PIM believe outcome based contracts will deliver fairer returns for all by driving innovation and subsequently improving bottom line returns and positively impacting sustainability.
Innovation is key to the health and development of any industry but especially to one such as the oil and gas industry where reserves are increasingly harder to locate and extract. Laura Johnston, contracts manager at PIM, believes that in some cases the development of new methods and technologies has been inhibited/stifled by the industry itself.
The boom and bust cycle is synonymous with the oil and gas industry and led to companies pushing for higher rates during the good times and, conversely, to contractors being expected to reduce their prices when the oil price dropped for sustained periods. During the boom times, when the oil price was high, there was generally no driver for companies to innovate and save money, especially when this would have eaten in to their profit margins. However the bust element of the cycle, which brought volatility and subsequent uncertainly, meant that smaller companies tended to find it more difficult to innovate because they didn’t have the available capital to allow them to invest in such activity.
This appears to be an industry wide trend. According to a 2018 article by Arthur D Little, the oil and gas industry is ranked 12th (out of 13 industries) for innovation, lagging behind industries which encompass food, tobacco and beverage as well as home appliances. Parallels are often drawn between the oil and gas and the aerospace sectors so surely at the very least we should be aspiring to be more in line with the aerospace and defence industry when it comes to innovation? The same article lists the aerospace and defence industry as being in eighth place with information technology, telecommunications and the automotive industries taking the first, second and third places respectively.
So how do we encourage innovation in our own sector? We can’t continue to do the same thing and expect different results, if we want things to change then we need to instigate it. Things can only change if there is buy in from both sides of the supply chain; the requirement for innovation and sustainability needs to be considered by those purchasing products and services too.
Traditionally oil and gas industry contracts are prescriptive, the contractor has little, if any, scope to deviate from how the operator expects the work to be delivered. Rather I am suggesting a move to outcome based contracts which focus on the expected outcome and quality rather than detailing exactly how this is to be achieved. Such contracts will normally guarantee that the subcontractor is paid a base rate with an additional element being linked to performance. This transfers the risk to the supplier but also enables them to determine how best to deliver their agreed services and, as a direct result, drives innovation as they also seek to reduce their own costs.
For this to work the company’s needs must be defined and manageable and the outcomes have to be specific to each contract. In the main, PIM sees this approach as focusing on achieving the industry requirements of no HSE notices, no hydrocarbon loss of containment and no loss of production while being freed up from the confines of a prescriptive contract and instead able to innovate to the benefit of both parties.
Essentially this approach should lead to informed buyers choosing the option which will deliver the best value based return. At the same time this will also stimulate both innovation and competition as suppliers strive to deliver the best value to their customers. The end customer can also expect the work to be delivered on time and on budget.
The implementation of such arrangements will encourage better relationships to develop between suppliers and operators as the emphasis transfers to a longer term view based on sustainability rather than the short term approach of choosing the lowest price available at the time.
As these relationships develop this could further impact the tender stage of the process with companies moving towards requesting solutions to problems and thereby encouraging innovation. After all, the reason work is usually outsourced is because there isn’t the inhouse capability so why not make best use of the experts you choose to work with?
This approach isn’t new. In 2012 Rolls-Royce celebrated the 50th anniversary of its ‘Power-by-the-Hour’ approach to engine maintenance management. However it is one that the oil and gas industry can learn from and, as a result, encourage innovation. Despite a period of sustained cost cutting the North Sea remains a high cost base and must change in order for its oil and gas industry to survive. The phrase ‘innovate or die’ is well known and an industry which is facing challenges in terms of limited reserves as well as environmental and cost pressures can not afford to stand still, innovation is key to its survival.