One size fits all? In offshore oil sector, using standard gear could cut costs 30%

[SINGAPORE] Offshore oil majors could shave nearly a third off their exploration and development costs by simply agreeing to industry-wide equipment standards, according to an industry association executive.

Rather than having big companies continue to go their own, expensive ways in ordering drilling gear tailored for their individual needs, oil majors could take a leaf out of the US shale oil industry's book, said Allen Leatt, chief executive of the International Marine Contractors Association (IMCA).

US shale oil drillers, whose rise was partly responsible for crashing crude prices in 2014, have halved their cost base to around US$30-40 a barrel, thanks in part to standardisation of drilling equipment. With an Opec oil output cut about to kick in and prices rising, shale oil producers are now poised for profitable growth.

"Oil companies could take out 30 per cent of the cost using standardised specifications and ruthlessly pragmatic engineering," the ICMA's Mr Leatt told Reuters in a recent interview. The IMCA represents about 1,000 firms including engineering companies like BW Offshore, Heerema Marine Contractors, and McDermott International.

In one of the most cost-intensive of industries, cross-sector standardisation of equipment is rare. Most oil majors use in house-designed equipment to explore offshore for and produce oil.

Capital investment in exploration and offshore development is expected to have fallen by almost a quarter this year, to around US$500 billion - the first time in three decades that budgets have been cut for three successive years, according to Norwegian offshore consultancy Rystad Energy.

"We haven't seen oil and gas companies work in a significant way to reduce their long-term cost base," said Mr Leatt. "They have delayed projects in the short-term, cut jobs and squeezed the supply chain unendingly." Mr Leatt said that if oil companies "put more emphasis into sensible pragmatic specifications" that would "help bring stalled projects back to the market".

That's an argument that has begun to carry tantalising appeal for the oil sector, even if industry-wide standards remain distant.

A group of 10 oil majors belonging to the International Oil and Gas Producers Association (IOGP), including BP, Royal Dutch Shell, Chevron, Saudi Aramco, and Statoil, set up a group late last year that has prepared a handful of standard designs for electrical and pipework equipment.

"What we now call 'IOGP specifications' we hope will replace participating company specifications," Ian Cummins, chairman of the IOGP's steering committee focused on standardisation, told Reuters.

REUTERS