with Iain M Light, Oil & Gas Director, Lloyd’s Register
How would you define the wide array of services offered under the oil and gas operations of the Lloyd’s Register banner?
Lloyd’s Register provides independent assurance around asset performance. Asset performance can be measured in different dimensions: input, output, cost, environmental impact, sustainability – a whole set of different measures. The organization is very much about having an independent role, acting as an honest broker and company that is trusted by society, government, and operators. Lloyd’s Register occupies a special niche with a belief and philosophy that what we do matters, and we are respected for our views. It is important that there are organizations such as ours not just driven by shareholder value, and which fights the difficult battle when it comes to establishing the balance of health, safety, environment and business performance – sustainability matters.
What are some of the main market issues faced by an independent body like Lloyd’s Register?
There are competing objectives in terms of production, operations, and what really does needs to be taken care of. One of the challenges we have in the offshore business here in the North Sea is that many platforms and structures are well beyond their design life. The question arises of how operators and owners can reliably sweat their assets safely. There are old assets, perhaps having experienced under-investment in inspection and maintenance. In times of high oil prices, operations become so important at a time when you can afford to spend the money to improve the assets for the longer term. This is the dilemma when you have the money for the work but the pressure is on production. Now, with lower oil prices, they suddenly don’t have any money to spend. The question arises: will we ever have the right amount of money to spend on the things we should be doing? Lloyd’s Register is very much about verifying and providing independent assurance that the operators are doing their best to achieve the delicate balance between production, operations, inspection, maintenance and keeping the platforms safe. At a time when assets are declining and becoming more expensive to maintain, but also with the need to tie back new field developments to old infrastructure, how do you ensure that the old infrastructure will be fit for service and integrate safely and effectively with the new?
You mention the balance between competing interests. How does Lloyd’s Register go about influencing the main actors in the marketplace who are trying to achieve that balance, while appreciating their particular individual internal and external pressures?
Lloyd’s Register operates in an environment with an increasing level of transparency, very vocal and powerful employee groups, and a strong Health and Safety Executive organization. In terms of particular initiatives, there is one called the KP3, which is a special program looking specifically at asset integrity. Two years ago, it was acknowledged the industry was falling behind requirements and standards. Since then, Lloyd’s Register has been working very hard with many operators to see how they can improve their performance in terms of meeting those qualification and operating standards. I sit on the industry committee of asset integrity on behalf of the verification providers, representing these providers, and can table our input and concerns into that group, in addition to OGUK, because we are collectively trying to understand the challenges, and not be unrealistic or unreasonable. There is great societal pressure coming on with the green movement, environmental awareness, and sustainability. In fact just last week Venture Production had a very small leak and an oil sheen in the water, and received incredibly high exposure. The offshore industry comes under great scrutiny, but compared to what happens in agriculture, construction, fishing, or mining, oil and gas is actually performing very well. But the media and attention tend to come onto the industry because it is such high profile.
But still, that doesn’t stop Lloyd’s Register from putting as much pressure on the companies to maintain that balance.
No, and Lloyd’s Register is concerned at this moment in time, because there are some very old assets and one wonders, despite increasing investment, whether it will be sufficient to catch up to prolonged under-investment, in terms of what should’ve been done to maintain and improve their quality and physical condition. For certain, it’s not a cheap activity.
We’ve spoken to some of your peers regarding the industry mentality toward inspection, maintenance, and so forth, who feel that it often takes a company to get to the breaking point before they will act to do something about it. How do you convince companies to adopt the necessary mentality in a timely manner?
The problem comes down to individuals at the end of the day, and how long people are responsible for a given operation. Typically, an individual is in a particular post for two or three years, and might well be measured on costs versus production. Taking a short term view to optimize performance, that individual might be best off not spending all that much money on maintenance and inspection. But all that’s being done is storing up a huge problem for someone else. There is also the issue of outsourcing, which means someone other than the owner operates the plant on a day-to-day basis, who may well be trying to do it from a different position of achieving the lowest possible cost. That’s definitely a dilemma.
Lloyd’s Register constantly reminds clients of their responsibilities, and one of the things we are concerned about now is how seriously we are taken. Most of our clients listen and react positively, and we have seen more expenditure, increased work scope, and so on. There is an interesting situation at the moment. If the UK has a security of energy supply challenge, and we aren’t able to supply enough energy ourselves, and we have to import while sweating old infrastructure, are we getting to a point where any of those units are unlikely to produce safely? And in that environment, how tough will the HSE be in terms of shutting a platform down?
I’m concerned, because when the pressure comes on to produce, it might even get to the point where you have to say, ‘Sorry, there’s not enough power for Manchester today.’ That sounds extreme, but the UK‘s energy balance is on a knife edge, and it doesn’t take much production to be shut down. Oil prices have come down, but gas prices have not, which is what many people forget. When you’re on the spot market, and seeing what Putin and others have done through Russia with the supply to Europe, I’m concerned whether a regulator be as strong and powerful as they should be in this climate. It’s a question which I will pose regularly.
What would you do as a regulator?
It’s an interesting balance between all the stakeholders. There’s society, who wants energy, operators, who want to make money, and the HSE operating on behalf of the government to ensure they’re doing it safely. You have those three in a triangle trying to get a balance. The HSE has gotten weaker over the years for one reason or another in enforcement. The industry has moved to a risk-based or goal-setting regime, and I wonder sometimes if risk is being used as an excuse not to do things: ‘Oh, but I’ve done a detailed risk analysis, and I have a safety case, so I’m managing my risk.’ Because we have seen an increase in the to-do list, the punch list, of corrective actions, upgrades of equipment and material, that list has been getting longer and longer, so has the industry been using risk as an excuse not to do the work which perhaps it could or should.
Operating cost-wise, the North Sea has become a very expensive place to do business, and that’s one of the downsides. The supply base has gotten expensive, and there is still a shortage of labour maintaining rates in the market, because we haven’t been training engineers over the last 20 years. Operations are certainly economic at $50 per barrel (and in some cases at even less), and prices are two and half times the levels of five years ago, and the industry was making money then. Although the supply base cost has increased and eroded margins, it’s important to keep in mind the payback period for many old platforms has been passed many years ago.
Given these competing interests, what are your biggest priorities right now?
Lloyd’s Register’s biggest priority right now is to provide independent assurance. In many of the projects we have been working for a long time, and have an enormous amount of knowledge. Typically operators have a high turnover and staff move on, but Lloyd’s Register is the custodian of a tremendous amount of knowledge around the assets, so we actually have a very good working knowledge of what needs to be done, and that’s what we want to work more on. Lloyd’s Register’s focus is going to be on getting a better balance with asset assurance issues, and understand not just the safety-critical issues, but also the business-critical issues. Lloyd’s Register has to learn as well, primarily coming from a safety background. The organization has been trying to understand more about the business elements, because we have attention on safety-critical elements, but we need to understand what all these companies’ business-critical elements are. If we’re smarter, we can help them apply their resources better to achieve a better return on each dollar spent. An example of that is investment in reliability-based mechanical integrity programs. Lloyd’s Register has worked in 80% of the largest US refineries, where our approach has enabled reductions in inspection and maintenance costs, improved environmental performance and safety records, and a better bottom line. We are putting together a reliability-based mechanical integrity approach for drilling units to help them increase their uptime, and have expanded this package to include offshore platforms and pipelines.
Overall, we will look to bring together risk-based services to help clients improve asset performance. It’s independent asset assurance, but also moving to the next level to help them get more performance, safely.
Although it’s still early days, in the next five years, do you see Lloyd’s Register becoming solidified in the industry as being the go-to people for combining business and safety?
Yes, and Lloyd’s Register wants to get into the lead position as the recognized provider if independent assurance to the energy supply chain.
The problem lies in the following scenario. If you’re an engineering contractor providing a large engineering service to an operator, you want to sell as many hours as possible at the highest profit margin to the operator. Some of the approaches Lloyd’s Register uses could actually result in less need for the contractors’ services; you may not need to do all their routine inspections, so there’s a bit of a competing interest. Yes, the operator may be interested, but what’s in it for the engineering service provider? That’s when it gets a little bit difficult, because these are some of the people who have to implement the new methodology.
Longer term, how do you want Lloyd’s Register to be perceived in the international arena?
Lloyd’s Register is seen very much as a British company. Today, in Australia, we have the #1 position as a provider of offshore verification services to all but two of the offshore units deployed in the country. In Canada, it’s a similar situation, with all but one unit on the Eastern seabord. Lloyd’s Register has been primarily UK and Europe based, but the strategy I’m driving through now is based on acquisitions. My tenure began a year ago today, at which time we were 600 people. Today, we’re 1,000, having done several acquisitions, including ModuSpec, a company acquired in January 2008. After analyzing where Lloyd’s Register was positioned on the energy value chain, we had a very small presence in the drilling business, and wanted to find something that genuinely added more value to the industry. ModuSpec represents a very natural extension of the role we would like to play.
Other acquisitions have enabled Lloyd’s Register to bring within the portfolio much more than our traditional services, including a very interesting company in Houston called Celerity3, which works in the downstream chemical plant and processing industry. Bought five months ago, Celerity3 added another 60 people.
The bottom line is that Lloyd’s Register can not remain Europe-centric. There is a big expansion going on in the Americas, and we have grown the Houston operation in five years from 15 to just under 300. Alongside interesting acquisition opportunities in Asia, Lloyd’s Register wants to be as big in the Americas and Asia as we are in Europe. Lloyd’s Register has a very traditional and successful business in marine, without really moving sufficiently fast to grow and develop in the oil and gas business. But now, we have done quite a bit in a year, and are already committed to moving forward.
I spend a lot of my time not only performing surveillance for the next best acquisitions, but on the integration of those acquisitions, because at the end of the day, even if we’re working in engineering, Lloyd’s Register is a people business, and sells expertise just like a professional service firm. The gold standard to which we operate is not lip service, because we’ve been in this asset assurance business since 1760, and in 2010 we’ll have a 250th birthday, with no plans on stopping yet. Lloyd’s Register is looking very much at how we will position ourselves with the new energy agenda going forward.
What is your final message to OGFJ readers?
Lloyd’s Register is and has been on the asset assurance agenda approaching 250 years, moving from wooden ships to high tech units. It represents a successful marriage of understanding both safety and business aspects of the industry, and finding the optimal balance between them. The sustainability agenda isn’t just about being green, but about keeping the business going, from an employment, property performance, environmental, and social perspective. Lloyd’s Register wants to be very much positioned in that space of helping organizations strike the balance between their business, safety, and environmental agenda. We are about providing independent assurance helping our clients year by year improve the safety and sustainability of their contributions to the increasingly important energy supply chain.