Offshore risk

This means producing basins are squeezing their lifting costs, rationalizing capital spend, and disposing assets with minimal operating margins at prevailing prices. It is a familiar pattern which many of us veterans in the industry have seen repeated during such cycles.

Unfortunately, the threat of Major Accident Hazards (MAH) does not turn down with the oil price; so, how should we behave to properly manage our risks? To begin, let's look at what typically happens when operating and capital budgets are tightened for producing assets:

Inspection and preventative maintenance work is rationalized

Pressure is exerted to defer activities where possible, especially major events such as plant shutdowns and turnarounds, where the frenzied activities over a few days involve costly manpower and materials. The necessary downtime also results in lost production.

Some activities cannot be deferred such as statutory inspections and integrity testing determined by regulations, standards, and insurance needs. Wherever possible, the tendency will be to delay until another budget year when, hopefully, oil prices and cash flow improve.

Responsible organizations will be careful not to directly change their inspection and maintenance programs for safety critical equipment, but these will inevitably suffer as the result of reduced manpower. If backlogs exist, then they will be more difficult to work down.

Many capital projects will be cancelled or postponed

Projects that survive will be the ones whose business case is robust and payback time is short. This will curtail innovative approaches with higher degrees of uncertainty as well as long-term initiatives that take longer to realize value.

Contractor day rates will be negotiated down

This will have a knock-on effect on the contractor organization. Layoffs will occur, salaries will be cut, and voluntary redundancy packages could take too much experience out of the industry. Lower cost, less experienced people will service contracts.

Staff reductions

On the facility and at headquarters, staff reductions will take place. Older, more experienced employees with top salaries will be encouraged to take early retirement. At a time when many "baby boomers" are already heading out of the door, expect the long talked about "big crew change" effect to be amplified.

Morale is inevitably impacted by the threat of reduction, and "survival" tends to be more on people's minds than focusing on the job at hand. This, in itself, can lead to incidents.

Discretionary budgets will be tightened which will typically impact training and competence development. Those projects which were not seen as urgent, such as procedures review, housekeeping, and behavioral initiatives will suffer as a result.

For organizations with an international staff base, costly overseas assignments will be cut short as people return to their home bases. This effect, which is sometimes humorously referred to as "ethnic cleansing," will reduce the impact of informal but effective best practice sharing. Regional organizations will have a tendency to slip back into more parochial ways.

It is worth noting that not all people in the industry believe that companies should behave this way. In 2008, when oil prices dropped following the financial collapse, the then Chairman of the Chemical Safety Board, John Bresland, put out a press release and even a video safety message urging companies to stay focused on process safety - even when prices are low. In his message, he proclaimed low oil price cycles have a history of contributing to process safety incidents years later. The 2005 Texas City incident is an example where corporate spending decisions made in the 1990s triggered cutbacks in maintenance, training, and operator positions.

Additionally, John Bresland cited Trevor Kletz, one of the founders of Process Safety, suggesting that periods of low oil price should be seen as opportunities to work down maintenance backlogs. If turnarounds are required, then what better time to do it than when prices are low, thus lost production is less costly to the company? This opinion is pertinent right now for another reason.

Before the recent downturn, we have seen a prolonged period of cost inflation in the industry - where parts, materials, and human resources were in high demand resulting in price inflation. These prices are quickly falling alongside oil and general commodity prices. We should expect maintenance campaigns in 2016 to be less costly than 1-2 years ago. So, ironically, now maybe the perfect time to address maintenance backlogs and perform periodic inspections, but don't expect a flurry of activity. The majority of company actions will be dictated by constrained cash flow.

It is worth looking at one mature offshore basin area, the United Kingdom's North Sea. Even before oil prices started to decline, worrying indications emerged about declining production and escalating lifting costs - such that margins even at $100/ barrel were becoming challenging for some operators. In 2014, the Oil & Gas UK, a joint industry body for the UK sector of the offshore oil and gas industry, published data on production and efficiency across the basin (see Figure 1).

Production had reduced by nearly 50% since 2007, averaging below the Gulf of Mexico (GOM) daily production output of about 1.6 million barrels per day. Some of the rapid decreases in production were due to more than just the natural decline in reservoirs. Unplanned outages - specifically rotating equipment, turnaround extensions, and maintenance efficiency were some of the reasons cited. This can be seen by the decrease in production efficiency (essentially plant availability), which declined from 80% to 70% during 2004-2010. More dramatically, the subsequent two years resulted in a 70% to 60% decrease!

The Oil & Gas UK reported in their 2015 economic report, lifting costs in the United Kingdom Continental Shelf (UKCS) averaged $29.3 per barrel of oil equivalent (boe) in 2014. This should be compared with the GOM's $6 per boe, Norway's $13 per boe, and Indonesia's $8 per boe, based on Wood Mackenzie's research. The reasons cited for the escalation were rising commodity prices - which impacted unit costs, the growth of activity - placing a high demand on supply chain services, and low production efficiency. It should be noted that data published at the time of writing shows lifting costs in 2015 had come down to $21 per boe, due to stronger production performance, reduction in operating costs, and improvements in efficiency. Despite this and with the prevailing oil price, it is reported 43% of producing fields are expected to operate at a loss this calendar year.

The example of the North Sea shows a basin area struggling with low margin production for the past few years. All of the responses to low oil prices cited earlier have manifested in this region. With a background of tight margins, declining production, reduced oil price and low efficiencies, if we look at how the industry is addressing the risk of Major Accident Hazards, the picture becomes more alarming.

In the first quarter of 2015, the Oil & Gas UK published their annual Health & Safety report. Figure 2 is an extract from the section on safety critical maintenance, which is essentially the maintenance of risk control barrier systems which prevent and mitigate Major Accident Hazards. These show an increasing rise in backlogs, particularly in deferred Safety Critical Equipment (SCE) maintenance. In other words, companies find reasons for deferring critical maintenance, then struggle to meet the deferred dates. The regulator has issued a note of concern to the industry, asking them to address what appears to be a trend of making safety critical maintenance backlog "disappear" into a status of deferred safety critical maintenance.

You could say this appears to be the perfect storm; a rising backlog of SCE maintenance, high maintenance costs, low oil prices, pressure to increase equipment availability, narrowing staff and contractor competency, increased vigilance from the regulator. It should also serve as a warning for operators in other offshore basin areas around the world. Like the North Sea, Gulf of Mexico assets are aging, and reliability and uptime should be expected to reduce with time.

So how should we tackle this challenge which maybe more critical in mature regions, but likely exists in other places - perhaps to a lesser extent? Two things are obvious:

First, in times like this, we need to have a good appreciation and control of MAH risk. We need to quickly assimilate the status of our process safety barriers, understand which are impaired, and make decisions on any activity or plant changes in a specific area or at a specific time which could elevate risk.

Second, we desperately need to manage activity in a way which allows us to get more work executed. We need to ensure the work we are doing at any given time is the most appropriate for the asset.

Unfortunately, neither of these two areas are ones in which we as an industry currently excel. We need to have new approaches. The industry is slowly becoming more focused on barrier management, recognizing that frontline workers on the plant need to be aware of the role risk control barriers play. The frontline workforce also needs to play a more vigilant role to ensure risk control barriers are kept in good working condition.

The fact is, data collected through system inspections and testing is not easily shared across the "silo walls" of our organizations. The supervisor evaluating the added risk of performing hot work or making plant changes at the frontline assumes barriers are in good condition, unless otherwise told. The inspector assessing corrosion on pipes and vessels may know of an impaired barrier, and hence the increased potential for a hydrocarbon leak, but does not necessarily know about planned work, the combination of which may pose an intolerable risk.

What is missing is the ability to communicate widely, the real-time status of barriers. We need to employ systems to assess the cumulative risk of impaired barriers, plant status, and deviations in risk control systems.

The fact is, safety is a major contributor to shareholder value - and is essential to preserve the 'license to operate.' Therefore, it needs to be proactively managed. Without visibility into low probability, high impact risk and activity, a higher level of risk may exist than management believes.

Fortunately, software platforms are starting to emerge which can connect organizations in this way and provide a means of highlighting impaired barriers alongside planned activities. These Operational Excellence Platforms integrate with enterprise systems such as Asset Management, Resource Planning and Scheduling, Maintenance Management, Inspection Systems, and Accident and Incident Recording systems.

Operational Excellence Platforms are effective because they manage all activity and risk. It is a mistake to think that Maintenance Management Systems (MMS) manage all activity. Indeed, they plan and schedule maintenance and inspection activities, but those are just the tip of the iceberg.

For example, if planned activity is to change out a relief valve, which will take two people 4-hours, an MMS system will not show the relief valve sits 40 feet up in the air. To access it you need to build scaffolding. The vessel needs to be taken offline and depressurized, vented and gas freed. Isolations need to be installed to make the area safe to work. Insulation needs to be removed, and a crane needs to be used to remove the valve and lift in the replacement. All this work then needs to be reversed to reinstate the equipment. In total, it can take upwards of 2-days and multiple unaccounted activities to perform a scheduled 4-hour job.

Operations need to prioritize and manage sequenced activities for all items scheduled in the MMS and put them together with other operational activities to make a safe work plan. It is through coordination and management of these activities where efficiency is either gained or lost and the ability to attain the planned schedule is determined. We need visibility into "all of the job," "all of the jobs," and all of the activities to create a safer, more effective plan.

The benefit of using these new Operational Excellence systems is that planned activities and all operational risks can be viewed concurrently. Visibility into the program of work and the status of process safety barriers, risk control systems, and other factors enable future work to be prioritized based on the forecasted reduction of risk.

Operational Excellence systems should provide operators improved control of MAH risk and better, more efficient management of planned and dynamic work activities. These solutions may offer a better way to head-off the challenges that low oil price brings to our industry.

The experience of UKCS is worth considering. It has been a model for the industry in many areas of safety following the Piper Alpha experience in the late 1980's.

Many operators have global reputations for Operational Excellence. Contractors and their staff are equally as sophisticated. No doubt, together they will find a way to take on new market challenges. In the meantime, we should see these as an indicator of the challenges mature basins pose with aging structures and equipment, complex and dependent infrastructures, and declining revenues. Most if not all basins will go through the same cycle in late life. Perhaps we should not wait until these problems become more acute.

In an environment with significant financial challenges, let us not succumb to pressure and attempt to just "get away with it," operationally - with fingers crossed that nothing will happen. Whether small injuries and equipment failures or Major Hazard Events, all incidents have measurable costs and impact on the value of the firm. Let's address the challenges of risk management and activity efficiency before we reach that point. Our profitability depends on it.

ABOUT THE AUTHOR

Mike Neill is the president of Petrotechnics USA. He holds over 35 years of safety and performance management experience. Prior to joining Petrotechnics, Neill held senior roles in operations, drilling, and petroleum engineering for BP Upstream in Scotland, Norway, the South of England, and Egypt. Neill holds a BSc in Mechanical Engineering, MSc in Petroleum Engineering from Imperial College of Science and Technology at the University of London, and an MBA in Strategic Management from the Peter F. Ducker Graduate Management Centre, Claremont Graduate School in California.