Graham Scotton notes that Quality management decision making is needed for better project outcomes?
Oil and gas management needs a step change if the industry is going to prosper in a $50 to $60 world – and perhaps the best way to describe the necessary improvement is ‘more rigour', as well as more continuous decision making, says Petromall's Graham Scotton
One major factor that the industry needs, in order to continue to thrive at a $50 to $60 oil price, is more rigour in management decision making, says Graham Scotton, consultant with Petromall, and a former COO of Dana Petroleum and GM of BP Angola, among other roles.
"The approaches and judgement required by managers making proposals, and for decision makers as capital gets liquidated, need to be sharpened from the practises of the past," he says.
Today, it is too common for projects to cost 2-3 times their original sanction estimate, and come in years late, based on decisions made 5 or 6 years ago. There are a number of projects completing from the $100/bbl era and most make rather harrowing stories when it comparing what was promised at the time of sanction, to the ultimate outcome and today's consequences of balance sheets, cash flows, share price and reputation.
At best, the typical reaction is for people in the industry to shrug their shoulders and say, ‘that was all in the past'. At worst, they can be victims of the failure, and crucially, fail to learn or do things differently in a lower-for-longer price environment
A common root cause of the overruns can be blamed on people trying to fulfil past promises to the market or to government, which probably should not have made, he says.
Then the industry has a propensity to keep throwing money at challenged projects, and end up losing money overall, he says.
Today, companies don't have room to lose money when they are in a tight financial situation. Exacerbated by poor turnover if a project fails to perform for any reason, especially if wells fail to meet predicted production rates and reservoirs
Perhaps what is needed can best be described as “more rigour of thought,” being far more thorough in going through the different options and making sure projects are worthwhile continuing with, he says.
Typical reasons for lack of rigour are that people take personal ownership over a project ('it's my baby') and won't let it go, or they don't want to cancel something which they have spent a lot of money on.
Or they have made a commitment to government to develop the license.
It is so common that you hear board members or senior managers saying, 'we had to do something because someone else wants it to look this way,' he says.
"These are red flags that go up around the decision making," he says. "It causes a compounding of errors sometimes, cost overruns and schedule delays, and something you didn't want at the end of it".
Anyone in projects should be motivated by wanting to meet the cost schedule and scope of work, and everyone including contractors and stakeholders need to be aligned around that goal.
The industry needs to see more clarity of accountability.
Too often, "accountability tends to be diluted and dispersed," he says. So if something goes wrong, "it's comforting to stand there and points fingers at one another and shrug shoulders. The contracting industry is very familiar with this sensation.
“The industry can't live like that anymore. You cannot look to blame the nearest contractor, government official, or junior employee."
Who has not heard of the confusion of accountability syndrome? Being in a situation where you are not sure if a decision should be made centrally or by a regional office, if it should be made by a line or by a function, or which function should make the decision.
The industry perhaps needs to be better at recruiting, appointing and training managers who are willing to stand up for the decisions that they have taken, rather than hide from them and deny the consequences, he says.
The industry also needs to be much more rigorous in how it reduces and manages its costs.
But of course reducing safety margins is something which needs to be done very carefully.
Perhaps risk management is actually a much more important skill in the North Sea than engineering, science or finance, he says.
The industry is known to make changes in response to desperation, when it is the only way to survive.
But this sort of cost cutting has its own problems - as an example consider the Baker Report into the Texas City Refinery explosion of 2005, which blamed the incident on cost cutting by BP after its acquisition of AMOCO, and one of the root causes was reducing supervisory levels of staff in the control room.
Companies end up using a "one dimensional cost lever", he says, and it also means that the people who take decisions are not the people who end up being accountable for subsequent consequences.
The industry can also be more thorough in how it works with suppliers.
Ultimately business success is about cost efficiency - making sure that every dollar which gets into a pocket of a supplier works as hard as possible. "It needs to be efficient at every turn," he says.
Companies should start out by working out which component parts will meet the specification and the schedule.
What happens instead, too often, is that the procurement process is designed so that no-one can be blamed if it goes wrong, he says. Contractual penalties are meant to mitigate this, but are commonly ineffectual or have dire consequences for the very existence of a contracted entity.
It is too common in the oil and gas industry for suppliers to deliver something different to what was actually asked for and people accept it.
This would never be tolerated in the consumer world, for example if you order a car with a certain type of seats and a certain stereo and it arrives set up differently. But it is fairly normal in the oil and gas industry, he says.
People say, it isn't my money we're spending, why should I sort it out. "It's that sort of attitude," he says.
Continuous decision making
Perhaps the most pertinent point to suggest is that companies should be more willing to continuously review and if necessary change their decisions, not make a decision in an annual planning meeting and fail to see that the original decision was inappropriate or just plain wrong.
Oil and gas operators, suppliers and investors can all be guilty of refusing to change decisions once they have been made, he says.
But decisions are made based on a forecast of what is going to happen, and may need to be changed if the forecast turns out to be different to reality. Otherwise it is like making plans on the basis of a weather forecast, and refusing to change the plans if the weather forecast turns out to be wrong, he says.
“The truth is that quality decisions are required on a day to day 24-7 basis.”
Also, if decisions are only made once, then you end up trying to adapt the actual business results to the decision, rather than changing the decision to meet business changes, he says.
Companies develop a plan which fits with their budget and overall strategy direction, and then try to make what actually happens fit with it. “There is no degree of freedom to challenge that,” he says.
Afterwards, people wonder why a decision which had so much thought going into it turns out to be wrong. But perhaps the inflexibility of decision making is part of the reason that the project failed.
So it remains to be seen what rigorous analysis shows for the North Sea projects that have come on stream in the past 18 months or so, and those due to start up in the forthcoming 18. Will it be a true-to form case of explanation of what went wrong and investors taking or leaving the excuses made? What can no longer be is the failure to identify, and actually learn, the lessons of the past. Not possible at $55/bbl.
Graham Scotton was interviewed by Karl Jeffrey of Future Energy Publshing Ltd
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