The oil and gas industry is paying increasing attention to costs, though concern about both capital and operating expenditure (capex and opex) predates the recent oil price slump.
The oil and gas pipelines sector shares this focus. It is vital to address a deep understanding of what really drives up cost levels and the aspects of the business that could make the most significant difference to profitability.
DNV GL conducted research to identify what contributes most to higher costs for pipeline projects as developments in deepwater, ultra-deepwater and more extreme environments become more common.
The company surveyed a cross-section of the industry with insights into the challenges of owning, designing, constructing and operating pipelines.
The aim was to help develop measures to reduce costs without compromising on integrity, and ultimately to create a better model to assist the sector to achieve more effective project planning.
DNV GL asked industry players what drives capex and opex. Feedback from 52 survey respondents across 37 businesses at the company’s Pipeline Day in October 2014 was presented and discussed in February 2015 at the annual Pipeline Integrity Management Forum. 
Key drivers of pipeline capex
- Survey respondents’ perceptions of what drives up capex were grouped under eight main headings:
- Complex fiscal and regulatory regimes
- Shortage of skills and capacities and higher salaries
- Increased procurement and installation cost
- Use of new materials and technology
- Creation of zero-risk environment due to recent major incidents
- More challenging projects
- Less optimised design and poor project management
- Ineffective business models and creation of joint ventures.
Complex fiscal and regulatory regimes
Complex and changing fiscal and regulatory regimes figured among the leading capex and opex drivers mentioned. Companies noted how greater complexity was lengthening the decision-making process. They questioned the usefulness of ever-increasing guidelines and procedures.
They cited African legislation on local content as a specific example of how legal change can impact on cost. For example, it can lead to ‘doubling up’, with a local team and a ‘shadow’ team in the US, UK or European Union also doing work.
The concerns of local teams close to the point of legislative pressure can create a challenge to working in unison with a distant team even though they share common goals to validate and ensure quality and safety.
Political instability in the Middle East and Africa was deemed to have introduced uncertainties in the market and to require further contingency for investors. In the UK sector of the North Sea, recently revised fiscal and regulatory arrangements are set to change the landscape for investments in a mature oil and gas province.
Complex and changing fiscal and regulatory regimes figured among both capex and opex drivers.
Shortage of skills and capacities and higher salaries
Concern was expressed about the widely-diagnosed shortage of engineering skills, and companies identified resource management as a particular challenge. Professional and experienced engineers are hugely in demand in the pipelines sector.
This has forced companies to offer increased salaries to attract and retain high calibre and experienced personnel, driving substantial cost escalation in the supply chain.
The survey was conducted as a string of leading oil and gas operators and contractors were announcing major redundancies. Respondents warned that sustained periods of layoffs and recruitment freezes would likely reduce the industry’s appeal to young people.
The worry was that there will be a shortage of skilled staff when an inevitable revival happens. This fear was heightened by awareness that a large number of skilled workers are now retiring, which will add to pressures on business-critical skills and knowledge transfer in the years ahead.
Increased procurement and installation cost
Participants in the survey observed that installation and support vessel daily rates remain high, and that there is limited vessel capacity. The impact of these high costs is passed on to the engineering, procurement, construction (EPC) contractor.
There is limited pipe mill capacity worldwide for the diameter and thickness of line pipe required in increasingly deeper water. There are fewer EPC contractors for deepwater installations, so there is less competition to rein in costs.
However, respondents pointed out that EPC contractors have had to take on higher financial risk in some markets where they have had limited in-house capacities, such as for subsea hardware. They added that requirements on welding and engineering critical assessment were additional cost drivers.
It was further noted that while pipeline technology has taken great strides, particularly to meet demand for application in deepwater and extreme environment, this has not led to a general decrease in procurement and installation costs.
Use of new materials and technology
The introduction of new technologies, materials and components has increased over the last ten years to extend the serviceable economic life of assets; address more demanding high pressure high temperature (HPHT) environments; and to reduce maintenance costs.
However, respondents said that the complex qualification and testing process that accompanies the development and deployment of technological advances was a downside to such innovation.
The survey echoed the widely-held industry view that it has consistently underestimated the long lead-times for technologies to become fully compliant and operational. It confirmed the widespread perspective that every deepwater development is treated largely as a one-off assignment.
Replies suggested that experience gained from sharing know-how and experience, and from best practice transfer through standardisation, is not always transferred from project to project.
Creation of zero-risk environment due to recent major incidents
Companies questioned the usefulness of ever-increasing guidelines and procedures. After major events such as Macondo in 2010, there has been a significant reduction in confidence as industry and investors require more assurances to facilitate the mitigation of risks. The respondents noted a changing perception of how to control and manage risks and greater scrutiny in the design and financial processes pushing up costs.
Replies to the survey further noted that society and interest groups also have higher expectations on health, safety and environmental risks associated with oil and gas projects.
This, they said, has led to greater scrutiny of design and financial processes, raising budgets as risks and costs are transferred around parties including designers, owners, contractors and third party verification bodies.
More challenging projects
Companies surveyed highlighted how costs are aligned to complexity for more challenging projects. A rising number of field developments are at great depths. Ultra-deep production was practically zero little more than ten years ago; but most new developments in recent years have been in deepwater and ultra-deepwater. Flowlines of up to 16 inches (in) in diameter have been installed at around 3,000 metres (m) depth, and export lines up to 30 in diameter at 2,200 m.
Many fundamentals of pipeline design, construction and installation are actually the same for deepwater and ultra-deepwater developments as for shallow waters.  However, the deeper the water, the higher the external pressure on the pipeline, and the greater the technical, logistical and economic challenges in design, line pipe manufacture, pipeline construction, monitoring, inspection, repair and maintenance.
For example, there will be longer tie-back and flow assurance requirements in some regions. Deepwater pipeline projects also require more expensive vessels, and there are more post-and pre-lay interruptions for complex projects.
Less optimised design and poor project management
Time was a common theme in survey responses, both the time allotted and taken for projects, as well as the timing of key phases.
One clear message was that poor project management, and lack of detailed pre FEED / FEED in the selection of solutions in the planning phases, over engineering and multiple layers in the supply chain would result in cost increases later and can be key inflators of pipeline budgets.
Ineffective business models and creation of joint ventures
It was generally held that business models need revisiting, and that pipeline owners should take a longer-term view of operations, particularly for strategic management of ageing assets.
Respondents cautioned against awarding contracts based purely on ‘best price’. They argued that contractors winning business on this basis do not always understand the realities of a situation, nor what a realistic price is, and may fail to look at the entire lifecycle cost.
Survey responses also flagged up how companies selling hours - such as some designers, facilities management contractors and verification bodies - may not have a goal to reduce hours or to be more efficient.
It was suggested that more joint ventures (JVs) should be considered in response to complexity and geographical span among larger pipeline projects. However, respondents conceded that costs can creep up due to JV stakeholders’ different approaches contributing to delays in taking final investment decisions.
Respondents felt that a more unified approach can offer major efficiency and financial savings. They maintained that this could avoid highly variable requirements by operators from field-to-field, and also associated quality assurance processes that are often customised on a project-specific basis.
Key drivers of pipeline opex
Perceptions of what drives up opex were grouped under seven main headings:
- Robustness or operational reliability
- Capacities and salaries
- Strategic management of ageing assets
- More monitoring, maintenance, engineering and inspection
- Cost of operational overtime
- Corruption and sabotage
- Legislative change.
On robustness or operational reliability, respondents felt that demand for safety has risen and that the industry is much safer as a result. Consequently, they believed that operational reliability has increased in importance, but highlighted how challenging it can be to find spare parts for older equipment.
Some businesses flagged up how poor quality equipment installed during capex phases contributes to higher opex. However, respondents also reported that applying new technologies to pipeline assets has stabilised or slightly reduced their opex, and that automation has replaced some manual operations.
On the issues of competency, capacities and salaries, it was again noted on the opex side that professionals and engineers with operational experience are hugely in demand, forcing companies to offer increased financial packages to attract and retain high-calibre and seasoned personnel. It was also felt that the industry needs to do more to meet demand for skills to counter the cost of operational overtime.
Companies identified strategic management of ageing assets as a key opex issue as the industry operates increasingly in more remote areas. It was widely held that such management of ageing pipeline assets is still not well established and detailed.
As the industry works towards enhancing quality targets, assets close to the end of their lifecycles need more monitoring, maintenance, engineering and inspection, reducing their financial returns. The survey found that repair technologies and associated costs for complex pipelines can be significant.
Sabotage was cited as one of the largest threats to pipelines in some locations, and was blamed for lost production. Environmental concerns due to sabotage can be considerable, respondents said. Corruption also caused a number of news headlines and scandals in some countries.
DNV GL’s survey findings reflect the difficult balancing act facing industry leaders today. On the one hand, long-running pressures to find and access new hydrocarbon reserves have not gone away, despite a recent surge in supply. On the other hand, financial risks are clearly intensifying as prices drop, given that these environments typically demand costly new technologies and innovative approaches to curtailing costs.
There will inevitably be more deliberation before the green light is given to a number of pipeline projects in a high-cost, low-price environment.
DNV GL’s survey, and continuing work with the industry, will play “a key part in redefining future business models to increase opportunities for the entire industry,” according to Asle Venås, global pipeline segment director, DNV GL - Oil & Gas.
He said that taking a longer-term view on cost reduction will allow the pipelines sector to create a sustainable future based on it becoming more competent, assured, redefined and efficient. DNV GL aims to assist the sector along this journey by connecting experts to increase competence globally; providing assurance by creating more transparent interfaces between parties; redefining future business models to increase opportunities; and reducing lifecycle cost by promoting efficiency.
The company is running workshops throughout 2015 to further understand how the industry can drive down the lifecycle cost across all pipeline projects.
 ‘Complexity is the key cost driver’, DNV GL PERSPECTIVES, May 2015
 ‘Survey explores pipeline project capex and opex’, DNV GL PERSPECTIVES, May 2015
 8th Annual Pipeline Integrity Management Forum, Fleming Europe, February 2015, London, UK
 ‘The end of easy oil: the pipelines challenge”, Olav Fyrileiv, World Pipelines, May 2015.