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									Smart Fields: How Effective is the Current Relationship
   between Operating Companies and Suppliers?




                        Knut Arne Sund
               Smart Fields Consortium- Stanford University
                               01.31.2008
Agenda

            0. Introduction

            1. Survey design, implementation, data collection, and
               analyses

            2. Day-rate and incentive-based contracts

            3. Analysis of the survey results with comments

            4. Choice of contracts - consequences for operations in
               the oil & gas industry

Knut Arne Sund            Smart Fields Consortium- Stanford University 2008   2
Introduction - Smart Fields on NCS


 According to The Norwegian Oil Industry Association (OLF), the potential of Smart Fields on
 NCS is huge:
 •8% to 10% increased production
 •4% to 5% increase in extraction
 •30% reduction of operating expenses measured from the 2003 level.

 The total investment on NCS is expected to be 25 billion NOK (US$4.2 billion), and the total
 profit is expected to be 250 billion NOK (US$42 billion)




 ConocoPhillips in Stavanger, Norway, reports that US$19 million was saved after 20 months of
 operation in their onshore drilling centre. The savings come from:
 •Improved decision making
 •More effective work processes
 •Reduced transport and optimised manning levels.




Knut Arne Sund                   Smart Fields Consortium- Stanford University 2008              3
Introduction - Smart Fields on NCS

Smart Fields – Focus on People, Process and Technology




Knut Arne Sund              Smart Fields Consortium- Stanford University 2008   4
Scope in my research                                                               Operator




        Data                 Data

Data/ information                                      Existing
                    Existing databases
       hub                                            applications




                                    Web portal




                                    Suppliers
Knut Arne Sund                 Smart Fields Consortium- Stanford University 2008              5
Agenda

            0. Introduction

            1. Survey design, implementation, data collection, and
               analysis

            2. Day-rate and incentive-based contracts

            3. Analyzes of the survey results with comments

            4. Choice of contracts - consequences for operations in
               the oil & gas industry

Knut Arne Sund            Smart Fields Consortium- Stanford University 2008   6
Survey Design and Implementation


•    Conducted a series of four case studies employing multiple data
     sources
•    The studies were carried out with one large operator (possessing a
     petroleum license) on the NCS and three of its largest drilling
     contractors. In addition, we also interviewed some small service
     providers
•    The chosen research design is an embedded multiple-case study.
     This means that the analysis is conducted at different levels in the
     organization and includes the organization itself and its collaboration
     partners
•    Multiple case studies are particularly useful when studying
     relationships between companies, because they provide an
     understanding of the latent factors that may produce contradictory
     views between parties

Knut Arne Sund            Smart Fields Consortium- Stanford University 2008   7
Data Collection


•    We collected data for the survey through archival records, direct
     observations, participant observations, and interviews conducted
     with employees at the companies. The primary source for this survey
     was semi-structured interviews with 23 questions.
•    We conducted 27 qualitative interviews in total
•    Multiple data collection techniques allowed us to use findings from
     several sources to strengthen our analyses




Knut Arne Sund           Smart Fields Consortium- Stanford University 2008   8
Data Collection

TABLE 1. INFORMATION GATHERING FROM COMPANIES FOR USE IN THE CASE STUDY
 Description of case data

 Information source                                   Operator A              Service                    Service                      Service                  Service
                                                                            provider B                 provider C                   provider D               provider E†
 High-level semi-structured                               4                        5                          4                            3                        1
 interviews
 Low-level semi-structured                                3                        1                          2                         n.a.*                       4
 interviews
 Meeting with key employees                            12                       1                          4                              1                      n.a.
 Work days on company’s site                           20                      n.a.                       n.a.                           n.a.                    n.a.
 One-day ODC training session                           1                      n.a.                       n.a.                           n.a.                    n.a.
 Innovation seminar                                     1                      n.a.                       n.a.                           n.a.                    n.a.
 Project reports from the                         Yes, several              Yes, some                  Yes, some                         n.a.                 Yes, some
 company/companies
 Strategy reports from the                        Yes, several                Yes, one                      n.a.                         n.a.                 Yes, some
 company/companies
 Other relevant information such                  Yes, several              Yes, some                  Yes, some                    Yes, some                 Yes, some
 as presentations, speeches,
 databases, observation of
 employees, meeting reports
*An “n.a.” entry indicates that we did not receive any information.



      [†Some interviews were conducted with small service providers having long-term relationships with the operator. Their work for the operator is performed onsite,
      on the same tasks as carried out by operator’s employees. The small service providers are gathered under one column (column E).

Knut Arne Sund                                           Smart Fields Consortium- Stanford University 2008                                                                 9
Data Analysis


• We used the computer software QSR NVivo7 to analyze the
  data
• We coded and categorized all of the information transcribed
  from interviews, historical documents, and formal and
  informal meetings.
• The software enabled us through empirical study to derive
  meaning and insights from word usage and frequency patterns
  found in the interviews.




Knut Arne Sund      Smart Fields Consortium- Stanford University 2008   10
Agenda

            0. Introduction

            1. Survey design, implementation, data collection, and
               analyses

            2. Day-rate and incentive-based contracts

            3. Analysis of the survey results with comments

            4. Choice of contracts - consequences for operations in
               the oil & gas industry

Knut Arne Sund            Smart Fields Consortium- Stanford University 2008   11
Examples of day-rate and incentive-based
contracts
                 Some of the single most important issues we observed in our
                 survey was the contracts that safeguarded the relationship between
                 the operator and their involved service providers.

•    The difference between a day-rate                 Start date                                   Estimated total days
                                                                                                    used: 50
                                                                                                                                                                 Estimated
                                                                                                                                                                 end date
     contract and an inventive based
     contract is that the incentive-based
     contract is set up with a bonus per                    as
                                                                 e1
                                                                           as
                                                                                e2             e3              e4             e5        as
                                                                                                                                             e6
                                                                                                                                                       as
                                                                                                                                                            e7
                                                                                          as              as             as
     day if the service provider can drill             Ph             Ph             Ph              Ph             Ph             Ph             Ph

     the well faster than they have
     agreed upon in the contract
•
                                                       Start date                                   Actual total days                                   End date
     Day-rate contracts have rates                                                                  used: 47

     according to the operating phase:                 Day rate: $30.000                  Bonus per day:
     drilling rate, standby rate, moving                                                  $7.000

     rate, suspension rate, lay-up rate, re-           Operator X’s cost reduction with
                                                       incentive based contracts:
                                                                                                                Service provider Y’s profit with
                                                                                                                incentive based contracts:
     drilling rate, or no-payment rate                 3*$30.000 = $90.000                                      3*$7.000 = $21.000




           For example, if it is agreed that the well should be drilled within 50
           days, and the service provider accomplishes it in 47, it will receive
                 for those 3 days, a pre-defined portion of the daily rate
Knut Arne Sund                    Smart Fields Consortium- Stanford University 2008                                                                                          12
Agenda

            0. Introduction

            1. Survey design, implementation, data collection, and
               analyses

            2. Day-rate and incentive-based contracts

            3. Analysis of the survey results with comments

            4. Choice of contracts - consequences for operations in
               the oil & gas industry

Knut Arne Sund            Smart Fields Consortium- Stanford University 2008   13
Analysis of the survey results
Does your company                              120%




                                                 Percentage of Respondents
have the right                                 100%

incentives:                                     80%

• The majority of respondents at                60%
    operator A and service providers D          40%
    and E believe that they receive             20%
    good incentives when working
                                                 0%
    through Smart Fields.                             Operator A Service     Service    Service     Service
• Service provider B’s employees                                 provider B provider C provider D providers E
    stated that they are pleased by the
                                                                Somewhat No Yes I don't know
    incentives, yet only somewhat
    satisfied with them.
• Respondents at service provider C do not believe that they receive what they deserve.
• An interesting observation is that the respondents at the small service companies in column E
    stated that the more work the company obtains, the better the effort. Work volume is seen as
    an incentive in itself, and long-lasting relationships would give employees a reason to
    increase their effort.



Knut Arne Sund                      Smart Fields Consortium- Stanford University 2008                    14
Analysis of the survey results




                                                  Percentage of Respondents
Does your company                             120%

increase its incentives if                    100%

it performs better than                        80%

expected?                                      60%

•    Operator A, yes and no, depending         40%
     on the employees department               20%
•    Most of the departments at service         0%
     provider B increases its incentives            Operator A Service     Service    Service     Service
     if it performs better                                     provider B provider C provider D providers E

•    Service provider D, provides
                                                              Somewhat No Yes I don't know
     incentives if employees perform
     better.
•    The majority of respondents at service provider C stated that they do not increase its
     incentives if they perform better than expected.
•    Respondents at service providers E stated they don’t have incentive-based contracts.




Knut Arne Sund                      Smart Fields Consortium- Stanford University 2008                    15
Analysis of the survey results




                                                Percentage of Respondents
How can incentive based contracts be                                        120%

developed to improve the                                                    100%
                                                                             80%
performance for your company?
                                                                             60%
Operator A                                                                   40%
•   Better use of KPIs and keeping                                           20%
    business units separate were important.                                   0%
                                                                                      Needs    Better use    Develop     I don't    Not mix   Incentives      Avoid
•   Incentives should create value for all                                          incentives of KPIs        better
                                                                                                            incentives
                                                                                                                          know     business
                                                                                                                                     units
                                                                                                                                                 should
                                                                                                                                                 create
                                                                                                                                                             conflicts

    involved parties, to ensure that all are                                                                                       together     value for
                                                                                                                                               all parties
    working toward common goals.
                                                                            Operator A                Service provider B              Service provider C
•   Attention should be paid to how                                         Service provider D        Service providers E
    different parties treat each other and
    how they affect each other’s operations.
Service provider B
                                                                                 …As it is today, you get paid when the tools are leaving
•   All stated that the incentive contracts
                                                                                 port and when they return to port. If you perform
    needs to create value for all involved
                                                                                 better than expected and finish earlier, this will give
    parties.
                                                                                 you less pay, something that does not support optimal
                                                                                 performance…
                                                                                                    Middle manager- service provider B

Knut Arne Sund                 Smart Fields Consortium- Stanford University 2008                                                                                         16
Analysis of the survey results




                                                  Percentage of Respondents
How can incentive based                                                       120%

contracts be developed to                                                     100%
                                                                               80%
improve the performance for
                                                                               60%
your company?                                                                  40%
Service provider C                                                             20%
• Needs to develop better                                                       0%
                                                                                        Needs    Better use    Develop     I don't    Not mix   Incentives      Avoid
    incentives for all parties                                                        incentives of KPIs        better
                                                                                                              incentives
                                                                                                                            know     business
                                                                                                                                       units
                                                                                                                                                   should
                                                                                                                                                   create
                                                                                                                                                               conflicts


• Important to avoid                                                                                                                 together     value for
                                                                                                                                                 all parties

    conflicts
                                                                              Operator A                Service provider B              Service provider C
• Better use of KPIs in                                                       Service provider D        Service providers E
    operations.




Knut Arne Sund                   Smart Fields Consortium- Stanford University 2008                                                                                         17
Analysis of the survey results




                                                Percentage of Respondents
How can incentive based contracts                                           120%

be developed to improve the                                                 100%
                                                                             80%
performance for your company?
                                                                             60%
    Service provider D and E
                                                                             40%
• States it is important that all
                                                                             20%
    involved parties have incentive-
                                                                              0%
    based contracts that benefits all                                                 Needs Better use
                                                                                    incentives of KPIs
                                                                                                          Develop
                                                                                                           better
                                                                                                                      I don't
                                                                                                                       know
                                                                                                                                 Not mix
                                                                                                                                business
                                                                                                                                           Incentives
                                                                                                                                              should
                                                                                                                                                           Avoid
                                                                                                                                                          conflicts
    involved parties, and make better                                                                    incentives               units
                                                                                                                                together
                                                                                                                                              create
                                                                                                                                             value for
    use of KPIs on projects.                                                                                                                all parties


                                                                            Operator A              Service provider B             Service provider C
                                                                            Service provider D      Service providers E




Knut Arne Sund                 Smart Fields Consortium- Stanford University 2008                                                                                      18
Analysis of the survey results

           Main findings:
           •All companies stated that better use of KPIs and incentive based
           contracts that increase value for all involved parties are important
           for better collaboration in drilling projects.
           •It also indicates that only some service providers increase their
           incentives if they perform better, and they have implemented
           incentive based contracts.
           •In incentive based contracts, it is important that there is a best-
           practice balance between risk sharing and rewards
           •If the operating company assumes all the risk, there are no
           incentives for the service provider to perform better. Therefore
           most contracts should assign some risk to the service provider.




Knut Arne Sund                 Smart Fields Consortium- Stanford University 2008   19
Agenda

            0. Introduction

            1. Survey design, implementation, data collection, and
               analyses

            2. Day-rate and incentive-based contracts

            3. Analysis of the survey results with comments

            4. Choice of contracts - consequences for operations in
               the oil & gas industry

Knut Arne Sund            Smart Fields Consortium- Stanford University 2008   20
Choice of contracts - consequences for
operations in the oil & gas industry

      Some possibilities with using incentive based contracts:
     •When analyzing drilling contracts, we must look beyond the actual contract, and
     se how it affects all the involved parties performance.
     •Incentive based contracts can:
     Increase the possibility to work for the same goals
     Decrease the level of conflicts
     Better success with communicating strategy
     Increase the health, safety and environment level
     Increase productivity through adoption of “lean” operation. “Lean operations”
     means operations using minimal resources, conduct pull processing, continuous
     improvement, flexibility and the possibility to building and maintaining long-term
     relationships between involved parties




Knut Arne Sund                 Smart Fields Consortium- Stanford University 2008          21
Choice of contracts - consequences for
operations in the oil & gas industry

     … and threats that can occur if one is not using incentive based contacts:
     •This can lead to risk exposure for involved parties
     •Suboptimal operations
     •Increased possibility for conflicts to evolve
     •Difficult to establish a long lasting relationship with third parties.




Knut Arne Sund                   Smart Fields Consortium- Stanford University 2008   22
                 Thank you!




Knut Arne Sund    Smart Fields Consortium- Stanford University 2008   23

								
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