Articles by Emveedo’s editors

Why the uncertainty in Oil and Gas is a growing space for smaller technical consultancies

As giant firms change their appetite towards lump-sum contracts, there is a vacuum for smaller companies to take their places.

 

 

The oil and gas industry has not had an easy decade. From the drop of crude oil prices in 2015 to negative oil prices in March 2020, it is not difficult to understand why major EPC contractors like KBR and Fluor have begun to reduce lump-sum oil and gas projects and turn their focus on to more secure areas of their portfolios.

This creates a vacuum for smaller companies like Emveedo Energy, to try and fill the gap with a more flexible and efficient approach.

But what are the current main challenges for traditional EPC companies and in general, the oil and gas market?

Fluctuation of the oil price

Spring this year saw oil prices collapse to a historic and unprecedented low. On April 20th 2020, future contracts of West Texas Intermediate crude fell to a negative $37.63, meaning there were no more buyers for those contracts. Such a price anomaly was the result of both a decrease in oil demand due to COVID-19, and a dispute between OPEC member Saudi Arabia and non-member Russia, which led to a flood of supply. This increase in supply and decrease in demand caused a break in fluctuations of oil prices, as this “supercontango” overwhelmed the market mechanism. Despite OPEC+ making efforts to cut the output of its members to control the price, the market still sees the oil price as very vulnerable.

The coronavirus pandemic has massively impacted airlines on a global level leading to a significant reduction in the demand for aviation fuel which is derived from oil. Even after the pandemic has been brought under control, it may take a long time for demand to recover as businesses have successfully adapted to using video conferencing tools such as MS Teams during the pandemic and travel budgets will inevitably be under scrutiny in the post-Covid era. In addition, the public may be reluctant to participate in avoidable travel and it is likely that the tourism industry will take some time to return to pre-Covid levels.

A transition to clean energy

The decline in lump-sum projects for big companies is also a result of the gradual industry shift to clean and renewable energy. BP has said it wants to reach 50 gigawatts of renewable energy in its portfolio by 2030, investing billions of dollars in the process. This is following Eni’s recent commitment to cut oil production and set bigger targets for transitioning into clean energy. Eni has begun a new phase in the development of their business model for sustainability, their ‘Long-Term Strategic Plan’ to reach an installed capacity of 55 GW by 2050. These company initiatives are significant as they lay the groundwork for such a transition to clean energy, encouraging smaller companies to do the same.

Electric Vehicles: charging for change

Electric vehicles (EV) are another main driver of new energy and will result in a further decrease of demand in oil. As manufacturing and purchasing electric cars increases, the need for petrol and diesel cars drops, affecting oil prices. Recent trends in government initiatives across the globe have exacerbated such discussions, such as the UK’s recent 2030 ban on fossil fuel vehicles, putting them on par with other European countries, who have similar environmental goals.

Companies and coronavirus: working remotely

The pandemic has played a huge role in this industry shift. While the abandonment of fixed-price energy projects was indeed inevitable, the coronavirus has nevertheless accelerated such decisions. A remote working culture has also exacerbated the discussions to a more technological approach. Companies have revamped their technological services to integrate more technology-led industrial services, driven by digital remote monitoring, and making their portfolios more expansive and efficient, yet remain sustainable.

The result: a business model that has to change

This uncertainty has resulted in larger companies behaving more conservatively in the oil and gas industry. These companies who are active in other industries, such as military and technological services, have begun to reduce the number of projects taken in oil and gas, changing their business model entirely, by reducing the dependence of oil and gas projects in their portfolios.

KBR is a good example of such a company, who have divisions for government services as well as technology. When CEO Stuart Bradie took over in 2014, around 80% of KBR’s business was in oil and gas, he told the Houston Business Journal last year. As of 2019, the Government Solutions segment accounted for about 70% of all of KBR. This is a result of a change in the business model. A review in August concluded that KBR is moving from a three to a two-segment business model, comprising its Government Solutions and Technology Solutions units and removing its Energy Solutions business from its portfolio.

Changes in business models can be seen across companies within the industry. Fluor has also reported a decision not to participate in competitively bid lump-sum projects. Instead, Fluor’s energy and chemicals business will now only carry out reimbursable or open-book lump-sum conversion engineering, procurement and construction (EPC) work.

A complete split from oil and gas?

This does not mean a split from oil and gas entirely. In fact, such instability in the oil and gas industry has forced big companies to adapt whilst still evolving as drivers of the energy industry, notably in areas regarding clean energy and sustainability. One of these industry developments is Carbon Capture and Storage (CCS), where a company will provide technical consultancy services for the capture of carbon dioxide (CO2), its re-injection and production of blue (carbon-free) hydrogen. Corporates are not the only ones driving this industry shift, but government initiatives and policymakers are also facilitating this change. One initiative is BP’s plan to lead a group of energy companies for two major UK carbon capture projects, with the aim to store half of UK’s industrial emissions beneath the North Sea from 2026. Such initiatives are aligned with the country’s aim to reduce greenhouse gas emissions as part of the Paris Climate Agreement and will be pivotal in the industry’s transition to clean energy, both for large and small technical consultancies.

A breakthrough for smaller companies

While these companies have been forced to adapt, there remains still an uncertainty in the oil and gas industry. What makes large companies vulnerable is the large overhead, affecting their competitiveness to win new projects. On the other hand, smaller companies have a smaller overhead as well as the potential to adapt quicker meaning they can better deal will fluctuations and uncertainty. This is almost identical to the birth of Fintech in the Finance Industry and the unique opportunity which arose for firms during the 2008 Financial Crisis. Companies like Emveedo Energy, therefore, have the capacity to be more fluid in their responses to industry fluctuations and crises.

 

Emveedo Energy and what’s coming

Emveedo Energy started as an engineering and projects consultancy start-up in 2015 by co-founders with extensive experience working with M. W. Kellogg (KBR since 2010) and other corporates. Using the same strategy, which was implemented by Fintech companies, the Emveedo team started to work around old-style work practices and traditional approaches, which were inefficient because they depended on a huge overhead and workforce.

The working from home (WFH) culture has been introduced by Emveedo management right from the beginning in 2015, but clients and available tools were not completely ready for the transition. However, the COVID-19 disaster and global attention to WFH approach as the only viable solution has helped the required Technical tools to develop and improve the Emveedo approach towards a flawless practice, ensuring resilience to market fluctuations and adaptability to industry shifts.

Emveedo Energy remains optimistic and versatile in their capacity to adapt to industry fluctuations and transitions and to change the current uncertainties to unique opportunities.

 

What Oil and Gas companies should take away from the COVID-19 outbreak?

Skype is continuously ringing as I’m on a call on MS Teams with 15 other people trying to speak one by one from different locations. People are sharing the screen while others are making comments and notes. The meeting scribe is taking the notes live in Trello with everybody capturing the live data as it’s being populated. When the meeting is over, the minutes of the meeting are available for everybody to review and sign online instantly. And once we are done, of course, I have some missed calls on skype to deal with!

While it might take a bit of time till the economy and specifically the oil and gas sector can be up and running again, the most significant impact COVID – 19 could have on our industry is in the way our companies will operate in the future.

It wasn’t that long ago when we all had to sit around a conference table in a meeting room which had to be booked in advance, making sure the room had all requirements of the meeting including a projector and the right lighting to make our model review possible.

Yes, COVID-19 will change the way we work, our previous “norm”, our work practices and the way we used to set up our teams and projects.

Oil and gas industry in comparison with IT, Finance and other sectors has been lazy and not very proactive when it comes to adapting to the new era of the digital world and communication revolution.

With other sectors taking the lead in implementing new tools, apps and digital solutions to maximise the flexibility of working while improving efficiency, our industry has been too loyal to 9-5 work and traditional office environments.

For our industry, many factors have contributed to this passive attitude towards change, including the nature of our work, which needs collaboration from large teams formed by many designers/engineers/managers, etc., at the same time.

Also, we use specialised software with expensive licences on a day to day basis, which has not necessarily been developed to operate over the network licences and remote connections.

 But when the rapid spread of COVID -19 triggered the necessity of working from home (WFH), we had to go the extra mile and make up for what we didn’t manage to achieve when we should have, in a couple of weeks, if not, overnight.

But what exactly is the COVID – 19 lockdown period teaching us?

 Which attributes will change in our “norm” to form the new way of working?

Trust

I believe trust will be our main takeaway from this situation.

Organisations, managers and those who are in leadership roles are learning to trust employees at a different level. They are learning to manage their teams based on production-driven performance rather than physical presence in the office and having the right thing on their screens!

On the other side, employees are learning to be more independent and self-managed, with minimum need to be supervised directly.

This, on its own, will have a significant positive psychological impact on teamwork and individual satisfaction for a persons’ achievements.

A new way of working

Even though Digitalisation has been at the top of the priority list for every single operator and EPC contractor for at least the last five years; when it comes to practice, oil and gas companies are well behind their rivals in finance, IT and management consultancy sectors.

With lessons learned from this period, having large offices with a massive cost for office moves, utilities, etc. will be pointless.

So when COVID-19 is done with us, oil and gas companies will be thinking seriously about reducing both Opex and Capex with maximising the remote working concept.

Office spaces can be significantly reduced with more employees being given the option to work remotely and perhaps attend the office only when they are occasionally required. Hot desks which we used to have for only a handful of them and were for visitors on each task force, will outnumber permanent desks and allocated rooms.

IT infrastructures

With the WFH concept being enforced around the world for the last month, it didn’t take long for IT infrastructure of companies to raise the alarm and show signs of being overstretched due to the number of users trying to connect remotely. This has been worse for the users who had to use specific software, mainly 3D modelling and other graphical applications like E3D/PDMS.

This also happened for main global communication applications like Skype, with users starting to experience low-speed connections, low quality of voice and video, and repetitive disconnections.

So, for sure, this will be a big-ticket for both global communication software developers as well as individual companies to improve their network infrastructure and IT capabilities.

Communication

If any changes to the way we use to communicate and manage our workflows, it will only be an improvement.

The meetings and discussions will be in the form of more efficient conference calls around specific subjects and resulting in a tangible outcome.

New apps and tools will be merged even more into our day to day operation with all aiming towards more transparency and visibility.

Resources will be able to work remotely for most of the week without the hassle of commuting long distances to work.

Collaborating tools and cloud-based solutions will be integrated even more into our work practices facilitating sharing information and data.

 Conclusion

To sum up, oil and gas companies will have a very valuable takeaway from the painful period of coronavirus. A fast-forward in the way the sector would have upgraded itself, similar to what resulted in forming Fintech companies in the Finance sector.

 However, the current low oil price might stay long enough to slow down this process of adaptation. The $20 per barrel price won’t give companies the flexibility required to try and expand their infrastructure and implement the changes they will be learning soon. On the contrary, this will drive the sector towards further cost cuttings and possible layoffs; something which we all experienced in 2015 for a couple of years.

We have to be patient to see the market bouncing back again, this time with valuable lessons learned and a fresh and smarter way of working.

The Next Big Trend In Offshore Oil & Gas | OilPrice.com

The offshore industry will shift its focus from oil to natural gas in the next couple of decades, while wind investment is also expected to soar

The offshore sector will increasingly focus on natural gas instead of oil over the next few decades, while policy support and technology improvements could also see offshore investment shift in favor of wind power. However, in the short run, offshore drilling is set for a resurgence.

The oil market downturn in 2014 hit offshore drilling hard. Developing an oil field offshore is a huge, complex, expensive and long-term undertaking, a proposition that fell out of favor when oil prices crashed. By comparison, shale drilling is relatively cheap and short-term and over the last few years, capital flowed out of the offshore sector and into the shale patch. Even the oil majors pivoted towards small, short-cycle shale drilling.

Today, a quarter of the world’s oil supply comes from offshore at about 26-27 mb/d, a figure that has remained steady over the past decade, which translates into a declining share of the overall market as total supply continues to grow.

But offshore costs have declined significantly over the past four years, so much so that the industry is starting to step up spending once again. Whereas a typical offshore project in the North Sea or in the U.S. Gulf of Mexico had a breakeven price between $60 and $80 per barrel prior to 2014, these days those costs have plunged to $25 to $40 per barrel, according to a new report from the International Energy Agency.

“Designs are being simplified, standardized and (in some cases) downsized, and a large overhang in the market for offshore services and equipment is also helping to exert downward pressure on costs – although this could be reversed as activity levels pick up,” the IEA wrote in its report.

An estimated 100 offshore projects could receive a greenlight this year, according to Rystad Energy, up from just 60 last year and 40 in 2016. “The offshore suppliers have created their own comeback,” Audun Martinsen, VP of Oilfield Service Research at Rystad Energy, said in a statement. “Their constant search for cost reductions and streamlining of operations has enabled them to cut offshore project costs by almost 50% compared to the heights of the last cycle.”

But even as offshore makes a comeback, the makeup of the sector is set for dramatic change in the years ahead. Oil companies are going to shift away from shallow water drilling, which tends to be mature, and move into deeper waters.Related: All Eyes On Iran As Oil Prices Soar

Meanwhile, companies will also increasingly target natural gas production instead of oil. Offshore wind is also set to grow dramatically, although the pace of growth depends quite a bit on the extent to which governments push policy in the direction of low-carbon energy.

The IEA lays out two scenarios, which it dubs the “New Policies Scenario” and the “Sustainable Development Scenario.” The former is a more business-as-usual approach, although it incorporates technology innovation and some policies that have already been announced. The Sustainable Development Scenario encompasses a much more dramatic energy transition, as it assumes policies go into effect to reach the goals in the Paris Climate Agreement.

In both scenarios, natural gas takes on a greater role in the offshore sector, and wind power also makes gains. But in a business-as-usual future, offshore oil production remains relatively unchanged through 2040, and oil demand does not peak before then. U.S. shale levels off in the 2020s, and because the world will still need new supply, particularly to offset mature oil fields, the offshore sector will be called upon. Because offshore production is generally higher cost, “the marginal project required to balance the market in the New Policies Scenario becomes steadily more expensive, despite the assumption of continued technological progress,” the IEA said.

Most activity will be concentrated in a relative few number of places. “Brazil remains the global leader in deepwater production; Mexico also sees rapid growth as a result of successful bidding rounds since 2016, alongside the United States, African producers and some new players including Guyana and Suriname,” the IEA said.

Natural gas takes on a larger share, with gas demand set to rise and questions surrounding long-term oil demand. Most of the new production will come from the Middle East and offshore Tanzania and Mozambique.

Still, there is a tidal wave of decommissioning looming. The IEA says that between 2,500 and 3,000 offshore oil and gas projects will have to be decommissioned through 2040.Related: Higher Oil Prices Are OPEC’s Only Concern

Offshore wind generation surges ten-fold through 2040 even in the more cautious scenario, pushed along by supportive policies in the EU and China, among other places. Technology is also improving rapidly, with the height of turbines doubling from 2010 to 2016 to over 200 meters. The IEA notes that a 12-megawatt turbine design is now in development. Floating turbines are also now getting underway.

The scaling up of wind generation, moving further offshore and into more attractive areas, is allowing for more generation at a lower cost. Those trends will continue. Offshore wind is currently 150 percent more expensive than onshore wind, but those costs will continue to fall.

However, in the IEA’s Sustainable Development Scenario, a much more dramatic transformation takes hold. Wind captures a third of total offshore investment by the 2030s, pulling equal to offshore oil and gas. Wind power rises from 14 gigawatts (GW) today to 160 GW in the New Policies Scenario in 2040, but it rises to 350 GW in the Sustainable Development Scenario. But even here the IEA offers a rather conservative estimate – offshore wind only accounts for 4 percent of global electricity generation by 2040 in that scenario.

Oil production remains flat at 27 mb/d in 2040 in the New Policies Scenario, but dips to 20 mb/d in the Sustainable Development Scenario as oil demand peaks and falls, which results in permanently lower oil prices.

Source: The Next Big Trend In Offshore Oil & Gas | OilPrice.com

What have EPC contractors learned from using High-Value Centres (HVCs) so far?

Are High-Value Centres really adding value to our projects? or are they simply just Low-Cost Centres?

Like any other business sector, the Energy industry and explicitly the leading oil and gas EPC contractors, have been trying for the last two decades to earnestly reduce the cost of their projects and make their business models leaner and more competitive. This has caused the rise of what is called   “High-Value Centres” (HVC), the engineering execution centres located in countries which can benefit from low-cost local skill workers, capable of carrying out the work under the supervision of the project head office.

Different HVCs have been utilised by leading EPC companies within various regions and countries, with Indian players being the front-runners for doing detail engineering work for many global scale projects.

So, the question is, after almost two decades of practising outsourcing the work to HVCs, how successful and efficient has their approach been?

Have lessons so far been learnt and necessary changes made to overcome the issues from previous projects? Have HVCs become a reliable option for our future projects and clients?

Evidently, the answer is NO.

In fact, a lot more could have been achieved and learned through this period of delegating work to HVCs, comparing to what we have done so far.

However, despite this criticism, the current challenging oil and gas market urges EPC companies who want to stay competitive in the bidding process and acquiring new work, to reduce their cost of workforce significantly. This won’t be possible with executing the whole project from the home office and avoiding the practical challenges of working with HVCs.

Hence, considering the painful experiences and case-studies from past projects so far, certain principals need to be regarded as the essential requirements of outsourcing engineering work to HVCs and must be implemented into any relevant work practice and process by main EPC contractors:

Robust Communication

Setting up a robust communication system is the lynchpin of using HVCs for any project task. Regardless of the geographical locations and time differences between the project home office (HO) and the HVC, there must be a set of reliable and simple communication tools in place to let everybody in all offices communicate effortlessly when required.

While new technologies and communication tools are already helping to avoid some of the past issues and lifting some barriers significantly, more efforts need to be put towards the simplicity of any communication system. This will also have a major effect on reducing the cost of training for the project team.

 

Defining the right tasks

Having access to an HVC to execute a project does not mean the main tasks of the project can be divided between the offices evenly. Careful considerations need to be in place when splitting the work at the beginning of the job. This is only possible with trying to allocate the more straightforward, routine and repetitive tasks to the HVC and keep the more challenging and niche work, which might need various meetings and discussions, between the contractor, client, third parties and other involved parties in the main office.

 

Implementing the right Culture

One of the most challenging aspects of using HVCs and executing a project across various offices is introducing and maintaining the right culture within the global team. This might look simple but needs to be planned and implemented very carefully at the beginning of the project.

The One project – one team culture must be promoted and implemented across all project offices. However, different regions and countries have different local and traditional working cultures. This sometimes conflicts with the routine working culture of the central office which can’t be learnt and implemented over the night.

This can be seen when somebody makes a mistake, or something goes wrong which nowadays, are mainly considered as the fault of a process or system rather than blaming an individual. In contrast, in many HVCs around the world where the no-blame culture is not yet in place, employees are afraid of being punished and lose their jobs if they make a mistake. This, sometimes becomes very problematic when the head office requests a correction on the work, as they focus more on defending their work rather than following procedures and applying corrections.  

This is an important fact which shouldn’t be put on the back burner and needs to be addressed early enough on the job to avoid potential impact on the efficiency of the project team.

Building and maintaining the team

 

While putting together the local project team at the HVCs is a crucial step to kick-start the project, maintaining its integrity for the duration of the project is even more critical.

For instance, there have been many cases where local employees of HVC offices have left the project after adding six months of work experience with a major EPC company to their CV, for a better job in the Middle East or similar places.

Therefore, the right approach is to put together a team of suitable skilful people, providing them with the required further training, and using the right incentive tools and measures to keep them loyal to the project.

 

Conclusion

In short, the competitive market will push the leading oil and gas EPC companies to use HVCs even more often, to keep their costs and prices as competitive. Despite the fact that the experience of using HVCs have not been smooth and efficient, applying the principles mentioned above and some other project-specific considerations would help EPC companies to increase the productivity and efficiency of this practice.

 

In Emveedo Energy, we provide a wide range of engineering and bespoke consultancy services to our clients aiming to improve their work practices, processes and workflows