Innovation and Cooperation: Companies return to basic fundamentals to overcome the crisis

This article was written for Energia a Debate magazine May – June 2018 edition

The E & P business of the international oil industry has been recovering from the most severe price drop in its history. The operating companies – and consequently the service companies – reached survival levels, affecting any program they had in their plans and portfolios and in many cases, executing dramatic reductions of employees, their people, including highly experienced technicians and specialists, in order to be placed in operational minimums to guarantee its future viability in the balance sheets.

Today we can say that the industry is on its way to recovery – without exaggerating the issue – as the price levels barely exceed $ 60 / barrel, still far from the 100 + dollars that the market maintained until mid-2014. Two important factors have had great impact in this recovery: the reduction in production agreed by OPEC members with the collaboration of other countries -Russia mainly- to maintain an adequate balance between supply and demand. The other factor has been the expectation of energy demand growth in the next decade estimated in one third, considering the recovery of the economy in countries such as China, India and the United States. In the case of the United States, the extraordinary advance of the shale revolution, with its technological developments to increase the recovery of hydrocarbons, will provide the necessary supply to satisfy its domestic needs, thus releasing a significant volume of barrels that will have access to the global market to compete.

This experience lived in the Exploration and Production sector worldwide in the last two years of crisis, has made that companies – both operators and services – revised their concepts of costs and investments, in a “mea culpa” exercise and perhaps the most important detail, has been to observe with a cautious optimism the future growth of the market, and understand how to face it or adapt to its ups and downs, in different ways, more creative, with more imagination and more productive. Companies have understood the importance of recapturing the concepts of operational efficiency, which includes improvements in projects and operations efficiency, seeking more productive investment each day, and more competitive costs, to maintain and increase their production in depressed markets and low prices as has happened in these two recent years.

Companies have understood that they require increasingly low break-even prices. The recent experience of companies like Statoil, in the North Sea, with deep water production costs in the order of 30 dollars per barrel in its main project, and Petrobras in Brazil, which has reduced its production costs from 69 to 45 USD / b, in Presalt deposits, located in waters that exceed 2500 feet of water depth and more than 6000 meters deep reservoirs location, are examples of this operational efficiency challenge. In the case of Petrobras, they continue to work to maintain the extraction of the volumes of crude from these Presalt deposits sustainable and profitable, and plan to reach $ 35 over the next three years. This type of extraction costs for those offshore areas could not be imagined 5 years ago.

In addition to operational efficiency, consistency is also important. Ensuring revenue consistently and continuously reducing costs will be practices that will differentiate companies in vulnerable and low-price markets. Concepts and common practices, that may need updating and revisions to meet the challenges in this new market realities to be competitive. One of these practices or concepts is innovation, considering the integral supply chain and operational planning, very tied to the strategies and tactics of the companies. This combination of practices is already giving quantifiable results to the companies mentioned before.

The other most recent practice is cooperation between companies; this can be done in different ways, from strategic alliances to complement contracts, competencies and technologies, up to the integration of services in consortiums. The most recently used by national companies is the creation of consortiums or strategic associations for the exploration and / or exploitation of fields. PEMEX has denominated this concept as Farm Outs, and basically seeks financial and technological partners to develop fields with large volumes of hydrocarbons on site (Oil in place), to leverage both the financial side and also to have technological partners that allows them to maximize reservoirs recovery factors.

Innovation has always been present in the oil industry since its origins and this has been a pillar to be competitive worldwide. In fact the oil industry is a reference worldwide as example of continuous innovation. The innovation has been the main enemy of the planner’s predictions in the organizations, and has also been protagonist of the great technological changes that have generated the milestones in the oil history. The most recent chapter is being written today by the technological advances that have triggered the operational efficiencies in the exploitation of the shales, – in new well architectures and the drilling and completion operations – that have given great relief and sustenance to the companies focused on fossil energy. Innovation combined with tactical operational planning is giving the industry a new reality that represents greater resilience now and in the future, that is, more strength to face adversity.

Cooperation has been understood and developed in recent years as the exploration in frontier areas grew and moved away from the coasts, reaching deep and ultra-deep waters. Nowadays, it has become a necessity to be efficient and also share risks and investments maximizing synergies in facilities and operations. Likewise, service companies have been integrated to complement technologies and practices and to be able to keep sharing and cooperation with each other, instead of competing ineffectively.

Throughout history, several have been the models used by companies to trigger innovation and cooperation, one of them has been to motivate their experts to look and think out of the box. Manufacturing industries, especially transportation: automobiles, railways and aviation, have made the hydrocarbon industry improve and innovate its products. The demand for more efficient and lower-cost fuels that has been continually required by the aviation industry and the threat of electric cars growth that has forced the reduction of gasoline and lubricant costs. The supply chain has also impacted today the concepts and practices of “just in time” in the industry, and already in the area of operational logistics are being implemented, and in some cases standardizing, these valuable practices.

History has taught us that crises have been the mother of great innovations, and these have mitigated their adverse effects. Although the ideal would be the opposite, that innovation provides companies with greater resilience, more strength in those periods of crisis. Now more than ever, companies must recover innovation and cooperation as an organizational value, and review the concepts that have separated them from their natural environments, which are the fields, where daily operational activities are developed at the level of wells, equipment and primary facilities of the industry.

The private and national operating companies have historically focused on maximizing production, and for this purpose they have developed a number of technologies that evolve over time and that ensure compliance with those goals. This trend was affected by the excessive increase in prices occurred from 2005 until 2014, which resulted in extraordinary levels of profits, that brought companies into comfort zones, minimizing the importance of innovation and cooperation as a basis for operational efficiency. Therefore, today it is necessary to recover those key factors of competitiveness. Companies must recapture these practices, and incorporate them along with the strategic and operational planning of their supply chain to ensure sustainability and consistency of medium and long-term purpose.