9 minute read
Avoiding ‘hollow out’ in the oil and gas supply chain
AVOIDING
IN THE OIL AND GAS SUPPLY CHAIN
‘HOLLOW OUT’‘HOLLOW OUT’ ‘HOLLOW OUT’
Barry Rust and Peter Bradshaw, Tata Steel, UK, consider the challenges facing the offshore supply chain industry, and the measures it can take, as the global transition to renewable sources of energy continues apace.
The offshore oil and gas industry is currently experiencing challenges and changes on two fronts.
Firstly, the COVID-19 pandemic, which has forced reductions in global travel and restricted industrial output due to workplace closures, has, until recently, had a significant negative impact on oil prices.
However, the short-term effects of the pandemic have merely exacerbated a long-term challenge for the offshore sector, which is the second issue facing the industry – an anticipated decline in demand as consumers look towards more renewable sources of energy and multi-modal transport options.
Driving greater decarbonisation
Around the world, more and more countries and companies, led by societal demands for change, are setting goals to reduce carbon emissions. In 2019, the UN announced that over 60 countries, including the UK, had committed to carbon neutrality – or net zero – by 2050. However, a number of others are working towards an earlier deadline (in Scotland the target date is 2045; Microsoft plans to be carbon negative by 2030; and Apple has promised to become fully carbon neutral by the same time).
This trend can be seen in the oil and gas industry too, where several major operators – including Equinor, BP, Shell, Total and Eni – have announced their commitment to net zero emissions strategies. Some have also signalled diversification from their core business into renewable energy sources.
The industry’s greater focus on sustainability is also being felt across the offshore supply chain, where companies are developing wide ranging, detailed and robust decarbonisation programmes that meet client and wider stakeholder ambitions.
One example of the sector’s understanding and accepting of the need to adopt more ambitious decarbonisation measures has been the recognition by steel manufacturers of the important role they can play in more sustainable pipeline manufacture.
For instance, Tata Steel has announced a target to reduce CO2 emissions by 30% before 2030 and aims to be a carbon neutral steelmaker by 2050. Already one of the world’s most CO2-efficient steel companies, in the last 30 years the company has reduced its CO2 emissions per tonne by approximately 15%. However, its ambition is to continuously improve its production processes and efficiencies.
The company recently started the first phase of its Everest project to capture CO2 from blast furnaces and transport it to former gas fields in the North Sea for storage. The second phase will see the company use blast furnace emissions for conversion into sustainable raw materials for the chemical industry and synthetic fuels.
Tata Steel recently announced that HIsarna, its reactor for lower carbon steel making, had exceeded expectations in sustainable steel production, with the possibility of achieving a CO2 reduction of more than 50%. HIsarna has been in development since 2011, and the aim is for it to be operating at full scale with the potential to replace an existing blast furnace. The reactor can cut up to 80% of CO2 emissions when combined with carbon capture and, in combination with an electric arc furnace, can allow for the recovery of zinc – often found in scrap – for reuse.
It is fair to say that the challenge of increased decarbonisation is one that the offshore industry is aware of and generally accepts. Across the offshore supply chain, there are examples of companies that started in hydrocarbons now reviewing their markets and current propositions – and some are moving into new verticals where a cross transfer of skills allow.
The ‘hidden’ challenge for oil and gas
However, another less visible challenge to the energy sector and its customers and consumers at large exists. While the global transition to renewables may dominate many of the headlines, oil and gas still accounts for more than 50% of global energy demand today and will continue to play a major role in the world’s energy mix for decades to come. In its 2020 Energy Outlook, BP suggests between US$9 trillion and over US$30 trillion will be required to be spent on upstream activity over the next 30 years.1 Data from Wood Mackenzie also suggests that, whatever the pace of the energy transition, the world will still rely on oil and gas for much of its energy needs well beyond 2040.2 Indeed, there are concerns that existing production will decline faster than global demand unless more is spent on developing already identified discoveries or, where these are uneconomic, exploring for new ones. Such intense market volatility and lack of clarity adds to the confusion for offshore companies trying to make sound investment decisions while planning and developing robust and fit-for-purpose business strategies. A recent report from PwC highlights the challenge: do oil service companies follow their customers into low carbon markets, or do they double down on hydrocarbons to become ever more cost-efficient?3 Of course, a third option for some companies would be to do both. It is widely accepted that the world will require a range of energy solutions – including fossil fuels, renewables and nuclear – to meet its future needs. However, in the current challenging financial environment, where thousands of offshore oil and gas jobs are being lost worldwide and companies consider a move into the renewables sector, there is a fear that the offshore oil and gas supply chain could be hollowed out to such an extent that gaps in service provision and product delivery could occur in the future. Those offshore supply companies that are trying to maintain operations today with uncertain order books and no clear sight of light at the end of the tunnel may face extremely difficult decisions in the short term. For the operator community, this could be interpreted as a stark ‘use it or lose it’ warning from their suppliers. It is therefore arguably more important than ever that, where possible, operators and the offshore supply chain, companies and clients work together to share whatever information they can for the greater Figure 2. HIsarna cast house. Hot metal flows from the forehearth into a torpedo ladle. economic good of all.
One way to achieve this would be through offshore operators adopting a policy of greater early vendor engagement. An important step forward in this regard at an industry level would be for operators, industry organisations and governments to further increase their efforts to share the broad visions they see for the offshore sector. While accepting that commercial confidentiality is critical and detailed plans could not be provided (nor would they be expected), there may be general forecasts or trends in offshore investment cycles that operators could divulge with the supply chain to give its members greater clarity, to support their future direction and avoid gaps in support provision. Events such as share fairs organised by operators – which have been so popular over the years – or business updates from industry bodies and governments can provide excellent opportunities for operators and the supply chain to share what they expect to see in wide-ranging terms from a business and industry perspective.
At a more direct level, early engagement and integration with a chosen supplier or the original equipment manufacturer (OEM) to determine specific project requirements can often generate financial efficiencies in the total cost of project ownership and risk profile, while simultaneously reducing operators’ carbon costs.
Figure 3. Supporting the energy transition.
Figure 4. A robust supply chain is essential in order to avoid ‘hollow out’.
More dialogue and data sharing
Greater digital integration, data transparency and dialogue between clients and vendors are ways of supporting such ambitions. The ability to collect vast amounts of data, analyse it and provide it in a structured manner at the point of decision-making can revolutionise offshore supply chain manufacturing.
As an example, Tata Steel uses dynamic data analytics to support steel manufacturing through to processing to produce its steel products. The data is connected to create an aggregated ‘digital passport’ for every product, and provides a thorough process database that grows over time and is further modelled by analysts. This process involves modelling and analytical techniques, including the development of visual representations for those that run the facilities – in the form of an online decision support tool – which is incorporated into process control and planning systems.
The ability to ‘fingerprint’ the process, with a complete understanding of how inputs at any point in production impact upon the product output, provides powerful support for optimised manufacturing.
Increased dialogue and data interchange across the offshore supply chain can lead to greater efficiencies (whether that is specification negotiation or quality documentation for approval) and support decarbonisation. An example of efficiency enhancement in the pipe manufacturing sector would be integrated pipeline tracking and tracing systems, and there are currently discussions within the sector on the adoption of a supply chain-wide, standardised system. Furthermore, horizontal collaboration across supply chains, such as the industrial clusters established in parts of the UK, can be a solution to help individual companies meet their CO2 reduction targets. It will be by accepting such a range of initiatives that the challenge of optimising activity in the North Sea will continue to remain alive.
Avoiding a supply chain ‘hollow out’
The global energy industry is in the midst of a transition towards greater decarbonisation and an increased adoption of renewable sources. The transition has broad agreement and is critical. Hydrocarbons will continue to play a key role in the energy mix for decades to come as part of that transition. As the oil and gas supply chain considers its future and where best to allocate its resources, it is essential that companies in this sector have as much visibility of future industry projections as possible. This will ensure that oil and gas is able to play its full role in the energy transition, and continues to have a robust supply chain ready to support it.
References
1. BP, ‘Energy Outlook: 2020 edition’, https://www.bp.com/content/dam/bp/ business-sites/en/global/corporate/pdfs/energy-economics/energy-outlook/ bp-energy-outlook-2020.pdf 2. LATHAM, A., and WILSON, A., ‘Why exploration will be critical in meeting future demand’, https://www.woodmac.com/news/feature/explorations-future-in-alow-cost-low-carbon-world/ 3. PwC, ‘Time to choose: oil services at a strategic crossroads’, https://www. strategyand.pwc.com/gx/en/insights/2021/oil-services-at-strategic-crossroads. pdf
