Julian R. Darley
BP Exploration (Alaska) Inc.
Anchorage
Production and revenues from America's largest oil field are declining. The cost of operating it is rising. If both trends were to continue unchecked, oil production at Prudhoe Bay on Alaska's North Slope could become uneconomic in the next decade.
Simply maintaining operating expenditures at current levels -barring a dramatic, lasting increase in oil prices-would postpone the day of reckoning by only a few years.
Today, nearly 4 years after Prudhoe Bay oil production began its inevitable and irreversible decline, the field continues to account for 1 of every 6 bbl of oil produced in the entire U.S. and more than 1 of every 3 bbl produced worldwide by BP.
Prudhoe also plays a pivotal role in sustaining the economic viability of the Trans-Alaska Pipeline, the sole lifeline to market not only for Prudhoe Bay crude but also for production from other prolific North Slope fields currently accounting for nearly 500,000 b/d of oil.
Despite ongoing investments in tempering the decline -gas and water handling expansions, development drilling, enhanced oil recovery, and well maintenance and repair programs-production will continue to decline. That's why it's imperative we reverse the tide of rising costs. To continue to produce oil at Prudhoe well into the 21st century, we must immediately-and continually-cut costs to reflect declining production and revenues.
CUTTING OPERATING COSTS
If we're to significantly reduce overall spending, we must achieve major reductions in operating costs.
We've been working closely with ARCO, which co-operates Prudhoe Bay with BP, to reduce costs through various initiatives designed to avoid duplication and standardize equipment, facilities, and operating practices throughout the field. We've embarked on various programs within BP to enhance efficiency and streamline our activities. And with 80% of our Prudhoe Bay operating expenditures going to contractors and vendors, we're focusing on working more closely with contractors and suppliers through a process called "alliancing."
In our traditional dealings with suppliers, dialogue has been limited. We've developed bid specifications detailing what we want-or at least what we think we want-and they've produced it.
COMMAND AND CONTROL
Master-slave. Despite its apparent simplicity, the process has often been tedious, time consuming ... and expensive.
Consider some of the hidden costs:
- By not including suppliers in our planning, we've made it difficult for them to satisfy our real needs. We've either ended up with too much or too little ... often too soon or too late, or with too many defects. And often at a premium.
- We've spent an inordinate amount of time and energy searching for providers, resulting in continuous starting and stopping, and rarely moving us up the learning curve.
- Instead of bringing us closer together with our suppliers, it's often made us adversaries. They ought to love us for our money, but it hasn't worked out that way. I wonder why...
SLAYING PROFITABLE
This approach has been good enough to keep us profitable in Alaska for the last 15 years. But what kept us profitable in the past isn't going to keep us profitable in the future.
The reality of rising costs coupled with falling production and revenues requires new strategies, new solutions. Teamwork. Innovation.
We're seeking supplier alliances that are truly collaborative-ones driven by value, where price is only one of the components.
A business alliance is a marriage. It has to be a win-win situation, or it won't work. We've concluded that our traditional approach to dealing with suppliers-putting a lot of time and effort into finding a date for Saturday night-isn't always the best.
We're looking for long-term, strategic alliances: dynamic relationships that will spawn new ideas, better practices, and continuous improvement-with the ultimate goal of driving down everyone's costs-ours and our suppliers' alike.
This approach isn't going to work for all of our business dealings, and it isn't going to happen overnight. For simple, low-cost purchases, the traditional way may be the best way. But we've found that 80% of our expenditures go toward 20% of the goods and services we buy, and that's where our focus must be.
We've begun to identify our top contractors and suppliers based on spending. Initially, we're focusing on high-dollar expenditures for strategic and technically complex goods and services - things like drilling, well work.
MUTUAL BENEFITS
A little more than a year ago, we approached several suppliers about purchasing gas lift mandrels. We told them we wanted "just-in-time" delivery so we could avoid holding inventory and free ourselves of the up-front administrative and financial burden associated with delivery and storage.
No problem, they told us. But it's going to cost more-$200,000/year more. This struck us as a peculiar way to reduce costs. We declined.
Two months passed, and one of the firms called and asked if we'd negotiate. They'd talked to their own suppliers and done extensive homework on the feasibility of just-in-time deliveries. Nine months later we signed a 2 year agreement for gas lift mandrels with just-in-time delivery.
The pact is predicated on planning, on open and honest communication, and on mutual benefits. Instead of placing orders annually, which left us fully exposed if our drilling plans changed during the year, we meet with the supplier regularly and provide updated forecasts of our requirements.
Benefits to BP: greater flexibility and reduced inventory costs. This agreement alone will reduce our inventory close to $1 million and save us $250,000/year.
Benefits to the supplier: a longer-term business commitment from BP and more predictable volume.
Win-win.
We've entered into a similar "just-in-time" arrangement for low-alloy steel casing used for drilling and workovers.
As we fine-tune the list of suppliers for potential alliances, which ones do you think will make the short list - ones like the companies we never heard from again after they told us we'd have to pay a premium for vendor-held inventory, or companies like the ones that were willing to work with us to identify mutually beneficial ways to reduce costs?
SHARING VALUES
We're looking for suppliers that share BP's values-ones that are innovative, flexible; ones that share our commitment to the environment and safety.
We're also looking for companies with a diversified product base and that can offer an array of goods and/or services in a timely and cost-effective manner-ones that are strong financially and ones that play an active role in the community and in the politics of the state.
While the political process has rarely added value to our business, it can destroy value with a vengeance. A single legislative vote or new regulation can subtract months or even years of production on the North Slope. We would be naive to dismiss that reality in considering our strategic business alliances.
'Win-win" is a formidable task for all of us. To us, a win means spending less without sacrificing quality or safety. To suppliers, a win traditionally has meant us spending more. We've paid for input: man-hours, rig-days, or whatever. And that must change.
Mutually agreed-upon performance measures and targets based on output, not input, will be a cornerstone of our alliance contracts: things like productivity, quality, turnover, safety, protecting the environment, timeliness of deliveries, Alaska hire, Alaska Native hire.
There will be tangible incentives for achieving and surpassing them. We'll share the rewards of our partnerships, just as we'll share the risks. Just as the challenge of declining production will continue to grow, however, so must the standards we set for ourselves.
The expertise of contractors and suppliers has been among our most under-utilized resources. Instead of involving them early in our planning, we've often excluded them altogether. This also must change. At the same time, we need contractors and suppliers to tell us how we can be more effective in the way we use their services.
SHIFT OF FOCUS
As we shift our focus from price to value, we'll also redirect our emphasis from paper to people.
We're working to replace short-term contracts with long-term agreements, avoidance with regular contact, criticism with recognition, "us-and-them" with "we."
This requires much more than regular phone calls between our buyers and suppliers' sales reps. Instead, we're building teams composed of end users of the product or service - our people in the field-and the people who actually provide the service or manufacture the goods.
These teams include buyers, sellers, executives-whatever it takes to get the job done. They're responsible for planning, for problem solving, for forging innovations, for continuous improvement.
This level of involvement simply isn't feasible with a contractor and vendor base of more than 2,500 companies like we had at year's end. We're consolidating our supplier base in Alaska and reducing the number of our suppliers by at least half over the next few years.
The process is painful, but it's absolutely necessary. It enables us to put more effort into our relationships with the best companies, and it helps us to standardize materials and scope of work.
This approach may be new in the Alaskan oil patch, but variations on it have been proven time and time again by other leading companies: DuPont, Hewlett-Packard, Motorola, GE, Shell, NCR, Federal Express, Xerox Ford, Honda.
COSTS DOWN, QUALITY UP
Our goal, in the very simplest terms, is to drive down costs while enhancing quality and safety-to effectively manage the extended transition from peak North Slope production to sustainable production and build a base from which we can continue to produce oil in Alaska for decades.
We're continuing our aggressive drilling and well work programs in our North Slope fields, and we continue to invest in other projects to temper Prudhoe Bay's decline.
This means business for our contractors and suppliers. It means jobs. And it represents our continuing commitment to sustain production and maximize recovery.
But these investments are also symptoms of the aging of our Alaskan assets-of rising costs and declining production. Long-term alliances we're building with many of our Alaskan suppliers are an acknowledgment that we can't overcome the challenge alone. With their products and services alone, we're doomed to failure. With their experience, expertise, and ideas, we can succeed.
The '90s can be the beginning of a prolonged and painful end for North Slope oil production-or merely the end of what has truly been a glorious beginning. If we're to continue to do more to sustain oil production in Alaska, we must do it for less.
To do otherwise would be to hasten the day that we do nothing at all. With the critical role of North Slope oil in creating jobs and satisfying America's energy needs, in providing revenues and economic stability for the state of Alaska, and in generating revenues for North Slope oil producers, that's an outcome none of us can afford.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
