An article came up recently on FuelFix about a topic that I’ve heard referenced a few times: establishing industry standards – particularly for offshore operations – with the goal of lowering costs.
A little bit of context here: owing to the extreme conditions found offshore, there is already a high level of expense inherent in deepwater equipment. Add the fact that there is little standardization, making every order among different companies essentially a custom job, and you have a situation where costs can (and do) in fact escalate very quickly.
Standards sound great, but I see obstacles to their adoption. I’ll outline those this week, and, since no one likes people who complain about problems but never offer any solutions, I’ll share some thoughts on how to overcome these issues. Yes, I realize these are more easily said than done, but it is my hope that they are enough to at least spur some initial discussions.
Presently, the “standards” as they are described cannot really be referred to as such
True “standards” are great for consumers. An excellent example is bluetooth technology: this is an accepted standard used to enable inter-device communication, so it is very easy for manufacturers to create “plug and play” offerings allowing us to connect any phone to any portable speaker, any car, etc
The way the article above describes common standards is NOT like the bluethooth example. Indeed, there is one service company joining up with several operators.
Of course, there are several service companies in the marketplace, so it seems that we could end up with a situation that looks like the “format wars” with BetaMax and VHS, and more recently HD-DVD and Blu-Ray: hardware manufacturers would form alliances with movie studios, so some movies were available in one format but not the other.
You can imagine that until one standard was set, consumers lost out. Certainly, over time the market converges to one standard, but not until significant costs have been incurred by each side vying to be “the one”.
Going back to the subsea industry, at best there will be an equilibrium whereby each service company has standards for a handful of clients. Those clients lose out though: no doubt the costs of switching from one company/standard to another will be considerable.
Proposed solution: If the industry wants to set standards in the strictest sense, there has to be a willingness from the equipment providers to discuss those amongst themselves as well as with their clients. As the operators have purchasing power, they could seek to partner up with several companies not only to evaluate their options but also to facilitate dialogue amongst the service providers.
How does the industry facilitate the drafting of those standards?
Even with the recent pullback in oil prices, the industry is still really active. Yet, the drafting of common standards will require the highest levels of expertise from operators and service companies coming together to share ideas and establish what the common-ground solutions will look like.
How willing are companies to allow this?
After all, even if in the long term the cost savings from standardization are there, there is a considerable short-term opportunity cost to pull expert engineers off of deepwater projects (for which delays are extremely costly).
Furthermore, assuming these talks occur, there will be so much complexity involved that reaching consensus in a timely manner could prove challenging.
Proposed solution: It seems from the pact described in the article that there is already willingness to get people together to agree on these standards. I don’t have a solution here so much as encouragement to the industry to continue along this path.
In a standardized environment, how do service companies differentiate themselves?
It’s clear that service companies benefit in a high-price, bespoke service environment, but what happens when standards exist, pushing their offerings further down the spectrum towards a commodity?
Granted, buying a 20,000 psi BOP will never be a trivial matter, but if the point of standardization is to achieve a “plug and play” environment for the operators, where one company’s offering is as close to the same as possible to another’s, how do the service companies differentiate themselves?
What incentives are there for them to draft and adhere to common standards?
Proposed solution: I find that the North American fracing market provides a good analogy.
During the last big-ramp up in activity, many new entrants to the fracing market came about. Competing on cost is only possible up to a point, so the big, established service companies focused on tightening their supply chains and developing proprietary technologies. Today, they are benefiting from these investments, and are able to compete in a pressure pumping market that is supposedly commoditized by offering specialized solutions that go beyond “baseline” offerings.
Reluctance to sharing intellectual property
Two types of information will likely have to be shared to develop industry standards, not only for subsea equipment suppliers but also any other technically challenging area of the oil & gas industry:
- Suppliers may have to share technical data about their products
- Operators will have to share data about their assets and development plans (this will set the technical specifications the standards should meet).
How willing are each of those groups to share their intellectual property?
My guess is that initially, it will be very hard to convince both service and operating companies to share their data, but I’m of the view that creating standards requires trust and cooperation between all parties, and not only does sharing data serve a technical purpose, it also helps to build that trust.
Proposed solution: Have the various constituencies first agree on a neutral third-party to act as a clearinghouse for all the data, which would be scrubbed and normalized so as not to allow identification of particular companies, but would still be granular and detailed enough to draft standards against.
Isn’t every well supposed to be different?
One of the first tenets of the oilfield – right behind “safety first” – is that “every well is different”. That’s a very important statement: it can be very easy to become complacent during a production campaign and say “well, this one is just like the last one”.
Until it isn’t, and a serious problem occurs, so proper care in engineering and execution are of the utmost importance over the lifecycle of every well.
A push towards standardization inherently means the industry moves away from the “every well is different” philosophy, to an acknowledgment that different wells can in fact be very much alike.
An objection to the point above may be that standards won’t ever cover the totality of operating environments, so some customization will always be necessary and desirable (see above example about the frac market).
But then don’t we get back to the highly costly, bespoke industry paradigm that operators are attempting to shift?
Proposed solution: Identify the parameters where the need for customization comes up the most (service companies can focus their differentiation efforts here) and then attempt to set standards that govern everything else.
Final thoughts
When there is a will there is a way, and the industry certainly appears to have the will to move towards standards. As the industry transitions into a period of relatively lower oil prices, it will be interesting to see how it balances the short term goals of hitting financial targets with the long term ones of investing in initiatives such as standardization which could bring about future savings and efficiencies.
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