NORTH SEA TRENDS TYPIFY INDUSTRY'S WORLDWIDE ADJUSTMENT TO CHANGE

Constantine S. Nicandros
Conoco Inc.
Houston

The oil and gas industry must conduct its business in rapidly changing environments everywhere in the world.

This is so even in mature producing regions such as the North Sea.

The fields we are finding in the North Sea today are smaller and more difficult to tap than they were when the area began production more than two decades ago. And the oil price collapse that occurred in 1986 has kept oil prices more or less on the floor, while the cost of running our business has continued to rise.

How our industry, with the help of various governments, has managed to keep the North Sea competitive by developing new technology and better work practices is an impressive story. Central to this story are two trends that are reshaping the industry, not just in the North Sea but around the world.

Those trends are the evolving nature of business relationships and the creative power of people to adapt when confronted with adversity.

PRICE ENVIRONMENT

When we harken back to the hockey-stick oil price forecasts of the early 1980s, we realize how much we have learned about the responsiveness of supply and demand to price.

Now we expect no real improvement in oil prices, but we're not expecting stability either. Volatility may even increase as a growing share of the world's oil supplies comes from politically charged areas of the world.

However, notwithstanding some politically induced blips, we are betting that the average price over the next 10 years will not be any higher than the current price, which puts us in a range of $17-19/bbl in real terms.

One reason why we expect flat prices is the outlook for slow growth in world oil demand.

Sluggish growth in industrialized nations is a major factor, as is the fact that demand has been permanently reduced by conservation, efficiency measures, and fuel substitution induced by the higher prices of yesteryear.

Lower crude oil prices will not necessarily stimulate growth in demand because cheaper crude does not always translate into lower product prices. Since the mid-1980s, some consuming nations have substantially increased taxes on products as crude prices have declined. In the future, consumers are likely to face rising product prices-regardless of the underlying crude price-as Government regulations and taxes are used to achieve air quality standards and to reduce budget and trade deficits.

Consumers in the former Soviet Union and Eastern Europe will see particularly, rapid price increases over the next few years as formerly controlled prices move towards the world price level.

But perhaps the greatest reason for the flat-price forecast is the abundance of low-cost supplies in the Middle East, along with the inability so far of the Organization of Petroleum Exporting Countries to limit production.

The problem is not just OPEC, however. There are sufficient non-OPEC supplies available to meet the modest growth in demand that is expected, despite lower oil prices. These non-OPEC supplies were developed for one of two reasons: Either improvements in technology and efficiency, made them commercial, or a group of relentless optimists refused to believe the price forecasts and developed them anyway.

Along with lower prices, we face a profusion of safety, health, environmental and other regulations that impose rising costs on us, none of which we can directly control.

We have coped by working to become more efficient in everything we do.

Productivity, as it applies to people and capital, has had to continuously improve. And it must continue to do so forevermore.

This has driven the trend toward major industry restructuring, which is deeper and more far-reaching than ever before. In fact, it is almost trite to say that change is the order of the day and that we must live with it.

At the same time, we are presented with significant opportunity. It is up to us to turn those opportunities into realities in spite of the difficult environment we are facing.

THE OPPORTUNITY

In the North Sea alone, there is more oil waiting to be recovered than has been produced-up to another 22 billion bbl of proved and probable reserves, let alone volumes that have not yet been discovered.

The outlook for natural gas is even better. While oil production is approaching its peak, gas production should continue at or above current levels for many years. There could be 130 tcf of remaining natural gas reserves-almost three times the amount already produced.

The reshaping of the gas industry is opening up great opportunities for expanding this dynamic sector into continental Europe.

The U.K. government-inspired initiative for an industry-financed Gas Interconnector Project to link the U.K. to the continent is an exciting advance.

Thus, the rest of this decade may be a period of much greater opportunity than many of us may have thought possible. I believe this because of the remarkable resourcefulness of our industry in the face of adversity over the latter half of the 1980s.

Managing change in a new era has hardly been a pleasant experience, but the benefits have been truly amazing.

Change has become ubiquitous-so much so that it is impossible to find a single part of our work today that has not been turned upside-down. My company's effort to manage this change can be divided into four parts: change from an intracompany perspective, change from the intercompany perspective, change affecting third-party relationships, and change from a personal perspective.

INTRACOMPANY CHANGE

Over the past 2 years, Conoco has undertaken a wide-ranging evaluation of our cost structure, of our asset base, of how we conduct our business, of how we are organized.

We have redrawn our maps, so to speak, to give us a new focus on core areas, where greater value can be created because we have logistical and technical advantages or superior geological knowledge. Obviously, the North Sea is one of our most prized core areas.

We have honed our selectivity for new exploratory, frontiers. This will reduce the geographic dispersion of future production properties. But we are applying the same philosophy to existing producing fields as we seek to concentrate on core areas and manage our existing asset portfolio accordingly.

We are correcting the fallacy of overengineering our facilities to achieve high but short-lived production levels. By matching facilities to reservoir characteristics, we can optimize production levels, reduce cycle time, avoid gold-plating, and even achieve some degree of standardization.

We have also realized the need to focus more on the large activities that create value-like exploration and production and other core competencies-and do more outsourcing for the things that are not at the core of our business.

CHANGING RELATIONSHIPS

We're also making major changes in terms of our intercompany relationships, primarily by learning how to become better partners.

While partnerships are part of our industry's culture, we were not even scratching the surface of the benefits that could come from taking traditional relationships many steps further.

The most dramatic change has been in new field development techniques, but those techniques must not make us overlook the existing facilities which are still the backbone of the industry.

Built to produce large fields and based on high oil price expectations, their operating costs are high and increasing. Many are now over 10 years old, and, like all machinery, they need more maintenance and servicing to ensure then, are operating safely and efficiently.

As every effort goes into nurturing these facilities to achieve optimum production rates, oil companies and contractors are working together in new ways to reduce support costs. We can no longer afford the luxury of custom-made support service for each platform. Through new cooperation activities with other operators, we are sharing supply boats, helicopters, and warehouses in both the U.K. and Norway.

Better reservoir management is coming through joint partner teams, which replace the laborious old process whereby independent teams in each company invariably reached different conclusions that took ages to resolve before the partnership could act.

Our relationship with Chevron in the joint ownership of the giant Britannia field is a major change in the way we do our business. How it came about and what we have learned so far are both significant and exciting.

Three years ago, Chevron and Conoco held almost equal interests in the field. Both companies had ambitious plans to operate it, and the stage was set for a major struggle. Top managers of the companies' two U.K. subsidiaries were wise enough to appoint a small team to seek alternative approaches.

Over 4 months, three representatives from each company hammered out an agreement that satisfied everyone's aspirations, allowing the operatorship to be shared.

This shaved as much as 2 years off the typical operator selection process, improving the project's net present value by at least $50-60 million.

However, having hit upon a plan that would take us into uncharted waters, we then had to master the melding of the different cultures and talent inside two very large organizations, as well as find ways to cooperate with the 10 other partners.

We had to walk before we could run. It took an up-front investment in time to build the trust that allows the open and frank exchanges we enjoy today.

But all agree that the existence of such an open dialogue is allowing us to resolve issues more quickly and with better understanding than has been possible with a single company operator.

We are seeing major cost efficiencies through the combination of the best ideas, resources, and databases of two companies. In addition to hard core benefits, there are intangible advantages coming from being more amenable to opening up to one another. We used to think that openness brought risk in allowing others into our business. In Britannia, we are discovering that openness with our partners leads to the common agenda of maximizing the value of the asset.

Although we are only 18 months into this arrangement, Britannia already represents a treasure trove of learning experiences that are being transferred to other areas of operations.

OTHER PARTNERSHIPS

In Norway, thanks to in initiative suggested by Statoil, we have cloned and slightly modified the subsea well system on the Statfjord satellite project for Heidrun field, which Conoco is developing.

This avoided starting a considerably more expensive new system from scratch.

More importantly, this standardization has allowed for a tool sharing arrangement that is reducing storage and maintenance expenses for the Heidrun, Statfjord, Sleipner, and Draugen fields.

In addition, teaming up with Statoil has provided leverage in buying casing for Heidrun field. Utilizing Statoil's considerable purchasing power for pipeline and tubulars for the North Sea, we were able to buy casing at significant savings. At the same time, the additional purchases for Heidrun lowered the price for Statoil's future needs from its supplier.

We expect all our significant new ventures to involve even more creative partnerships.

If we want to improve in this area-and we must because that is what continuous improvement is all about-we will have to become better at developing and selling our expertise to those we want to team up with, and better at seeking and recognizing excellence in others.

Companies will have to do a better job of demonstrating their competitive advantages-whether technological, environmental, or safety or cost-related.

THIRD-PARTY RELATIONSHIPS

Just as we are starting to see the benefits of better partnering between producing companies, we have only begun to realize what value can come from better cooperation with our important service support contractors.

With contractors such as Brown & Root, and many others, we are negotiating from a common set of objectives, eliminating duplication, and realizing major improvements through integrated services. We are taking pains to understand each other's values as well as each other's business.

In drilling operations in the North Sea, partnering approaches vary from Shell's "Win 90s" concept of a few preferred major contractors to the integrated solution approach being utilized by BP on Miller field development. Both have merit.

Our people in Aberdeen have another angle on partnering: the single vendor approach. This has reduced our drilling service contracts from more than 100 to less than 30. Single vendor services range from mud services to directional drilling.

Some benefits are obvious. The amount of time required for administration and invoicing for both the operator and the contractor has been greatly reduced.

Other, less obvious benefits include a higher quality relationship with the vendor.

In a few cases, we've given vendors offices inside Conoco. With this access comes increased accountability and the added bonus of the vendor representative's helping us manage the work.

Using a single vendor provides continuity, allows better problem-solving, and permits the transfer of solutions from one site to another rather than reinventing the same wheel at every well site.

The bottom-line benefit is astounding. Over a 2 year period, our drillers have reduced cost per foot by nearly 40%.

No one is claiming that all of the savings is due to this new contracting philosophy, but it is a significant factor.

From the vendor's perspective, the upside is increased stability through longer-term contracts. By working together longer, contractors become more familiar with our operational requirements and safety and environmental standards and in some ways become an extension of Conoco. Ultimately, it perpetuates a partnership that benefits both parties.

NEED FOR COMMUNICATION

What is apparent from all these examples is that one of the most important aspects of partnering is the need to communicate more often and more thoroughly than ever before.

Our people in Norway have found another elegant method using proactive communications.

To ensure that Norwegian industry is fully apprised of the work to be bid for our Heidrun field project, an industry coordinator was appointed to travel extensively to improve links with the supplier community.

The person is responsible for keeping suppliers informed of prequalification requirements and the nature and timing of work to be awarded.

Contractors have access to more information that can improve their chances to win the work. We benefit from an expanded, higher quality bidders list, which increases the chances of lowering the cost of awards.

We have high hopes for cost efficiencies through technological break-throughs, such as replacing traditional materials like carbon steel with advanced composite materials.

Conoco, our parent company DuPont, and Advanced Materials AS of Norway are developing products made of lightweight, corrosion-resistant composite materials which offer particular advantages in deep water and arctic offshore environments.

PERSONAL CHANGE

Change from a personal perspective is perhaps the most important aspect of all.

Every improvement I have described results from personal initiative.

Each step represents one person's idea that was communicated, evaluated, improved, and put into action by many others.

While we are seeing monumental benefits from teamwork and partnering, change must start within each of us.

In addressing change, we must realize that the expectations of employees are changing. Employers have had to recognize this fact and adapt.

Rock-solid communications are now more vital than ever before. We have a greater responsibility to see that people understand what their company is doing, why it is doing it, and what their role is or can be.

We as managers have had to adjust our styles to enable all our people to contribute to their full potentials.

Today's successful manager is no longer someone who operates in a command-and-control style, but rather someone who solicits input in all aspects of decision-making. There is no going back to practices that often pigeonholed people in certain roles or underestimated their talent, enthusiasm, or flexibility.

In the same way that our people are asking more of us, it is obvious that today's business environment is forcing us to ask more of them.

We are expecting them to work together as never before, as members of value-creating teams composed of people from different disciplines.

In summary, change is all around us. Managing that change-inside a country, inside a company, and within our working styles-will determine our future viability.

We are making excellent progress. The current growth and opportunity in the North Sea, accomplished in an environment we could not have imagined a few short years ago, is solid evidence of the resourcefulness that people will produce if given the opportunity.

This spirit typifies the best of our industry and gives us confidence that our finest achievements are ahead.