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Published: November 9, 2006

 
 

Unprecedented and Unseen: The Next Great Energy Challenge

Personnel managers tick off reasons for the industry’s failure to attract, develop, and retain young talent: uncertain employment, the lack of formal career paths, and the greater likelihood that engineers would have to move to frontier regions — a lifestyle many reject because it creates hardship for their families. It doesn’t help that oil and gas extraction, despite its importance to the economy, is seen as a “sunset industry” in the United States, a view backed by Department of Labor projections that employment in the industry will decline by 6 percent through the year 2014.

• Risk Mitigation: As projects have become more complex and expensive (Jack 2 could ultimately cost more than $3 billion), even major corporations cannot afford to miscalculate the risks. Most oil and natural gas company executives say they believe they have a good sense of the risks involved, but they do not always know how to mitigate them, for instance, how best to deal with joint-venture partners and host governments. Suppliers and contractors express even greater concern, with a heightened sense of urgency: They believe oil and gas companies do not fully recognize, evaluate, and manage the risks, and consequently are not addressing them effectively.

Power Shift
Unless companies make quantum shifts in their management practices, they may not be able to manage a significant wave of capital investment and meet the future energy needs of the global economy. The survey as well as our own observations suggest that there are four vital agenda items for both owners and contractors who want to ensure the future well-being of the industry and thus of the world’s oil supply:

Adopt a global project-management framework to increase performance. Some of the companies that responded to the survey have adopted central management of key functions; they report significantly improved performance, particularly in megaprojects. They have done this in several arenas: human resources, where more formal career paths can help junior staff members assume new, challenging, and more rewarding roles; knowledge management, including on-the-job mentoring, structured training, and other ways to capture and spread in-depth technical knowledge; and supply chain management. The leading companies have learned to forecast their needs across several projects, looking for opportunities to aggregate and possibly standardize the demand for specific components, such as pumps, or raw material, such as steel, and share this information with the supply base. In turn, this helps contractors better manage their resources, anticipate needs, and plan their production and procurement activities. Costs can be reduced by as much as 15 percent by centralizing operations and purchasing in bulk.

Train and tap into local talent. To address the talent gap, some EPC companies have established engineering centers in developing nations such as India and Indonesia. This benefits a company’s bottom line, and also builds goodwill with the host government and a public eager for jobs. In a period of increasing sophistication and activism on the part of host governments and civic groups, and in some regions, civil unrest targeting the oil industry, it helps companies gain recognition as good corporate citizens.

Balance technology innovation with cost and schedule. By leveraging design similarities across projects, companies can reduce capital costs and cycle time while improving operations and engineering productivity. Leading oil and gas companies are following the lead of automotive companies that use the concept of “platform” and “subassembly” for new model introduction. Recently, the CEO of ExxonMobil promoted the concept of “design one, build many” as a means to allow his company to execute megaprojects more effectively. Supply-base companies have already aggressively moved to a modular approach to design and manufacture complex engineering equipment, providing quick turnaround time. A leading manufacturer currently starts assembly of gas compression engines even before their design is finalized. This flexible production system allows the supplier to respond to last-minute changes.

 
 
 
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Resources

  1. Global Upstream Performance Review, John S. Herold Inc. and Harrison Lovegrove & Company, 2006: Source of statistics on and forecasts of exploration and production investment and performance. Click here.
  2. Sachi Hatakenaka et al., “From ‘Black Gold’ to ‘Human Gold’: A Comparative Case Study of the Transition from a Resource-Based to a Knowledge Economy in Stavanger and Aberdeen,” MIT Local Innovation Systems working paper 06-002, July 15, 2006: Benchmark study of two North Sea oil and gas sites, focusing on innovation. PDF download. Click here.
  3. Matthew G. McKenna, Herve Wilczynski, and David VanderSchee, “Capital Project Execution in the Oil and Gas Industry,” Booz Allen Hamilton white paper, 2006: The article on which this “leading idea” was based goes into more detail for industry leaders. PDF download. Click here.
  4. “Oil Sands Costs May Rise 35%,” Energy Bulletin, November 2, 2004: Cost overruns in megaprojects in northern Alberta, Canada. Click here.
  5. Peter Parry, Otto Waterlander, Varya Davidson, “Resourcing the Challenges of Maturity: An Oil Industry View,” Booz Allen Hamilton white paper, 2006: Lays out the challenge of an aging workforce (and declining expertise base) in the oil and gas industries. PDF download. Click here.
  6. “Peak Oil Resolution in U.S. House of Representatives,” Energy Bulletin, November 20, 2005: Resolved that the U.S. create an energy project with the magnitude, creativity, and urgency of the “Man on the Moon” project. Click here.
  7. Andy Serwer, “The Gusher Paradox,” Fortune, September 21, 2006: Columnist argues that even megaprojects won’t mitigate the need for oil independence. Click here.
  8. John Wormald, “Engines of Change,” s+b, Summer 2006: Overview of recent books and resources that seek to make sense of future trends in energy and transportation. “A forced transition away from fossil fuel dependence is almost certain,” but no one knows for sure how quickly it will take place. Click here.
  9. Chevron Web site: Official announcement of the Jack 2 megaproject. Click here.
  10. Oil Career Web site: For professionals seeking careers and for those trying to understand the industry’s greatest points of activity. Click here.
  11. Rigzone Web site: Gazetteer of oil and gas projects worldwide, with pictures. Click here.