Extracting and processing oil and gas at a profit has always been a numbers game. Last year the price for crude oil dropped by 60%, leading to thousands of job cuts across Norway. It’s now more critical than ever for operators to make better use of IT to understand and manage every element of risk and uncertainty to safeguard the future of the industry.
“There’s a clear need to make better data-based decisions in this business,” said Leif Braute, a project risk management specialist at technical assurance, research, certification, and risk management company DNV GL.
“Budget over-runs, schedule delays, and production shortfalls are regular causes of project failure. It seems like companies are not setting cost and schedule targets correctly and perhaps in some cases not selecting the right projects in the first place. It's easy to say these things with hindsight, but the industry must learn the lessons.”
The high cost of not mitigating risk
Despite the Norwegian tax system offering favourable tax incentives on investment, the cost of such failures can be severe.
In 2013, Canadian energy company Talisman Energy scrapped an oil platform in Norwegian waters, without any crude oil ever being produced. The Yme platform was supposed to begin producing oil in January 2009 but numerous structural and safety issues led to serious cost over-runs and delays from which the project never recovered. The initial project cost was estimated at 4.9bn kroner (£425m).
More recently, ENI’s Goliat field is reported to face a 50% increase on planned cost after years of delays.
A recent government report assessing the cost over-runs and delays on a set of projects on the Norwegian continental shelf concluded, among other things, that insufficient up-front planning was done before investment decisions were made. A similar report reached the same conclusion back in 1999.
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Software just one part of the puzzle
Although planning and risk management software is undoubtedly more sophisticated than 15 years ago, many companies are still failing to manage and mitigate their risk appropriately. Braute at DNV GL said it’s about far more than just the software.
"The sophistication of software has improved but that’s just one part of the puzzle. Appropriate methods and processes have to be in place, but most important of all is the data. The quality of the knowledge base that is input to cost estimation models, scheduling systems and economic and financial models must be addressed," he said.
“Although process and culture is a significant problem, it is primarily a management problem that can be solved within the project organisation. The quality of available data - both expert judgment and historical data - is a more fundamental problem since the quality can only be improved through collection of experience feedback and historical performance data from previous projects.
“The quality of available data varies between companies. There is currently not sufficient sharing of project experience across the industry. This is especially true for information related to why things go wrong, the underlying risk drivers.”
Empowering the wider organisation to understand risk
Stavanger-based Safran Software Solutions recently launched a new product aimed at improving project planning and control by allowing more people in an organisation to better understand the complexities of uncertainty. Safran CEO Lars Petter Eliassen explained the rationale behind the launch of Safran Risk.
"Safran Risk is intended to go hand in hand with a planning system like Safran Project, MS Project or Primavera, to allow project managers to perform a full quantitative risk analysis of their project to look at risk types that range from broad - such as ash clouds and weather-related risks - to project-specific risks like equipment delivery times," he said.
“Risk is a broad field, both qualitative and quantitative. With Safran Risk, we are aiming to make quantitative risk more accessible, as it is becoming a topic frequently discussed at project meeting and in informal discussions. The massive cost and schedule overruns on projects such as Talisman Yme and ENI Goliat really got the industry focused on proper planning and risk management.
“Many of our big Norwegian clients have defined processes for taking capital projects through decision gates. They are very formal processes and projects won’t proceed through a decision gate without a very thorough risk analysis. As a result, projects require better software tools that can be used and understood by the wider project team, not just one or two risk specialists.”
Industry collaboration is the only way forward
Combining a thorough understanding of data with an analytics-based approach to consulting has paid dividends for fellow Norwegian company Rystad Energy. As one of the few IT companies in the industry to focus on business intelligence data, including a set of global databases specifically tailored to analysing the energy and petroleum and oilfield service industry, Rystad has quickly carved out a reputation as the go-to consultancy for industry insights.
Braute believes this kind of knowledge gathering at an industry level is imperative for companies in the future.
“Improving collaboration across projects and companies, and improving data sharing and the interpretation of that data is critical. There is still room for improved software tools, but innovations in software are not useful unless you can feed it with relevant and reliable data and have an experienced team in place to run the processes and interpret the results.” said Braute.
One emerging product turning heads in the industry is UXRisk from Proactima Solutions. The software uses software-as-a-service (SaaS) cloud technology and offers users a legacy-free environment that's designed for tablets and mobiles. Although not as quantitatively complex as existing software, its ease of use and focus on process could prove popular. Whether this approach to risk management is accepted by the industry remains to be seen, but it could certainly prove to be an indication of things to come.
Anders Krokfoss, business development manager at Microsoft Norway said: “UXRisk is one of the most modern SaaS apps we have worked with here in Norway. They have taken cloud principles to a new level.”
As exploration gets ever more expensive, companies cannot ignore the need to better manage risk, whatever happens to the price of crude oil. Improving not only the software but also methods, processes, and risk-literacy is the road back to profitability for the industry in Norway.