Oil companes’ squeezing of costs could lead to increased risk: Surveyor

The collapse in the oil price from 2014 to 2016 caused oil companies to begin a process that eventually slashed the breakeven cost for extracting crude by 50%, down to $40 from $80. Although the recovery of the oil price to $78 has led to oil companies “making hay”, they have not been “sharing the love” with the contractors, and the change in processes deployed by oil companies has led to increased risks, warned Marine Warranty Surveyor Alex Harrison, Group Director Energy Services, London Offshore Consultants, Perth, Western Australia, while speaking at the Offshore Energy Committee Workshop at the start of day two of the IUMI Conference 2018, held in Cape Town, South Africa.

Harrison noted that the potential problems were the result of two main factors. One was that oil companies had squeezed internal and external costs. “Oil companies have squeezed the life out of their contractors and suppliers, and that includes insurers”, Harrison said.

Staff were cut internally on the marine, engineering, production sides. And project schedules were compressed into a shorter time scale. In essence, a large amount of front-end engineering on new projects was pushed back to when after the award to a contractor had been made, and what now became in-construction engineering was allocated to the contractors.

A second factor, and Harrison conceded that this had been a change that had been taking place for some time, was that oil companies had been changing their contracting strategy. In the old days they engaged directly with all their contractors. Now they had moved to a EPCI(C) (Engineering, Procurement, Construction and Installation (and Commissioning)) model with one contractor for each sector, who would be defined as a primary contractor. Oil companies were not necessarily covering the contractor under CAR insurance, and Harrison warned that this could be leading to insurance gaps. Technical responsibility for policing and the liabilities had been shifted onto the contractor. But, as Harrison observed, the reality was that the contractor had also been squeezed by the 2014 to 2016 price collapse, “so they in turn do not have the engineering marine and technical resources that have been cut from within the oil companies”, said Harrison.

He noted that oil companies and contractors might both be saying to themselves that marine warranty surveyors would ensure that nothing dangerous would be allowed, but Harrison said that MWS Scopes had been slashed as well and, sadly, on occasion this had been endorsed by underwriters. There also appeared to have been a greater number of what Harrison defined as “non-independent surveys” – effectively, people policing themselves.

Harrison warned that these changes meant that the number of poorly considered would increase. “We are not really thinking things through before we get on to the nitty-gritty of doing the jobs.” He also felt that contractor delivery quality was at risk. “The contractor doesn’t have the team, the time or budget, and he might not have the knowledge, and – a further danger – he might be having to reactivate his vessels”, said Harrison, noting that the oil company says to him or herself, “I’ve put the responsibility on the contractor so it’s not my problem, and he’s told me everything is fine.’

Exacerbating the problem was the fact that there had been an increase in contractual hurdles in proper project policing, with the gap from oil company to extraction operator increasing considerably.

Harrison asked whether insurers were doing enough in the process of discover, given that soft markets and lower budgets might lead to an optimistic view of the dangers that might be well-hidden in a project. “Right now I think we are entering a period of very high risk”, Harrison warned.