Writing for InnovOil, Tim Skelton investigates an interesting new model for BOP services, and how it could be applied to other areas of the industry
Last month, US rig operator Diamond Offshore Drilling announced an intriguing new working relationship with GE Oil & Gas covering blowout preventer (BOP) systems at its offshore drilling operations in the Gulf of Mexico. If the partnership proves successful it could provide a blueprint for other businesses in the industry looking to make efficiency improvements and deliver cost savings in the current cut-throat climate of depressed oil prices.
In what the two companies describe as a “first-of-its-kind” contractual service agreement (CSA) for the offshore industry, Houston-based Diamond Offshore – which is majority-owned by the New York based conglomerate Loews – will transfer full accountability for BOP performance at its rigs to GE Oil & Gas.
In effect, this will mean GE buying back the eight BOP stacks it supplied to four Diamond Offshore drillships currently operating in the Gulf, for a combined price tag claimed to be around US$210 million. The BOP systems will then be leased back to Diamond Offshore. Importantly, however, under this revised set up – dubbed the “Pressure Control by the Hour” model – Diamond will only have to pay GE for using the equipment during the hours when it is actually online and available to them. Downtime will no longer be chargeable.
Compared with the cost of buying new, at US$40-50 million per stack, the model offers potentially large savings to operators. It is also a far cry from just a few years ago, when drillers were happy to pay for and install two BOP systems on a single rig, if only to avoid the possibility of downtime.
GE said that this 10-year collaborative contractual service arrangement involving its engageDrilling Services™ showcased “a new way of thinking to drive continuous improvement in deepwater drilling.” Yet the idea itself is deceptively simple. The service agreement will mean GE personnel working aboard the drillships, and being responsible for management of parts, overhaul and repair, continuous certification, data monitoring, and management of change for the pressure control equipment.
This performance-based contract is in part made possible as a result of the massive scale of GE’s data collection abilities, including predictive analytics and continuous certification capabilities.
These processes are already going on in installations across the world, as smaller sensors and larger processing power have allowed operators to capture substantial amounts of information (increasingly in real time). Under this partnership, Diamond will capture data using GE’s monitoring and analytics platforms and over time, as more data is collected, expects to be able to implement more condition-based monitoring and maintenance.
By simplifying Diamond Offshore’s operations and optimising between-well maintenance, this should in turn result in great BOP system availability, by reducing both the frequency and duration of downtime – so much so that GE appears confident it can see a ROI based on a leasing model for its BOPs, and one which should provide a regular stream of income rather than the large up-front orders the industry has come to expect.
According to company statements, the original idea came from Diamond Offshore, and it was the drilling contractor that first approached GE with its proposal. “Subsea equipment repair and maintenance is the single largest cause of non-productive time across our industry, resulting in great expense to both drillers and operators,” Diamond’s president and CEO Marc Edwards added. “The purpose of our new service model is to incentivise all parties to prioritise equipment reliability and availability for the ultimate benefit of our customers.”
He elaborated on the issue in a GE blog, where he said that: “There is no other industry that would accept the type of performance reliability that we see in subsea stacks, which costs a lot of money for our clients. There’s significant unproductive time of the drill rig over the well.” He backed this up with some figures, suggesting that a typical deep-sea drilling rig is unproductive for around 10-12% of its time – most of which is caused by problems with BOPs – and ultimately adding up to around US$35 million lost time per year on just one deepwater well.
Incentivising reliability, he noted in a video explaining the agreement, means “tying compensation to system availability.”
Given ongoing tough times for the industry, it seems as if both sides are set to benefit from the agreement. For Diamond Offshore it is a way to cut costs – dramatically if it no longer has to pay for downtime – and improve operational efficiency. For GE it represents a long-term investment in gaining market share and knowledge in the offshore sector. The data gathered from Diamond operations will also be valuable, enabling it to look at future technical improvements and predict patterns in use and maintenance.
“My clients are applauding this deal,” Edwards has said. “They believe it will be material in driving nonproductive time out of deepwater drilling.”
It should be noted that GE appears to be bearing the brunt of the risk under such a partnership, at least compared to a traditional service model. Yet being first to market with such an agreement has its advantages, especially in the current environment, and GE will be banking on attracting more cost-conscious customers to the service.
If it proves a success it may spur the operators of other drilling rigs to take another look at the way they think about their own systems – particularly in the case of subsea equipment. From a historical perspective, offshore oil service and completion equipment have traditionally been outsourced to specialised service companies, but the drilling contractors have generally owned and maintained the drilling systems themselves.
There may be some reluctance on the part of other manufacturers, however, to sign up to agreements that require them to move towards a rent-and-maintain model, or in some cases to repurchase subsea equipment already sold to customers. Some of that difficulty is reflected in the above partnership: sources close to the Diamond Offshore deal with GE say it took a full eight months to negotiate.
Yet evidently it can be done, and there is strong business and technology sense behind this kind of arrangement. A successful roll-out to customers could help others in the industry see the long-term benefits and adopt similar concepts. It is also proof that collaboration – a word overused and under-delivered in oil and gas – can be made to work within a business context.
Indeed, there is no real reason why similar CSAs could not be applied more widely to other areas of the oil and gas industry. By transferring responsibility for equipment availability to those parties most able to identify and rectify potential breakdowns – i.e. the equipment manufacturers themselves – the production chain could be streamlined. That would allow for improved efficiency for all parties involved, and less time lost to costly, disjointed – and frequently unplanned – maintenance programmes. This is vital at a time when low oil prices have dramatically reduced margins and eroded profits, and is particularly the case at deepwater drilling installations where production costs are even higher.
On paper, the new way of thinking could also have another beneficial knock-on effect. If the manufacturers are forced to guarantee that their products work effectively beyond the point of sale in order for them to get paid, then the onus will be on them to maintain product uptime insofar as is possible. This in turn could spark a new wave of technology and equipment innovations, benefiting the sector as a whole – a situation in which everybody wins.