“That exploration well isn’t going to be drilled next year, because nobody told me and I’m the person who orders the long-lead items”.
How many of you have overhead similar water-cooler comments or heard murmurs that a joint venture disagreement or a delay with a landowner contract is jeopardising the drilling of a committed exploration well?
Whether a well gets drilled on time (or at all) relies on a huge number of moving parts to come together at a particular time. An oil and gas company will have a significant number of employees, contractors, service providers and partners that sit in different teams, maybe in different locations and time zones that each need to complete some small but critical part of the process. Then there are the numerous approvals from regulators that may be equally scattered in different departments and locations each with its own agenda and set of priorities.
Permitintel wasn’t developed as a result of months or years of market research into the particular compliance challenges of oil and gas companies. The idea of a purpose-built oil and gas licence and compliance management tool started to germinate when I was working for a regulator and saw first-hand that oil and gas companies (both large and small) weren’t managing their exploration and licence commitments well. I also saw the significant consequences that can result from that, such as licence renewals declined and acreage lost.
It wasn’t until I was later in-house counsel for an oil and gas company that I fully appreciated the enormity of the compliance management task and how it requires just about every person in the organization to be aware of, and actively manage, their part in ensuring the work programme commitments can be met on time. I gave up legal practice to develop a technology solution to the problem and Permitintel was born.
So, what is it about oil and gas operations that makes compliance management so imperative and yet so difficult?
I think it boils down to these four things.
1. Your commitment is to the government
In most countries, oil and gas are nationalized resources and the right to explore and extract them is under some form of concession or contract with the host government. Although companies operating in other sectors still have to comply with laws and obligations and contractual commitments, oil and gas companies rely on their relationships with host governments to be able to do business in that country at all. Whether or not an operator meets the commitments it has made in its licence or contract is the foundation of that relationship.
The terms of licences and contracts with host governments are not static. Inevitably as time moves on, things change – whether that be factors such as perceived prospectivity or global economics changing fiscal terms, or experiences with other operators forcing changes to plug gaps in operational requirements or reporting. You can end up with three exploration licences in the same country being subject to three different sets of terms. Setting up systems and processes that can deal with that is a challenge in itself.
A licence or contract with a host government is not like any other business relationship. First and foremost, the host government is managing a national resource on the part of its people. The special nature of that ‘custodian’ relationship means that a failure to do something you have committed to is not treated in the same was as a run-of-the-mill contractual transgression between business parties might be. The host government must always be seen to be managing the resource in a way that delivers maximum benefit for its people, and in some cases that may mean cancelling the rights of a non-performing operator.
The consequences of that can be far-reaching. First, there may be sunk exploration costs that can now not be recouped. Secondly, your ability to obtain new acreage in that country may be impacted by the non-compliance or cancellation. Thirdly, your ability to obtain concessions in other countries may also be compromised as disclosure may be required and considered in competitive bid-rounds. In short, it can be a company-killer.
2. You are representing your partners
Not only do you have the government looking over your shoulder, so too are your joint venture partners. This aspect of an operator’s role can’t be overstated. There are relatively few examples of similar unincorporated joint venture operating models in other sectors where the fortunes of a number of companies are put in the hands of another who will represent them all.
How a company is perceived by the government and the people of the countries in which they explore is hugely influenced by how well they meet their commitments to the government and more broadly how they conduct themselves as a corporate citizen. A poor record on employment or health and safety conditions, or allegations of tax avoidance can be just as damaging as a failure to complete a work programme.
Although the operator may be the ‘face’ of a particular asset, if something goes wrong, you can bet the joint venture parties’ names will make it into the headlines too. Just as a host government is the custodian of the resources of the nation, the operator is the custodian of the reputation of all its joint venturers.
Any prudent joint venture partner will not take it on trust that the operator has this under control. Non-operators should satisfy themselves that the operator has systems and processes in place (and the operator must be able to demonstrate those systems and processes) to:
- identify, record and manage compliance requirements
- track regulatory change and changes to licence and contract or approval conditions
- readily identify impacts of those changes on business activities and operations and promptly implement any changes required to respond to them
- audit the effectiveness of the compliance management program systems and processes and demonstrate that compliance is actually being achieved
- ensure non-compliance is appropriately risk-assessed and mitigated and continuously reviewed as regulatory settings change
Needless to say, if there is non-compliance under your watch, you will no longer be an operator of choice. The effects of that will be felt not just in your ability to seek future farm-in partners, but also investors.
3. The nature of the operational compliance requirements
When we think about compliance management, we can sink into dread about the annual survey where hundreds of questions ask if we complied with our requirements under the privacy legislation or the health and safety regulations. The questions are often so nebulous or they encompass such a broad range of requirements that a yes or no answer is almost impossible. How do you even know? It’s also a little late to be figuring out that maybe you didn’t comply.
Exploration and production operations are covered by a whole raft of compliance obligations that don’t lend themselves well to reliance on a periodic survey or audit. There are numerous time-bound compliance requirements that relate to particular exploration activities such as shooting seismic or drilling a well. Sometimes you might find out the hard way that you missed something – you don’t have an approval that was required or there was a notification due last week. Those are the things that can really cost you, not just in fines or penalties but by ratcheting up project costs when you have rigs and crews on standby while they get resolved.
The nature of global oil and gas operations also means that these requirements differ by country or state and they can also differ by location (for example, whether the operation is onshore or offshore) and by the particular activity (requirements for an exploration well may differ from those for a production well or a well workover). Trying to use a spreadsheet or a generic compliance management system to manage them is both frustrating and futile. The obligations need to be understood and managed in the context of the exploration and production activities, their geographical location and the regulatory framework applicable. They need to be proactively managed in the context of the business operations and they need to keep up with ever-changing project timelines, otherwise non-compliance is a foregone conclusion.
4. Subject matter experts are fantastic, silos are not
Identifying your obligations is only half the battle. When you take on a new exploration block, the on-ground activities might be a few years away but as we all know, planning an offshore seismic acquisition or a well-drilling campaign is years in the making.
That’s particularly true for assets in locations where rigs or vessels are not abundant and mobilization costs may dictate that you need to work with other operators to share the financial burden. Suddenly, you may be working to someone else’s timeline altogether. Add in weather windows, consenting requirements or environmental conditions or landowner constraints restricting opportunities to carry out the activity and suddenly those timeframes can be reduced dramatically.
Larger oil and gas companies are great at building functional teams with experts in their field. They may develop their own excellent systems and processes for compliance in their area, be it environmental consents, JVOA requirements, health and safety regulations and so on. The problem is that none of these things occur in a vacuum.
Any oil and gas compliance management system needs to record and manage the requirements, regardless of their source or function, in the context of the business operations. A centralised system provides a source of real-time information to replace water-cooler rumours or a host of unread or forgotten emails as the source of project-critical information. As the opening quote suggests, if the moving feast of operational activity timelines isn’t constantly communicated to every person in every part of the organization that plays a part in the delivery of that work programme commitment, something as seemingly small and overlooked as a long lead item could be your undoing.