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Why is the upstream hydrocarbon one of the least energy efficient industries in the world

January 18, 2016 Jon Allwood

It may come as a shock, but this is a true statement and rather ironic for an industry that handles a product that provides energy for the world. Even within its own hydrocarbon sector, not renowned for being the most energy efficient, Upstream and LNG assets have a 30% energy inefficiency versus the petrochemical Industry, and at least a 10% inefficiency versus refining. Over the forty year lifetime of an upstream asset, energy can typically represent 30-40 % of the lifetime cost, with capital representing 40-55%, manning more commonly 6-10%, and asset management more in the range of 10-15%, albeit specific projects can be different from these averages.

Why this largescale gap in efficiency by IOCs and NOCs alike? From KBC’s observation across the world there are three overriding reasons.

  • The Upstream sector and LNG industry typically do not price its consumption of energy at consumer pricing levels, effectively subsidizing itself. This leads to less emphasis on energy reduction and effectively the sector overuses its own product to power itself.
  • During the upfront largescale capital expenditure phase, energy efficiency is very often compromised to shave overall capital costs which sometimes get out of control. As a result, energy inefficiency, crucial for the long term economics, is often built into the design, which over the lifetime of an asset adds an enormous bill. Oil and Gas has not learnt from the disciplines of the airline industry where lifetime cost of energy efficiency requires a clear focus on modeling the 40 year operating costs accurately and designing energy efficiency into the upfront capital allocation.
  • Perhaps less noticeably, Geologists, Geophysicists, Petroleum Engineers and even Production Engineers find the issue boring. In Upstream, rocks and reservoirs win over fascination with compressors, refrigerators, pumps, boilers and heat exchangers.

What can you do about this for the sake of your next decade of costs and sustainable environmental targets? Simply put, take four bold actions:

  • Realize that as a leader yourself, the massive de-manning going on in the industry at present is only targeted at 6-10% of your operating cost. Accept that energy efficiency is one of your highest priority operating programs, so don’t pay lip service to it, nor have it as a lower priority. Energy savings, which in each typical asset can represent $30m per annum (sometimes much greater with little capital outlay) even if the design is flawed at the early stage.
  • Be ruthless in applying world leading energy technology upfront into your new project designs, and don’t compromise at the last minute to shave capital costs across the board. Energy Efficiency should be the last compromise to make, not one of the first.
  • Create a team of enthusiastic design and operations people in your Upstream organization who have the same fun, ambition, professionalism and motivation from winning the energy efficiency game as you do in the “Rock and Geophysics” teams. Reward them well and advertise their success widely and loudly. They will be one of the most important teams in your organization to achieve your cost down program for lower price oil and gas. Start this high level program now - it will take you 18 months to achieve tangible results. If necessary bring in Petrochemical professionals, mining specialists or airline professionals to radicalize your teams.
  • Price your energy consumption in Upstream and within LNG assets internally at downstream market prices, not at Upstream marginal prices. You will be amazed at the shock impact this will have on the incentives of Upstream executives and operators looking for cost savings.

The petrochemical sector proves energy (oil and gas product) can be conserved and energy costs reduced much further in the rest of the hydrocarbon industry.

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