As supply chain struggles persist, LR Energy chief sees reasons for encouragement
During my recent interview with David Clark, global energy director at Lloyd’s Register (LR), one adjective cropped up repeatedly – “encouraging”.
Considering the amount of pressure the oil and gas sector is being placed under to change its spots, encouragement is welcome. Badly needed, in fact.
The sector is going to have to make big changes, and fast, if it is to retain its licence to operate.
LR is emerging fresh from its own “reshaping exercise”, having analysed its own energy services portfolio’s readiness for the energy transition.
The review convinced LR to withdraw from some of the “smaller, niche” areas which had become too “commoditised”.
Mr Clark, formerly of Aker Solutions, said LR had emerged stronger and focused on new market capabilities.
LR is a technical and business services organisation and a maritime classification society employing 8,000 people worldwide. Its energy business employs 850 people globally. The firm has 535 people in Aberdeen.
One plank of its new strategy involves moving to “higher end” asset integrity and maintenance optimisation.
Continuing to roll out digitally enabled solutions remains high on the agenda.
Another critical part of the vision means adapting LR’s portfolio to have a stronger weighting on renewables and transition services.
In the next three to five years, 30% of LR’s revenue should come from those areas, reducing its dependence on hydrocarbons.
Mr Clark is encouraged by the speed with which European operators are looking to decarbonise and to develop and deploy new energy systems.
He believes the transition presents a “huge opportunity” for the UK to use the North Sea as a test bed for the integration of renewable energy technology.
The offshore energy sector is already witnessing moves towards the use of floating wind to power existing and new oil and gas assets.
Market conditions are improving in a number of areas.
Drilling is picking up globally, which is good news for LR’s well management and engineering business, its drilling operations division, and survey and geoscience offerings.
Drill bits have been spinning more regularly in the UK North Sea, where the exploration well count is likely to double this year, albeit from historically low levels.
However, success rates have been dire, with few discoveries made.
Mr Clark said: “We’re coming out of a very low exploration well count. It’s disappointing not to see more successes in some of the wells, given the level of time taken to develop drilling programmes and analyse seismic data. But exploration is not a guaranteed science by any means.”
A healthy number of mergers and acquisitions have taken place in recent years, and 2019 was no exception.
A “flurry of activity” took place in the first half of the year as Chrysaor agreed to buy ConocoPhillips’ North Sea business, Delek’s Ithaca Energy subsidiary took Chevron UK off the shelf, while Faroe Petroleum fell to DNO in a hostile takeover.
In the second, a venture between Oman’s Petrogas and Neo Energy, a portfolio company of Norwegian private-equity firm HitecVision, agreed to buy a package of Maersk Oil legacy assets from Total.
Neo then merged with Hitec’s other UK North Sea exploration and production firm, Verus Petroleum.
Mr Clark said: “This activity highlights continued interest in the basin. It’s encouraging seeing operators from other regions look at the North Sea as their next move.
“The continued participation of international oil companies is encouraging and the changing shape of the North Sea is bringing in new players and a different dynamic and approach.”
LR’s upstream consulting business got involved on both the buyer and seller sides, making asset valuations and carrying out modelling for new clients.
Opportunities will also come from the decommissioning sector thanks to LR’s ability to do risk assessment and help companies understand the “true status of assets”.
Mr Clark said: “That’s going to be key to allowing the UK oil and gas industry to stretch the life-cycle of hubs and pipelines and figuring out how they can be repurposed and integrated with other infrastructure.
“In the North Sea we have an opportunity to evolve and develop smart solutions for subsea wells and infrastructure and platforms that we can export. The challenge for industry is how to accelerate testing and deployment.”
Mention North Sea decommissioning and most people’s minds will jump to the debate about the concrete gravity-base structures (GBSs) on Shell’s Brent field, though there are others in the basin.
It’s widely known that the UK Government intends to grant Shell permission to leave the legs in place.
Concerns about the fate of the legs’ contents have been raised by Germany, the Netherlands and the European Commission – and the Greenpeace protestors who climbed the legs in October – but Westminster will have the final say.
Mr Clark said: “It does highlight the shift in thinking. When you look at oil and gas or renewables, it’s about thinking through the entire life-cycle.
“There was not much thinking about decommissioning at the time when this was put in place.”
On whether to remove infrastructure or leave it in place, Mr Clark said: “We’re still thinking about it and analysing to get to a true understanding of what’s the best answer from a pollution and marine impact perspective.
“It’s a nuanced argument and it’s a challenge. We need to get a balanced conversation across all stakeholders to get a clear technical understanding of the risks and challenges.”
It’s still a “tough” market for the oilfield service sector, which is under “significant pressure on an on-going basis”, he said.
The financial results have been “very scary” for some tier one contractors and in the North Sea in particular the “big guys are really struggling”.
Mr Clark said: “Every company is different, but the fat was well and truly squeezed out of the supply chain quite some time ago.
“The reality is that operators understand they cannot keep squeezing hard and get further cost savings.
“To be sustainable we need to do some smart thinking and make smart commercial arrangements to get something of a win-win.”
He added: “There is idle capacity in some areas of the supply chain and in others there are going to be challenges as activity picks up.
“We’re going to see challenges in people resources and expertise, given the number of people who have left and won’t come back.”