Squeezing the Margin - Experience in Managing Late Field Life

Abstract

Abstract The upstream industry on the United Kingdom Continental Shelf (UKCS) is maturing, and innovative approaches are necessary to achieve the changes in performance required to sustain the business as oil prices touch 20 year lows in real terms. This paper describes the novel initiative taken by BP Exploration in 1994 with respect to its four most mature oil production facilities. The changes that were made, including the new calls made upon the workforce and the marketplace for service delivery, are described, as are the results achieved. Clues about some of the key success factors are given. Introduction Our industry faces a period of unprecedented change. In early 1994 real oil prices reached a 20 year low, with industry pundits projecting a further future gentle decline in price, but generally within a range of $12 to $20 a barrel. Environmental pressures, which have not really been a significant issue in the past, are also changing the priorities of the industry. Every day brings new announcements of organisational restructuring and redundancies - either in the oil companies themselves or the service sector. The concept of the "job for life" is disappearing, and performance incentivisation is becoming the norm. Analysis of Company reports shows that a number of major oil companies are seeing production growth slowing, and even the most respected multi-national is not immune from falling to replace reserves. Past performance is no guarantee of future success as the industry is becoming increasingly competitive and dynamic. Only the very best managed companies will prosper. Major oil companies are experiencing world-wide lifting costs of around $4 per barrel and average cash flows per barrel have been squeezed to around $6. As the industry matures in certain provinces this margin is further eroded. Attention to costs has become ever more important and the fight for survival in a tough, competitive environment is on. Organisational Context Over the past five years, faced with a falling oil price and an increasingly competitive business environment, BP has been gradually changing the way in which its upstream business in the UK is managed. By the late 1980s the organisation had become typified by business and functional groupings at dispersed sites. Today, the number of offices has been reduced and staff numbers at the management headquarters in London reduced, whilst Aberdeen has become the consolidated operations centre - albeit with half the staff of five years previously. BP Exploration has evolved into a federation of 42 assets worldwide, slightly more than a third of which are located in the UK. These assets, which are run as fully integrated businesses, are responsible for all activities in the value chain from exploration, through development and operation, and the Asset Managers are directly accountable to the Chief Executive for delivery against performance contracts. The company acknowledged that technical skills alone - of which there were an abundance within the organisation - were not sufficient to achieve the turn around in performance that would be required. Indeed, it was recognised that the culture of the company had to be changed to a performance driven one, allowing immense latent talent within the workforce to be unleashed through empowerment and responsibility for action. Key to this process of organisational development has been the considerable investment the company has chosen to make in coaching and developing individuals in the important skills of leadership and management. As part of the move towards a federal asset structure, four UKCS mature fields were grouped together to form the MAST asset in early 1994 with an unambiguous mission to reduce costs and test previous boundaries - both organisational and behavioural. The MAST Strategy McKinsey benchmarking data had indicated that there was around a 30% performance gap between the lifting costs of the MAST assets and the UKCS structurally-adjusted top quartile performers. Other companies in both the USA and the UK were clearly being successful in operating similar assets at significantly lower operating costs, and the initial challenge therefore for MAST management was to close this gap, whilst improving an already excellent BP reputation and HSE record. The business environment at this time (early 1994) was threatened by oil prices going below $13 per barrel and the need for change was therefore imperative.