The cost of problems

Not too long ago, Jory - our company's President sat in a morning session hosted by PESA (Petroleum Equipment Suppliers Association) in Houston, Texas. In this session, they had the offshore well delivery manager from Shell Oil (Joe Leimkuler) talk about a new system that Shell is considering to help evaluate potential suppliers like you in awarding future bids for their offshore drilling and completion programs. A key component in his calculation was “Trouble Costs.” 

For many of you, trouble costs may be a known measurement. Whether you are a supplier to oil and gas companies or some other industry, if you supply to large enterprise companies like Shell Oil - this is relevant for you. In this post, we will recap the key points of this presentation and bring this full circle to demonstrate how we can address key metrics like Trouble Costs in your organization. To begin, Leimkuler’s department evaluates potential suppliers by three criteria:

1. HSE – safety first, only a proven track record of safety gets you in the door.
2. Reliability – ensure that your products and the tools by which you perform your services are reliable on both installation and utilization.
3. Price – while keeping costs low are important, the lowest initial cost may or may not be the lowest overall cost so Historical Trouble Costs are factored in with both drilling and completion costs to give an overall cost to Shell.

The primary area of focus for Leimkuler’s talk was Historical Trouble Costs. 

• According to industry data, in the period of 1999 to 2004 the total operating cost per day for offshore drilling ranged from $120,000 to $450,000 depending on the type of operation, fixed leg platform vs. TLP vs. deepwater drillship.
• In 2009 for some deepwater semi-submersible and drillship operations the total burn rate can be over $1.1M per day. Of these amounts a considerable portion is spent on trouble cost.
• From 1999 to 2004 approximately 27% of the total well time was attributable to trouble time . If we project that rate of trouble time to the cost structure of 2009 that’s almost an average of $100,000 per day for a deepwater platform operation and up to $300,000 per day for the most expensive Drillship operations in the Deepwater GOM.
• While the breakdown of these costs can vary depending on the operation, the data shown by Shell indicated poor service and tool failures (MWD, packers, reamers, mud systems etc. failing to perform as expected), comprised 56% of the trouble cost. If we assume the 27% of well cost as trouble cost applies, then 56% of this cost was attributable to us - the supplier, and can average as much as $160,000 per day.
• Knowing this, Shell has begun tracking the Trouble Spend Percentage (TSP) for current suppliers. The TSP is the ratio of supplier allocated trouble cost to the total invoice cost for that supplier. A TSP of 0.54 means the operator spends an additional 54% on trouble cost above the invoice cost when using that supplier’s goods and services. Shell’s goal is to understand their current total cost structure for drilling and completions relative to historical trouble cost trends. With supplier related trouble cost appropriately allocated to each commodity and supplier the TSP indicator can be an effective benchmark to evaluate future supplier bids.
• TSP (Trouble Spend Percentage) = Trouble Costs / (Invoice + Trouble Costs). According to Leimkuler, if the TSP is less than 10% then the company is viewed as a green light company, or one to continue doing business with. If the supplier’s goal is a trouble cost of less than 10 percent and your goods and services are delivered such that they are below the overall target you are seen as a supplier that is enabling the operator to reach their goal. If the TSP is 10 to 20 percent then it is a yellow light company and a serious evaluation and determination occurs on the continued use of this client. If the TSP is over 20 percent then it is a red light and the supplier runs the risk of being replaced as the economics of continuing to work with them are no longer cost justified.
• These figures are not holdfast benchmarks, since the risk of “trouble” varies by commodity and service. Complex down hole tools that push the envelope of operating environments and technology provide great capabilities to perform multiple objectives and cut costs. However they are also very complex and subject to mechanical breakdowns. TSP for these types of tools and services tends to be considerably higher than relatively simple drill pipe and other down hole tools where there are no complex mechanics or “moving parts.” The net effect of this method of measurement is two fold:

1. For the suppliers they continue to work with, it is felt that using this method of measurement will help drive inefficiency and cost out of the system for everyone.
2. When awarding work, the historical TSP trend will allow Shell to properly evaluate historical performance, thus improving the ability to choose the best suppliers for their drilling and completion programs.

“Transparency, awareness and management are the keys to successful understanding and reduction of trouble costs,” Leimkuler said. If you are supplying Shell or want to supply services to Shell, Leimkuler shared with us two more important points:

1. At Shell they prefer to reduce these TSP numbers through their current supplier network and not have to replace suppliers as this comes with other additional costs and risk. So if you are a current supplier to Shell, they want to help you get better.
2. Any new companies coming in to win Shell business would add tremendous credibility to their bid if they could show their historical trouble costs on projects for other similar clients and work. This would reduce Shell’s risk of switching suppliers if the need arose.

Every day at VistaVu we work with energy services companies just like yours and in our experience a new focus on trouble costs, similar to the focus that has been given to safety, will drive quantifiable benefits into both the client and the supplier. 

So in follow-up to our discussion, VistaVu has begun the process of designing data capture and reporting around trouble costs so you as the leader or manager of your organization will have the tools to see, understand and manage these costs in your organization. 

If you are interested in learning more around our efforts on this topic or have feedback on what you are doing to manage trouble costs, it would be great to hear from you!