it can be more thanthat.

Exploration consultancy P.D.F. Limited, based inOxfordshire, UK, has been providing explorationoutsourcing to oil and gas companies for 21 years,both as a traditional consultancy - where individ-ual tasks are outsourced - and as an aligned strate-gic partnership, the “Outsourced ExplorationDepartment®”, where the full exploration func-tion is outsourced.

Dr Enfield outlined the importance that PDFplaces on long term relationships, the applicationof experience to exploration success, the impor-tance of full spectrum capability and the overrid-ing imperative of quality at every step: “qualitymust run through everything – quality of thoughtprocess, workflows, management and, critically,people”.

PDF have operated discreetly throughout theirhistory and have never divulged their client norproject identities, he said. “Discretion and confi-dentiality are our abiding principles and we be-lieve are critical in maintaining longer-termrelationships - a key issue in, and requirement for,successful outsourcing”.

PDF have worked with companies of varyingscale and type, ranging through from privatelyheld, to smaller-listed and medium-sized inde-pendents, to majors, super majors and govern-ments. Dr Enfield summarised some of thesuccess metrics of PDF’s track record, showinghow the company has helped its clients and strate-gic partners to grow and achieve exploration suc-cess through transformative events such asdiscoveries, new venture value realisation, moneyraises and IPOs.

Within the theme of cost reduction, Dr Enfielddiscussed the recent change brought about by re-duced commodity prices and how this hasbrought uncertainty into the industry and a per-

ceived need for efficiencies. The talk then wenton to explore outsourcing’s role in meeting thecurrent challenges.

More than traditional consultancy

Dr Enfield set out the standard model for the ex-ploration department, which is to have in-housestaff, or to have out-of-house staff workingthrough one of a number of consultancy models.

“There are pros and cons to both in-house staffand out-of-house staff (consultants). Advantagesof in-house staff include familiarity, corporatealignment, knowledge retention and certainty ofcapacity, but with downsides such as higher cost,less flexibility and higher G&A expenditure,” hesaid.“With consultants, advantages include, for exam-ple, lower cost, greater scalability and the poten-tial for more efficient working through focussedapplication of specialist skills and knowledge. Butdisadvantages may include potential loss ofknowledge/lack of project continuity and poten-tial difficulties with getting answers that addresscorporate objectives.”

Dr Enfield argued that by “fully outsourcing theexploration department in a best practice mannerit is possible to leverage the main advantages ofboth the consulting and in-house models whilstavoiding most of the disadvantages”.

Outsourcing in this way “achieves the benefits ofefficiency and scalability, bringing to bear thenecessary specialists when they are needed in avery cost effective and focussed way”.

Making outsourcing work

The structure and governance of an outsourcingrelationship are crucial, said Dr Enfield “If wedon't set this up right, it’s never going to work”.

He went on to explain that the overall spirit of theoutsourcing partnership “needs to be capturedwithin the agreement, just as much as the finercontractual details”. It is also important to fostera relationship based on mutual trust and respect,“it is a strategic partnership - the intention is tooperate seamlessly in an open and collaborativeenvironment for the success of the E&P com-pany”.

Many companies outside of oil and gas are suc-cessfully using the outsourcing model as a key

part of their business strategy. Dr Enfield de-scribed how “exemplars of outsourcing excel-lence”, such as Toyota, achieve success by “onlyoutsourcing to trusted suppliers who have provenan ability to deliver on time, with an overridingpreoccupation with quality and who can deliverat a competitive price”.

The company demands that outsourcing suppliersare continuously innovating and generating effi-ciencies, he said - “they've got to have some ideasof their own”.

At the same time it is important that the outsourc-ing provider is willing and able to adapt to theclient’s procedures and working practices. “Theexploration function should only be outsourcedto contractors who can demonstrate all of theabove.”

Another part of the key to success is for the com-pany to work “very closely with their outsourcingpartners and to respond to supplier concerns withintegrity and mutual respect.”

The relationship is optimised where the day-to-day management of the outsourced explorationdepartment’s work is also outsourced to thetrusted provider. This equally liberates the clientcompany executives from time-consuming‘micro’ management, allowing them to focus ontheir core business function.

Exploration outsourcing

Dr Enfield likened an exploration company to aship where the exploration department is the en-gine room, driving the vessel forwards. In thisanalogy the direction (and speed) of the ship isthe corporate strategy, with the direction set bythe captain - the company’s executive manage-ment and board.

The exploration department are “more than just‘G&G’”, with broader responsibilities includingthe addition of new assets, business developmentand the running of the company’s asset portfolio- “they are the engine room for corporate growth”.The outsourced exploration department modelprovides access to a bigger ‘engine’, allowingcompanies to “punch above their weight” andcompete on a much larger playing field than thecompany's size might otherwise suggest.

Dr Enfield went on to explain that the lifecycle ofan outsourced exploration department partnershipis not fixed at the outset, but the nature of the re-

Dr. Mark Enfield



lationship is carefully structured over a multi-yearcycle to achieve long term stability and to preventsurprises.

Importantly, flexibility is built in because changeis recognised as an almost inevitable feature ofany company’s growth and the beginning, middleand end phases are carefully designed to achievecertainty for both parties throughout the lifecycle– again Dr Enfield emphasised “no surprises”.

“Outsourcing of the core exploration function isa big decision for companies to make, but is per-haps highly relevant in today’s low oil price en-

vironment,” Dr Enfield said in conclusion.

“Alignment is a crucial feature of good outsourc-ing and is gained by the structural setup of thearrangement/strategic partnership.”

“Change is inevitable. It should be expected andanticipated, as a natural part of success, by beingaddressed in the contract for a “no surprises”functioning of the relationship.”

“Outsourcing, done well, is value adding and re-alises cost benefits including reduced corporateG&A (bringing G&A down to less than 10% in

best practice outsourcing).”

“Successful outsourcing of the core explorationfunction requires a supplier of sufficient scalewith a full spectrum of capabilities that brings tobear a highly focussed, ready-made explorationteam.”

Watch Dr Enfield’s talk on video and downloadslides atwww.findingpetroleum.com/video/1298.aspx

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The plight of Young Professionals – will history repeat itself?There are growing fears amongst our industry’s Young Professionals concerning job security as oil pricesdramatically plummeted from last year’s peak. Working Smart’s Managing Director, Deirdre O’Donnelladdressed these concerns and examined the current workforce demographics and the challenges we arefaced with in the next upturn.

A recent survey ofUK oil and gasYoung Profession-als was undertakento assess their viewsand concerns relat-ing to the low oilprice and how theindustry could sup-port their careersduring this down-

turn. The survey was undertaken by SPE,PESGB, and AFES Young Professional (YP’s)members with less than 5 years’ industry expe-rience and the results were presented to a groupof about 100 young professionals at the DEVEX2015 conference in Aberdeen in May. DeirdreO’Donnell chaired this YP session.

Speaking at The Finding Petroleum forum onthe 5th June in London, Ms O’Donnell pre-sented some of the survey results and stated that“There was a consensus amongst our youngprofessionals who felt there was a threat to jobsecurity and restrictions in job opportunities.”Although the results showed that only 3-4% hadreceived ‘at risk’ letters from their employersand only 7% had been made redundant, ‘Job Se-curity’ was a major concern for 80% of the re-spondents. Ms O’Donnell feels that employersneed to be more supportive and transparent indealing with YP’s with regard to job stability.

Today graduates leave university with largedebts in the region of £30-£40K so securing andmaintaining employment is vital. Ms O’Donnellfeels that the industry should be doing more tosupport them.

Mentoring

Many of the respondents expressed a need forgreater support through mentoring by more ex-perienced staff, but with the layoffs many senioremployees have seen an increase in workloadand have restricted time. Also there was a feel-ing that YP’s were expected to undertake workthat surpassed their current abilities and that wehave a serious need for effective mentoring pro-grams.

Working Smart conducted research of peopleaged 55+ regarding retirement plans, mentoringetc. 76% said they currently mentored staff.24% said they did not, however 85% of thesestated that they would be interested in mentor-ing. Of those that mentored, only 9% did sothrough a formal mentoring scheme and 59%through team participation. Ms O’Donnell feelsthat “You get the impression that some compa-nies merely pay lip service to mentoring.”

The majority of respondents said they expect toretire at 65 but 80% stated they were happy towork 3+ days per week after their retirementage. “We as an industry need to take advantageof the willingness of our semi-retired people tomentor”, said Ms O’Donnell.

With many of the 55+ generation retiring, ourfuture industry leaders will come from the 36-45 age range (the most sought after). However,industry surveys typically show that this demo-graphic represent only 9%-12% and it is re-ported that we need 60% more leaders by 2017.As our mid-tier technical staff take on more of

our managerial roles, our younger generationwill have to step up. The question that arises is“are they equipped, have we provided thebreadth of experience required and more impor-tantly what are we doing to build the pipeline offuture YP’s?” she said.

“All senior level staff should be involved inmentoring, especially those over 55. We have tocapture this knowledge before they leave our in-dustry.” said Ms O’Donnell.

1999/2008/2014 Downturns

Prior to 1999, most functions were managed in-house by oil and gas companies. Ms O’Donnellexplained “the age of the ‘Flexible Organisa-tion’ which was highly prevalent in the car andother industries had escaped our sector. “Whenoil fell to $9 in January 1999 we had a bit of awake-up call,” she said. “As mergers and acqui-sition progressed, organisations looked to re-duce costs through the outsourced model whichprovided numerical, financial and functionalflexibility. Functions that were deemed non-core were outsourced.”

Oil and Gas companies dramatically reducedthe number of ‘first tier contractors’ who tookon the responsibilities for many of the secondand third tier suppliers. There was an emergenceof consulting houses and a shift in how theywere contractually engaged and paid. It was an era of constant change!

Before this crash, many oil majors were running2 year graduate training programs, where people

Deirdre O’Donnell



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would spend 6 months in different departments,such as field, geoscience, operational, commer-cial... “These programs delivered very wellrounded individuals” she said.

“After the crash, we experience a major de-crease in graduate intake as oil and gas compa-nies hired for their core activities only.” shesays. Many technological research and devel-opment (R&D) projects were abandoned, out-sourced, or offloaded to service partners.Training and staff development budgets werealso severely cut. The industry during this pe-riod lost a great deal of experienced people whonever returned and the universities saw a majordecline in the number of students entering sci-ence and engineering. Overall industry recruit-ment remained low until 2002/2003, leading totoday’s low mid-career demographic.

The years 2003 to 2008 saw a steady improve-ment in graduate recruitment and training anddevelopment spend, and overall good-times pre-vailed! The pipeline of young geoscientists andengineers was being replenished, albeit slowly,but progress was being made. Some initiativesas to how to engage more effectively withyoung people were also coming to the fore.

“However, the global economic downturn in2008 saw tumbling oil prices and the com-mencement of another cycle of layoffs and costcutting measures” she says. In January 2009, an

estimated 100,000 staff were laid-off from theoil and gas industry as a whole in the US andthis trend was reflected elsewhere. 2008 was an-other poor year for graduate hires across all in-dustries with a 28.2% decrease in graduateintake across the oil and energy sector.

“From 2010 to 2014, Working Smart witnesseda vibrant recruitment market for experiencedpersonnel, especially for consultants” she says.Competition was fierce and with it came esca-lating day rates, salary packages and a require-ment for strong negotiations.

“The current downturn appears to be more char-acteristic of 1999.” she says. The service indus-try has been badly affected, with reported costscuts of 45%, and layoffs in the region of tens ofthousands for some of the larger players. Manyof Working Smart’s 3200+ registered consult-ants have already adjusted their day rate expec-tations – some by as much as 35%.

Industry resource challenges

Ms O’Donnell presented many of the resourcechallenges we as an industry are faced with,from tackling our negative perception amongstour youth; how to attract and retain or gradu-ates, to harvesting the knowledge of our elderdemographic who have retired or are due to retire.

“We have been aware for the last decade of ourskill shortage problems” she says. “As we haveexperienced over the last 3 downturns, peopleleave our industry, graduate intake declines,numbers entering our universities decline andso the cycle continues.”

However, many positive initiatives haveemerged since 1999 – we have seen greater col-laboration between industry and academia, im-proved outreach programs and industry focuseddegrees etc. and most recently industry taking aproactive approach in providing hands-on train-ing free to graduates. For example Romanianseismic contractor Prospectiuni has organisedgraduate field trips, teaching them the basics ofgeology and geophysics and how to conduct aseismic survey, with 20 - 40 students for a 6week stretch, with access to their equipment andexperienced personnel.

Research shows that we still have many hard tofill positions and we are faced with a lack of ex-perienced leaders for the future. The questionis, are we doing enough? “There are many po-tential solutions but a coherent industry ap-proach is needed. Yes this great industry willsurvive but at what cost? Devising a sustainableresource strategy is now critical” she says.

Watch Ms O’Donnell ’s talk on video anddownload slides atwww.findingpetroleum.com/video/1335.aspx



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Attendee list – 'Cost Reduction in This Era' at The Geological Society in London Friday, June 5, 2015

What did you enjoy most about the event?

“ “ “An interesting topic and achallenge to the industryas a whole. The future ofE&P in the UK is at stakeand another generation ofyoung geoscientists andengineers will be lost. Ed Evans

Interestingrange of talksfrom differentperspectives.

Very interesting & informative sessions byStuart Amor & Mark Enfield. Excellentslides, which were verythought provoking.David Harper, Harper Associates

”””“Networking, and

gaining an insightinto other less familiar aspects ofthe industry.Rego Exploration

”

Christian Bukovics, Partner, Adamant VenturesChris Beech, Business Development Manager- Capital Projects, Amec Foster WheelerHugh Ebbutt, Associate Director, AT KearneyDerry Vaughan, AutodeskDominic Thasarathar, Strategic Industry Relations, AutodeskLili Chahbazi, Bain & CoMark Bexon, Director, Bexon Search & ServicePhilip Leijten, Manager Group Strategy, BG GroupPhilipp Chladek, Analyst, Bloomberg ResearchHolly Mcdonald, Category Manager Seabed and Marine Seismic, BP ExplorationOperating Co. LtdNick Wayth, VP Competitor Intelligence, BP plcEmeka Anosike, Share Dealer, Capita Share DealingJocleyn Lomer, Managing Director, CerenoSean Barber, Business Development Manager, CerenoClare Baldock, Sales and Marketing Manager, CGGMustafa Elsherif, Sales Manager, CGGSean Waddingham, Data Library, CGGVeritasMicky Allen, ConsultantChristopher Roberts, ConsultantMohsen Daneshkhah, Chairman & ManagingDirector, Dana Geophysics Co.Simon Bates, Project Advisor and Manager , DDCBob Tyler, Director of Business Development, DDC FPOEsther Hayes, Solutions Director, EnergySys Limited

Nicholas Daly, Managing Director, Eutelsat UK LimitedSalar Golestanian, Managing Director, Finity AssetPaul Bannister, Vice President A&D, FirstEnergyAlexandra Kenna, Managing Director, GEOSERVE LIMITEDDuncan Clarke, Chairman of the Board,Global Pacific & PartnersSimon Berkeley, Principal, HalliburtonWally Jakubowicz, Managing Director,Hampton Data ServicesDavid Harper, Principal Consultant, Harper AssociatesNorman Hempstead, Director, Hempstead Geophysical SvcsBill Green, Account Director, Hermes DatacommsAlexander Chalke, Managing Director, Hydrocarbon Search PartnersBani Norouzian, Global Marketing Analyst, HISAnis Chaghal, Senior Principal EMEA E&P Lead, InfosysRonald Doherty, Manager Field Developments, IntecseaPaul Warwick, Account Director, ISN SolutionsIan Dring, Business Development Manager,Jackson Oil & GasRavi Chandran, Director, Kalki Consultants LimitedPeter Allen, Consultant, Layla resourcesJames Pope, LR SenergyBrian McCleery, Director, M2C Energy AdvisersCharles Lesser, Managing Director, MacquarieEd Evans, MD, NDB Ltd

Ramesh Shukla, Shareholder of exploration companies Riley Smith, Group Manager, OPCMark Enfield, Managing Director, P.D.F. LimitedPaul D 'Arcy,"Director, Technical Services,Europe, Africa, CIS & Middle East", ParadigmRobert Parker, ConsultantJonathan Popper, Vice President Business Development, Petrofac Integrated EnergyServicesGreg Coleman, MD, Petromall LtdRex Gaisford, CEO, RCM ConsultingMike Rego, Managing Director, Rego Exploration (Oil & Gas Consultancy Services)Stuart Amor, Analyst, RFC AmbrianRobert Waterhouse, Director, Rosha Resources LtdIan Hutchinson, Principal Geoscientist, SasaolPaul Day, Director / Consultant, SCGIS Ltd.Stephen Ward, Head of VMM O&G, Siemens plcTony Edwards, CEO, Stepchange GlobalChris Jones, Senior Consultant, StrategicFitRosemary Johnson Sabine, VP Exploration, Tethys Petroleum John Bridgeman, Research Analyst, The EICBrian McBeth, Managing Partner, The Oxford Consultancy GroupSimon Cushing, Head of Advisory Services,Venture Information ManagementKaterina Gunningham, Principal Consultant, Wipro TechnologiesChris Gumm, Business Development Manager Automation Business Unit, WoodGroup MustangAndrew Gilmore, Business DevelopmentManager, Wood Group MustangSteve Esau, Analyst, Xynteo



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