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The offshore oil industry could cut exploration costs by more than 30 percent if it would just agree to use standardized equipment, according to the International Marine Contractors Association (IMCA).
When starting a new offshore drilling project, oil companies often contract out the work to engineering companies and oilfield services, and the sub-contractors often fabricate tailor-made parts and equipment. In-house fabrication is also common, necessarily leading to differences in equipment from project to project. Manufacturing unique equipment to service individual projects raises costs, however, and also extends development time. The IMCA says that if the industry would agree on standardized parts an equipment, they could cut the cost of exploration by one third.
Analysts have been arguing for standardization throughout the industry for years, but when oil prices traded in triple-digit territory, there was little impetus to work together. The collapse of oil prices over the past two and a half years has helped focus minds.
Onshore, the revolution is already underway. The tens of thousands – and indeed, hundreds of thousands – of shale gas wells drilled each year have sparked a much more rapid move towards standardization. Drilling at that blistering rate makes streamlining and standardization unavoidable. Unlike offshore, drilling shale wells has become more like a manufacturing process, with building well pads, drilling laterals and fracking happening at such a frequency that it starts to resemble an assembly line. Standardization only makes sense.
The size of an offshore drilling project is a few orders of magnitude larger than the typical shale well. The number of separate projects is many times fewer. As a result, the pressure to standardize is much less. “Oil companies could take out 30 percent of the cost using standardized specifications and ruthlessly pragmatic engineering,” Allen Leatt, CEO of IMCA told Reuters.
Standardization is also where structural savings can be found. One open question is whether or not production costs will rise again when drilling activity picks up, as oilfield servicers raise prices. If that were to occur, it would mean that the cost savings trumpeted over the past two years were cyclical. “We haven’t seen oil and gas companies work in a significant way to reduce their long-term cost base,” Leatt said. “They have delayed projects in the short-term, cut jobs and squeezed the supply chain unendingly.”
The good news is that such a move towards standardization is underway. 10 oil majors have come together to create a group that will formulate standardized designs for electrical equipment and pipework.
By Charles Kennedy For Oilprice.com
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Charles is a writer for Oilprice.com