By Phillip Chamberlain, COO for Thome Offshore Management and Thome Oil and Gas
The downturn in the oil and gas market has driven offshore vessel owners to radically cut costs in order to weather the current storm affecting the industry. As these changes in the market were taking shape, Thome Group has responded to the challenges facing owners by conducting an extraordinary and intensive review to drive down operating costs.
The outcome has resulted in a bespoke cost cutting programme for each of Thome Offshore’s clients, the savings from which have provided immediate and ongoing bottom line savings for respective clients in addition to the cost savings measures afforded to owners through Thome’s procurement channels.
The offshore industry enjoyed a period of high oil prices before mid-2014 after which the oil price suddenly dropped before recovering to the current comparatively low price levels. With lower revenues and high production costs, oil companies have had to radically change how they manage costs and this has had a subsequent impact on all oil and gas subcontractors in the industry, including offshore vessel owners. Those in the market have had to rethink the way in which they operate and how to adapt to a new low cost environment.
Owners do not have control over the market conditions, but they do have control over costs. Thome’s cost reduction programme for offshore clients has identified and challenged every cost element of its operation, and has leveraged Thome’s capacity and relationships with suppliers in the market to minimise costs on behalf of vessel owners.
Reducing Crew Costs
Crew costs represent over 60% of the total operating expenses (opex) budget for vessel owners, by far the greatest operational expense.
During the period of high oil prices, the cost of crew wages increased dramatically as the demand for skilled and experienced offshore personnel was high but the labour market was in scarce supply. Now with the advent of low oil prices, and many offshore vessels going into layup to cut costs, the supply and demand balance has tipped the other way.
Owners have had to make tough decisions on crew wages. Cutting wages creates a risk of losing good people in the process, when retention is an important element of safe and efficient operations. Not cutting costs however will drive an owner into an uncompetitive situation when competing with the rest of the market.
Thome Offshore has supported owners in their quest for crew savings, and at the same time has had to balance the retention of skilled and loyal crew. Fortunately, most crew have accepted such market conditions with grace and are sharing the pain that everyone is feeling in the current downturn. Crew wages continue to be monitored and bench marked to provide a fair but competitive wage to seafarers.
Efficient Crew Change
Crew changes are a high tempo activity in the offshore industry with short duration change cycles between 4 to 10 weeks, compared to other sectors in the marine industry which are measured in months. The short cycle and complexity of selection, vetting, medicals, personnel approval, visas, safety passes and travel brings a lot of pressure to bear on the skills and supporting systems of the crew management team in a very demanding and dynamic environment.
Any slip ups can see crew waiting on a crew boat or helicopter transfer while those awaiting to be relieved are still onboard. This represents a double cost in wages and hotel expenses that is unbearable in current market conditions.
Effective management and control of crew movements using robust IT systems for crew management, and a pool of available seafarers, is essential for effective crew management.
It is critically important to have a high level of communication between owners, field operators, offshore personnel and relievers to make sure that any overlaps are avoided or where unavoidable situations occur (such as bad weather for crew transfers), the overlap is minimised.
Negotiations with Suppliers
Thome Offshore’s owners already gain the benefit of the many discounts and special rates that the Thome Group has secured for its clients. During the course of the cost cutting programme, Thome’s operational personnel together with the procurement group, met with suppliers who provide goods and services to the offshore fleet.
The suppliers are acutely aware of the market conditions facing offshore and most have been cooperative in providing lower rates. For the competitive procurement of goods and services, three quotes are recommended, where feasible, to ensure the most competitive price on behalf of owners.
Saving costs on Class fees can be low hanging fruit for some owners. Class societies offer up to 20% reduction in Class fees if owners elect to adopt a Block Fee arrangement over a five year period.
The Thome Group manages some 12,000 crew on a worldwide basis which provides good purchasing power for travel. Thome is able to minimise costs by working with relevant service providers to provide the best possible deals on travel. Accommodation costs were also an area of focus during the cost reduction activity.
Cost Reduction in Dry Dockings
Dry docking is a significant cost to the owner and can vary considerably depending on a number of factors. The best way to minimising the costs for this essential activity is to provide careful planning in advance, and to involve suitably qualified and experienced technical personnel early in the process. For example, in a recent case a new client for Thome requested support on a docking the client had planned. After a review of the planned scope and site visit to the yard and vessel by Thome, the cost was reduced by half and the time in dock reduced by two thirds after alternative repair methods were recommended and adopted.
Thorough planning is required to ensure the scope of work is complete prior to docking. If any important maintenance issues are missed, it may result in the vessel off hire and/or in detention with a higher cost of repair before the vessel is back in operation.
The competition between repair yards is fierce, therefore advanced planning allows for comparative quotes and competitive prices.
Fuel Savings and Efficiency
While the cost of fuel has reduced with the price of oil, the attention of the end user who pays for the fuel has not relaxed. Fuel efficiency is an important KPI for oil majors in the Offshore industry. Charterers will track the fuel consumptions of all the vessels under charter, and fuel efficiency can be a deciding factor if a vessel is to remain on charter.
Offshore vessels can operate in several modes including in-port, transit from port to an offshore location, on dynamic positioning waiting outside an offshore facility’s 500m safety zone, or in dynamic positioning mode to keep the vessel stationary against environmental conditions alongside a facility while operations occur.
For good fuel efficiency, care must be given to each operational requirement. During transit for example, if it is permitted by the end user, it is best to choose the economical speed for the vessel to save fuel. There are times where vessels need to wait outside the 500m safety zone of an installation until permission is granted to enter. This is a good time to get permission from the end user to shut down any additional generators if they are not required for redundancy.
Keeping machinery maintenance up to date is essential for good fuel efficiency and for ensuring a high level of machinery availability and redundancy.
During dockings it is important for owners to choose the right hull paint schemes to avoid hull fouling by biological growth depending if the vessel is going to be mostly stationary (such as a Dive Support or Subsea construction vessel or vessel intended for long term layup) or regularly in transit (such as a Platform Support Vessel or AHTS). Fitting/properly maintain Marine Growth Protection Systems is also effective in preventing the formation of marine growth which causes drag on the hull and increased fuel consumption.
Fuel theft is a big issue in some parts of the world. Systems can be fitted and procedures put in place for fuel monitoring purposes plus CCTV for additional security to discourage this behaviour.
Maintenance and Spares
Cost cutting concerning maintenance needs careful consideration. A mistake in this area can result in breakdowns or the attention from regulatory authorities, both of which can cause the vessel being off hire and loss of revenue/additional cost. Maintenance must be kept up to date to maximise vessel uptime and avoid costly repairs. Condition based maintenance methodologies, diagnostics and the purchase cost of associated hardware have improved over the years and provides an opportunity for improved reliability and efficiency.
Remote diagnostic tools have improved significantly in recent years and can be very useful for monitoring and accessing critical systems such as cranes, dynamic positioning and power management systems. This allows Original Equipment Manufacturers to access systems and provide diagnostics and/or repair from onshore when needed thus in some cases avoiding the time and cost of sending a technician to a vessel in a remote location, and minimising off hire time in the event of a breakdown.
The purchase of consumable spares needs to be carefully monitored to avoid over ordering. Unnecessary spares are costly and can sometimes degrade during storage on vessels at sea. Personnel need to plan ahead and order only what is necessary to minimise cost and wastage.
The carriage of critical operational spares should be carefully considered according to the operation, location and logistics lead time. While such spares are an added cost, without the right critical spare for repairs, a vessel can be off hire for a considerable time while waiting for a spares delivery from the manufacturer. A thorough risk assessment will balance the technical risk and cost necessary to strike the right balance of critical operational spares procurement.
Cost Monitoring and Cost Reduction Mentality
A healthy culture of cost monitoring and reduction is essential in today’s market. Cost control and monitoring expenditure against budget plus cost cutting needs to be an everyday part of operations on shore and at sea. Operations, purchasing and finance team members must work in unison to ensure that budgets are adhered to and opportunities for cost improvement are identified, and any waste trimmed. It is essential to conduct regular cross functional meetings between all stakeholders to ensure that budgets are monitored, and the lessons learned are shared across the fleet. This ensures a healthy balance of technical and commercial consideration in keeping costs in check.
In today’s market it is critical to control costs in order for offshore owners to stay competitive and survive a downturn market. The price of oil is not expected to rise significantly in the foreseeable future for offshore, therefore owners are having to adapt to new market conditions as a long term prospect. There are many areas for cost efficiency, and there is a constant requirement across all elements of cost control which involves continuous and careful analysis, monitoring and control of costs, plus good communications with all stakeholders to ensure the best prices and most efficient cost savings are implemented. It is a team effort for personnel both on and offshore to implement a cost cutting culture, plus the right tools and knowledge to ensure the very best cost profile plus safe and efficient operations are delivered to vessel owners and ultimately the end user.