Lessons from the UK Offshore Oil Industry

By Malcolm Storey

This is extracted from a Research Paper that is available on request.

INTRODUCTION

There are many factors in supply chain thinking but relationships, employing time and knowledge, provide the focus for this paper because they are less tangible and universally key resources whose influence might be overlooked. These are taken in turn because their ability to impact the employment of the more costly and tangible resources like labour, materials and capital is great and they could become potent ways to improve the ‘value’ derived from ETO projects.

The way supply chain methodology is regarded here concerns the continuous dialogue that might exist in an ETO industry including all the stakeholders. This reflects the potential for collaboration between the institutions, the customer and the suppliers from the earliest stages of project conception. Supply chain in these industries is not the whole picture; it only enables technological, commercial and emotional innovations to be built into every level of project engineering if the will exists. The approach prepares for transactions in a more certain environment. 

The UK Offshore Oil Industry as a Case Study

This draws on research into the UK Offshore oil industry. It is known as the United Kingdom Continental Shelf, UKCS or North Sea and was originally viewed as a mature oil province. Yet a study of the background suggests that many hydrocarbons remain unexploited in what are regarded as economically marginal fields. There are about 300 of these satellites containing over 30bnbbloe (billions of barrels of oil equivalent) which is as much as has been extracted since its inception thirty years ago. This is a strategic asset from a UK national viewpoint. The problem is the major operators do not see this fragmented resource as one they want to exploit.
Successive governments maintain a strong interest in the offshore industry because it sustains 300 000 jobs in the UK, it contributes £9bnpa to the economy and towards self-sufficiency in hydrocarbons supply. The sector has a strong institutional environment composed of government agencies, sector-specific Trade Associations and a range of facilitators including FPAL (First Point Assessment Limited) and LOGIC (Leading Oil and Gas Industry Competitiveness) and groups like PPWG (Progressive Partnership Work Group), the ILT (Industry Leadership Team) who co-ordinate initiatives under the banner of PILOT (not an acronym). Amin and Thrift describe these layers as being ‘institutionally thick’ and Martin sees it as being ‘sociologically instituted’, which means that a system of embedded relationships exists that underpin economic transactions. As a sub-set of the UK economy the strength of the environment makes it closer to the German system of order and control where system power and trust, which reflects the strength of the institutions, overrides corporate power and trust, which is the traditional model used by British buyers. Accordingly, a set of government-inspired targets known as the PILOT objectives were established. These aim to maintain production, investment and jobs.

PILOT spawned a number of initiatives to encourage collaboration including a Supply Chain initiative, to promote innovation, and an all-encompassing Satellite Accelerator programme that seeks to harness the industry’s strengths in exploration and production (EXPRO) specifically to exploit the marginals.

The importance of Relationships in Supply Networks

Hakansson feels that relationships between trading partners are important because there are no clear boundaries in the firm’s affairs with outside organisations with which it shares varying levels of inter-dependence, for example in commercial transactions. New knowledge exists at the frontiers of established knowledge and relationships with outsiders can introduce new ways of thinking that stimulates innovation. To become adept at the complementary skill of co-operating within networks firms need to learn how to collaborate with their partners because relationships enable the timely exchange of raw data for knowledge. This enables proprietary developments to be incorporated into each level of project engineering. Academically, collaboration depends on trust which comes from evaluating the reputation of suppliers and this lubricates the transactions.

Modern economies rely on international trade and depend on networks that are global associations; so the success in managing supply chains depends on the ability to extract benefits from a wide range of individuals and cultures because they do not accrue naturally. These networks are essentially relational. They depend on the social connections between individuals and this is where ‘emotional innovation’ releases the latent potential in the workforce through inspiration. Relationships usually begin as transaction-specific events but can develop into strong inter-personal bonds that transcend the economic purpose. Molm et al describe this as the ‘affective attachment’.

Emotional intelligence and the concept of ‘procedural justice’, introduced by Chan and Mauborgne to express the need to show respect for an individual’s emotional and intellectual well being, are crucial considerations because individuals are the atomic building blocks of organisations. Leadership, motivation and respect are elements of emotional management and the innovation is to convey these in an encouraging way to inspire individuals to overcome any feelings of self-interest and opportunism and extend themselves for the common good. Happy and respected people work better; they are more stimulated and this benefits the organisation.

Considerations of Time in Supply Networks

Time is the second consideration and Alderman regards it in two ways. There is the notion of speed and the concept of timeliness. Speed, implying the ability to manufacture in a limited period, is of lesser importance because many ETOs have evolved proprietary systems that permit real parts, for which no job history exists, to be produced from generic information. Since every ETO product is an original there is no prototype; so the task is to innovate, design, develop, manufacture, assemble and supply unique deliverables within the buyer's normal procurement-schedule.

Time as timeliness is a key to project viability because it concerns the arrival of the deliverable incorporating the appropriate levels of advances according to the customer's timetable. The question is, ‘how is this best done?’ The more advanced ETOs respond to customer demands via the medium of speed but there are limits to which speed can and should be used. However, if timeliness can be introduced it can be manipulated for additional competitive advantage. This is best done by getting the supplier and the customer to work together but it proves difficult if the customer does not work this way. Timeliness implies not only co-operation but also collaboration because it is the customer’s needs that are being satisfied. By not collaborating the user is working against his best interests because the excellence of customised products depends on timely exchanges of information.

Understanding the user's time pressures is integral to understanding his product needs but supply chain demands this understanding runs both ways and is not a hostage to the customer’s order release date.

Timeliness is enhanced by the appropriately timed release of information and the order to proceed which is predicated on trust existing between the parties. Das and Teng suggest trust has two components: goodwill and competence. Both are important but the goodwill is more important because it declares intent and the underpinning attitude between the parties. Competence is part of the learning process and is acquired if the cultural commitments exist to build the relationship. Trust measures predictability and leads to trading agreements through relationships.

Knowledge in Supply Networks

Proprietary knowledge is key to innovation and stems from the core competencies but its development and application needs guidance from the user environment. This is where collaboration, knowledge sharing and learning come into play.

A thread emerges leading to ‘superior performance’ as described by Powell. It begins by establishing what Garvin describes as a ‘learning organisation’. This is a unique cultural environment that is a measure of an organisation’s commercial virility. It happens when top management commits to transforming the culture to one where high levels of communication exist. Ireland and Hitt see the role of senior managers as providing strategic leadership and encouraging employees to contribute to an entity with high ‘absorptive capacity’, which is the ability to adopt, adapt and apply new knowledge beneficially.

The theory is that new knowledge is the basis for organisational renewal but only if it is used. The valuable knowledge is tacit rather than explicit and learning organisations do this naturally because they have unique environments and are probably emotional innovators. This enables them to recognise the value of knowledge and apply it to their goals especially in strategic alliances.

With collaborative ventures this learning derives from face-to-face encounters which generate tacit knowledge that lies at the root of superior performance because the interactive learning of alliances exposes the ‘know why’ as well as the ‘know how’. The ‘know why’ is the firm’s ‘dominant logic of commercialisation’ and characterises its attitude to risk, the size of project it undertakes, the types of project it seeks to undertake and its strategies for success. The dominant logic is a measure of the firm’s ‘conscious management’ skills and its mastery of alliance management techniques which do not accrue simply from entering into a partnership.

The issue is not about possessing core competencies or competitive advantages; but the ability to use them to achieve substantially improved commercial returns.

Reynolds suggests that ‘Project supply chain’ incorporates relationships, timeliness and knowledge. This enables firms to enjoy the benefits of a strategy where long-term, established partnerships are used to exploit other commercial resources more profitably: first, to stimulate industrial activity and then, to improve on the quality of the deliverables whilst simultaneously reducing their costs and improving the value.

FINDINGS

Porter reckons that strategic mediocrity results from failing to make a clear choice of strategy. This contrasts the corporations because introspection needs a purpose and then the vision has to shift to the outside. This work suggests the oil majors are too remote from their core business and the passion, flair and elements of enthusiasm in the workforce are dampened by their corporate policies. The emphasis on the shareholder affects the operational levels at the expense of the stakeholder and this reflects a lack of focus on the core competencies, the people and the ability to make a deal, ‘the investment industry drives decisions that may not appear to be totally logical from a project outlook’ (operator) and, ‘this business is suffering from unsustainable expectations from the finance business’ (well services contractor).

The owners’ reluctance to apply these initiatives as nominal leaders of the industry must cost billions of dollars of lost profit potential and could stem from their lack of understanding that leadership is required at the industry level. As well as economic responsibility to themselves they also have socio-economic dues from their position at the head of the line. An expression of their noblesse oblige would be welcomed because evidence exists that leadership at the firm, network and institutional levels is insufficient to drive the industry forward. This could result from the dichotomy between the operating group, the procurement department and the engineers, extending to a trichotomy between the operating group and the top team. They admit to insularity, ‘I am not sure the drive and the willingness exists in the higher levels of the company’ (operator) and to myopia and one of them is a very tired corporation, ‘senior management do not seem capable of letting things be and focusing on deliverables’ (operator). This refers to the lack of focus on core competencies.

Evidence of the use of Relationships

The operators have exceptional skills in project management and in working hostile geographic and political environments but they focus on the macro-elements at the expense of the details. Successful models for collaboration exist, especially with BP Andrew and the ETAP venture: ETAP emphasised the ‘can-do’ mentality and declared; ‘technological advances…of their own accord will not access…the remaining prize in the North Sea’. It recommended improved collaboration.

With regard to the supply networks the employees of the operators work where cash flow is not a real concern, ‘we are schedule driven but not budget constrained…we’re fat and happy’ (operator). They do not have to work on new projects to generate an income but when they stop the supply-side goes into a micro-recession, experienced labour is lost and relationships can be jeopardised. Might this suggest that complacency exists in an industry that pumps money?

The oil majors are downsizing. They do not manufacture equipment. Exploration and production are complex operations requiring specialist skill sets that none of them possess. For supply chain methodology to work a symbiotic continuum needs to extend from the user through the contractor to the supplier and the sub-suppliers with timeliness, information and the instruction to proceed appropriately applied. The days of adversarial trading are ending. Project supply chain is complimentary to Project management and an important step in the transition to a culture where vision, foresight, flexibility and the ability to manage relationships are pre-requisites.

Evidence on the use of Timeliness

Time in the offshore industry is an absolute resource and not about concurrency as understood in lean production techniques. The super majors dominate the sector and use it in a linear fashion. Much time is burned with FEED studies, conceptual studies and late changes of both a technical and an economic nature but no extension is made for first oil; ‘somehow…that chain isn’t…communicated back to us…[so the] engineers…fully understand the impact’ (operator). This compresses the time to generate the supply by delaying the order release.

The operator's concerns centre on the delivery of their projects, in their timescales, to their specifications, according to their contracts through their appointed contractor and then complaining because their requirements are not met; ‘you’ve put your skin on the table’ (operator). Perhaps their requirements are not met because they place unreasonable demands on the supply chain by making it struggle to meet due dates. Late delivery means hundreds of thousands of dollars of vessel charges but these pale into insignificance when replacing faulty items in a sub-sea application.

These risks result from the current system of working. The supply side suggests that the poor use of timeliness and knowledge through the lack of relationships reduces the inclination to invest. This increases the costs and the risk of project failure which accrues to the buyer. The lateness in the release of the ultimate specifications and the instruction to proceed holds the supply side in a state of uncertainty because it compels the supply chain to use generic information.

The OEM’s responsiveness may be feeding this problem rather than resolving it. The issue is not about the manufacturer meeting customer demands it is about the customer’s awareness of the time it takes to design and deliver complex, and frequently novel, kit. The concurrency in ETO manufacturers is necessarily high but that is not where the problem lies. It lies in the culture that prevails in the buyers that, ‘they can throw it out [on Monday] and get it back by Friday’ (sub-supplier) and, ‘they will place an order when it suits them’ (sub-supplier). This reflects non-awareness of the process of supplying complex equipment and is evidenced by a Project Manager’s myopia; ‘on the manufacturing side we have a lot to learn’ (operator).

By focusing more on their project than on what affects their project the benefits of project supply chain are not realised and the risks and costs are magnified.

Evidence of the Use of Knowledge

Industries change when the companies in them change and the incentive to alter the status quo is the desire to achieve a state known as ‘superior performance’. Stability is met by frame agreements because constant rehearsals minimises the commercial risks by cementing the network into a state of ‘mutually assured business’.

One super major was enlightened in responding to core competency; ‘the integration of contracts…it is a project management competence’, but these were managers. The OEMs were directors whose authority said how they would operate rather than how it might operate. The reassuring thing is that the knowledge exists; it just needs the cork removed from the neck of the bottle and that usually occurs at the top.

DISCUSSION

Supply chain is a commercial innovation and more an attitude and cultural mentality than a technique. The philosophy is about inclusiveness: it might reveal new meanings and result in different actions but it is a long term strategic methodology and not a tactical means-to-an-end.

Discussion of Relationships

When partnerships are established the element most often referred to is ‘trust’; ‘that was something that took us a long time to get to grips with and to understand’ (operator). This underlines the importance of the individual and collective action and reflects the symbiosis and inter-dependency between the employee and the firm.

Before management or leverage can happen another organisation has to become a partner. Where there is no partner there is no commitment and the ‘relationship’ is an economic exchange at arm’s-length. Leverage cannot be effected at arm’s length; that is power which amounts to intimidation that can cause offence and lead to adversarial transactions. The need for consensual partnerships is paramount to benefit from proprietary innovations derived from core competencies where the capability bears down on user-calls for enhancements to on-site utilisation.

Without partnership there is no dialogue: without dialogue there is no innovation and without innovation there can be no improvement.

Discussion of Timeliness

The super majors appear to use time liberally; operationally and strategically. If a dominant logic can be created it can be adapted. The suppliers in this research had studied their organisation and applied their learning beneficially. No evidence of this strategic direction-giving existed in the super major where manic efforts to introduce change is evidenced by three major reorganisations within three years; ‘initiative overload…stops people taking the opportunities to learn’ (operator) and, ‘how exhausting and energy consuming that is because you spend a lot of time looking in and not a lot of time looking out’ (driller). Might this suggest a lack of strategic capability and a poor appreciation of resources like timeliness?

Discussion of Knowledge

The individual is the atomic level of the firm, network, industry and the nation. These entities seek to gather intellectual capability in order to secure a disproportionate share of opportunity in the future and individuals generate this knowledge. Hamel and Prahalad see the future as involving competition between coalitions which requires the ability to manage relationships and knowledge based organisations seek to exploit the intellectual assets of its contributors.

Correspondingly, power and criticism appear naïve ways to induce improved performance and are lethal concoctions when it comes to the management of internal and external relationships because they demonstrate ignorance of emotional innovation. Persons cannot withstand condemnation, uncertainty or intimidation for very long: so these tendencies are counterproductive in any environment where innovation is an objective.

Collaboration starts when the individual crosses that gap between working for self-interest and the common good. This shifts the nature of an inter-action from a transaction to a relationship and depends on trust existing between the individual and the employer. Robinson describes this as ‘commitment’ which occurs when the individual senses a safe atmosphere of respect for his intellectual and emotional well being. This is emotional innovation.

CONCLUSIONS

This paper suggests that long term collaborative thinking, including contributions from wide ranging stakeholders, will enhance the overall scenario and lead to purposeful activity in for the common good.

Conclusions with regard to Relationships

The EXPRO industry does not appear to be adversarial. This could reflect the strength of the institutions and the fact that such behaviour tends to prohibit the possibility of a collaborative network. Collaboration is used by elements of the chain but the business model is rarely completed by connecting to the operator.

The value of relationships is well understood and the asset owners agree that the way to the future is through improved working relationships, ‘if the relationships aren’t there you will find life very difficult’ (operator); ‘if the relationship works well it reduces risk on both sides’ (operator) and, ‘it is a particularly symbiotic relationship where they need us and we need them’ (operator). However, they are not practiced.

Supply chain is not linear; it is networked and multi-dimensional and the way to manage and lever a partner is to engage on a technical and commercial footing endeavouring to establish an emotional understanding based on embedded practices. Then move the organisations so they are extensions to one another. This requires a mutual commitment to openness and trust that permits the free flow of information in real time. The way to take advantage of a partner’s skills and talents is to harness him with the incentive of future work based on mutually assured business. The prospect of securing this without the need to tender exists in Frame Agreements and the entry price is to forsake opportunism.

With insufficient partnerships it is easy to imagine that insufficient information is being shared.

Conclusions with regard to Timeliness

Trust lubricates the management of relationships and makes significant contributions to operations through better reliance than the contract or general morality. Once established the contract is used as a reference document: ‘we do not work to the letter of the contract; we sit down and talk things through’ (operator). The operations are based on trust and relationships and are said to use time more progressively. This improves dialogue and leads to problem avoidance. Better relationships mean that project management requires fewer systems monitoring and controls; risk is reduced because the partners are stakeholders and power is dissolved from the equation because it is not relevant.

Relationships reduce bureaucracy and lead to comfort by improving the quality of the deliverable and by reducing the uncertainty.

Conclusions with Regard to Knowledge

Major industry developments necessitate drawing on the skills and talents of the supply side. Suppliers are potential partners to be managed and levered into an extension of the operator with the objective being to develop the sector.

This industry has high levels of structural interaction and a common purpose. The framework exists because it works and is probably an ideal environment. There are many mediums through which issues can be raised but a driller reflects on the tendency to ‘churn’ problems at senior levels. Might this complacency be eliminated in favour of a relationship approach to business?

The uptake of concepts that originate in an academic setting is good. The FPAL facilitation surrounding reputation was implemented in 2000 when the need was expressed by Buskens only two years before. This suggests the UKCS is a ‘learning industry’ because this example belies much innovation and knowledge management within the individual firms and supply chains but the rewards still escape them because the leaders do not operate this end-to-end mentality as a norm.

If the operators would adopt the commercial and emotional innovations presented in project supply chain methodology the harmony of the sector might be significantly enhanced because to benefit from these concepts the industry has to practice them.


Malcolm Storey has Global experience in the ETO sector. This includes the UK, Europe, Africa, USA, the Middle and Far East with corporate multinationals and as a Management Consultant. He specialises in International Marketing Strategy and Business Development. Malcolm holds a PhD in Offshore Supply Chain Relationships from the University of Newcastle upon Tyne, an MBA in Marketing and Strategy from Durham University Business School and a BSc. in Metallurgy from the University of Manchester. He is a Fellow of the Institute of Business Consulting, holds a Diploma from the Chartered Institute of Marketing, and a Member of the Society for Underwater Technology. Worldwide Business Portfolios is an Associate Member of Subsea UK. Malcolm is a Director of Worldwide Business Portfolios Ltd. and can be contacted on: malcolmstorey@btinternet.com.



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