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Innovative models for a tricky market

In eras of high oil prices, operators have focused on bringing oil to market, with less consideration for the costs and risks they incurred.

As exploration and production (E&P) continues its slow recovery, operators are now taking a different approach.

Operators want service solutions that drive greater value, include more risk-sharing with contractors and incorporating integrated services that improve operational efficiencies.

As a result, oilfield services (OFS) providers are under pressure to make structural changes that closely align their offerings with these criteria.

There is no one-size-fits-all approach, but rather, several innovative commercial models that are being adopted, they include:

Investing with customers: In this model, OFS companies take an equity stake in a project, deploying capital in the form of products, services or financing.

In exchange, they get returns in the form of equity, profit or a share of hydrocarbons.

Operators benefit by lowering their development risk, reducing their initial capital outlay and ensuring that their contractors are fully aligned to their interests.

Contractors benefit by securing work they may not have been able to otherwise and developing stronger partnerships with operators.

However, this requires a very robust risk management culture and a clear understanding that the ultimate goal is not for contractors to become E&P companies and to compete with their customers.

Shifting from capex to opex-based pricing models: Such a model requires the OFS company to rent out an asset for a specified time frame, while being responsible for asset-related costs and performance.

Not only does this model reduce the capital intensity of their customers’ operations, it also incentivises contractors to improve their asset performance – ultimately making the economics of operations more competitive.

Implementing outcome-based models: These models link payments to performance. OFS companies are compensated based on how effectively their products and services improve metrics.

Operators benefit from reduced hidden costs and transferring some of the project risk to the contractor.

As improved performance is the key metric here, time delays and costs are reduced.
Integrated contracts: Multiple services are provided through a single contracting structure, reducing the number of interfaces for the operator.

This improves project co-ordination, lowers transaction costs, accelerates response time, and affords better project design and accountability, while reducing non-productive downtime.

Such contracts could be undertaken on a lump-sum turnkey basis, or as a mix of lump sum and day rate work.

When combined with other models, such as performance-related measures, these contracts can also include performance-based incentives and may be attractive to all parties involved – not only in terms of value created but also in terms of technology deployment and business transformation.

With market conditions still difficult, the ability to partner with customers by offering them multiple models tailored to their preferences is a key differentiator, and might even be the key to survival for many contractors.

Celine Delacroix, EMEIA Oilfield Services Transformation Leader, EY

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