Integrated Operations: How Effective is the Current Relationship between Operating Companies and Suppliers?

Abstract

Over the past few years there has been an unprecedented wave of capital spending in the exploration and production industry. Still, the expectations for improved capital efficiency from Integrated Operations and its promise of "faster and better decisions" have not materialized. Industry headlines are filled with notable examples of multi-year, multi-billion-dollar overruns. Indications show that leaders of oil and gas companies may be less satisfied with their overall performance than at any time in the industry's history. In this paper, the main focus is on inter-organizational relationships between operators and suppliers in the context of Integrated Operations. We have surveyed one large operator, three large suppliers, and some small suppliers operating on the Norwegian Continental Shelf (NCS). The survey included a broad range of technical professionals at different management and business levels and included questions related to the collaborative relationship between operators and suppliers. The paper presents and discusses some of the results from the survey. We will discuss the disconnection between operators and suppliers related to contractual/ incentive based contracts. Further, end results with use of incentive based contracts will be illustrated and possible improvements will be discussed. Improving collaboration between operators and suppliers offers perhaps the greatest challenge and, we believe, the greatest potential in achieving the much anticipated value creation from Integrated Operations. This paper contributes to this by identifying the key disconnects between operating companies and suppliers. Introduction In this paper, we investigate the oil and gas industry's interest in adopting incentive-based contracts with risk/reward sharing. If there is such an interest, it will largely be driven by an expectation of increased competitive advantage for all involved parties. In general, competitiveness stems from the possibility of building core competence faster than one's competitors. A key success factor is management's ability to consolidate corporate-wide resources into competencies that enable the business to efficiently evolve (Prahaland and Hamel 1990). Drilling contracts particularly need to be examined more broadly than just considering incentives (Osmundsen, Toft et al. 2006). They have to be evaluated for how they support the new "lean" collaboration that is an integral element of Integrated Operations (IO). In this paper, we argue that incentive-based contracts can be the driving force for this kind of operation. They should therefore be considered not only in the usual context of safeguarding the relationship, but also in supporting better collaboration between parties. We have surveyed one large operator, three large service providers, and some small service companies. In total, 27 respondents participated in the qualitative survey. The paper is organized as follows. First we give an introduction to the survey design, implementation, data collection, and analyses. Next we analyze the survey results, starting with the survey's attributes. Then we give an overview of the different contracts (fixed-price and day-rate contracts) and evaluate them against the survey results. At the end, we summarize and provide recommendations for future research.