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Blog Hint long-term vision

Investing for Savings

New opportunities in a changing oil and gas market

I recently attended the Offshore Technology Conference (OTC) in Houston, the largest oil and gas conference in the world, where just about every end user and supplier from the offshore energy market was running around. It was, therefore, the perfect place to listen in on the biggest con-cerns, which included important themes such as cost savings and efficiency. However, action here is too often about quick wins, while a clear, long-term strategy could yield much more.

At the moment, the low oil and gas prices are top of mind since the pricing has direct repercussions on projects in the industry. Many missions are on hold and new projects are starting more slowly. Oil and gas supplies are still available, but are often difficult to extract. The raw materials are locat-ed deep in the sea or the circumstances in which they can be found are extreme. Exploitation is thus expensive because it requires costly technology. Of course, there are still plenty of parties here who are benefiting. Right now, a weak dollar makes doing business with the US favourable for European companies. Trading with the Americans is currently about 30 percent cheaper than it was in the past.

While companies, on one hand, are struggling with the economy, on the other hand, there is still room elsewhere for development and growth. The popularity of Liquid Natural Gas (LNG) is a good example. LNG is increasingly popular, and as it happens, is a specialty of the Dutch. The increasing demand for LNG is also accompanied by a demand for LNG measuring systems and other related technology and, because it is a relatively new fuel, there are almost no standards in this booming business. Plenty of work around then for engineering companies.

LNG has major advantages. The transport is relatively easy, as it can be shipped, and, for countries that have no energy resources it is a godsend. Many emerging economies have to rely on energy imports in order to meet their demand. Transport through pipelines is, in many cases, either im-possible, or very expensive. An LNG carrier may offer a good alternative to get gas from A to B, but there is more to it. In order to transport the gas through cooling, it must first be liquefied and then heated again at arrival. LNG also calls for new installations, both on land and offshore. All in all, a more expensive operation than when you simply withdraw the natural gas from a gas bubble in the traditional way.

So, how can a profit be made from LNG? The key is to cut costs and operate more efficiently. For this, you need to invest in innovative systems and installations. Especially now, at a time when we are at the height of the economic crisis. The recession should be bringing new techniques to opti-mize operations. I plead for countercyclical investments in preparation for when the market picks up again, permanently. By using smarter solutions, operators will be able to do more with fewer people and thus, save money. This is also sensible in view of the disappearance of all the workplace knowledge lost to an aging population. Put this knowledge into intelligent engineering tools, so that the younger generations still have access to the necessary tools.

Preferably, investment has already begun in the first stages of a development for oil extraction in a new place even though the tendency here is to save on investment. However, this is only benefi-cial in the short term. A large amount of the expenses will come only when the factory is in use. Maintenance costs of a factory and its expected lifetime upkeep are often not included in its con-struction costs. A new development is charged in the CAPEX and sits on the balance sheet, while maintenance belongs on OPEX. If the two budgets are integrated, and innovative techniques are bought together in the beginning, this can result in cost savings for future decades. Upgrading a plant once it is built is much more radical and costly. Fortunately, this longer-term view is increas-ingly espoused by clients and can be seen in projects in Saudi Arabia and other countries in the Middle East already. It’s now a best practice, but will be commonplace in the future.

Wouter Last, president of Hint
 

Wouter Last