OilVoice - The Changing of the Guard - a Speech by Andy Inglis, Chief Executive of BP E&P

The Changing of the Guard - a Speech by Andy Inglis, Chief Executive of BP E&P

17 October 2008

The following speech was given by Andy Inglis, Chief Executive of BP Exploration & Production, at Rice University, Houston, earlier this week;

The topic I’ve been asked to address today is ‘The Changing of the Guard – Making Talent a Strategic Priority’.

I should tell you from the start that for those who take ‘Changing of the Guard’ to mean there is an insoluble demographic crisis in our industry, caused by those born in the late 1940s and 1950s – the Babyboomers – retiring, then I am afraid I am going to disappoint you. I do not really agree with that proposition.

Sure, that generation is retiring. But this shift is only part of a far bigger challenge which we are experiencing: plugging the Capability Gap.

I believe that Capability – another word for what some call “intellectual capital” – should be a major strategic priority for all Boards; and I would like to argue today that it is a challenge we can manage, indeed it is a challenge we are beginning to manage already.

In our industry, these strategic challenges come and go and we usually conquer them in the end. For that is what we do. We manage risks, whether they be technical, geological, commercial or political. And today, near the top of that list is capability.

The really big strategic issue for all oil and gas companies is matching the earth’s resource endowment on the one hand, with the capability - technology, skills and know-how - required to bring those resources to market on the other.

I think it is true to say that we may have reached a period of ‘Peak Capability’, at least in the short term. As far as I am concerned, Peak Capability bears a far closer relation to the facts than so-called “Peak Oil”.

The days of ‘easy oil’ are well behind us. For International Oil Companies, and increasingly National Oil Companies too, new resources are harder to reach and tougher to produce. Resources are now found in reservoirs which lie at greater water depths, at higher temperatures and pressures and require complex drilling and completion designs. Bringing them into production is going to be difficult. It will require that Capability Gap to be filled.

Today I want to start by briefly discussing the global industry context. I’ll then go on to look at the capability challenge as it confronts the whole industry. I then want to finish by talking a little bit about how we in BP are specifically addressing that challenge.

The global context

Recent developments in financial and commodity markets are just the latest reminder that we are definitely living in interesting and changing times.

In the current chaos it is easy to focus on the short term, literally the last hour of trading, but today I want to maintain a longer term perspective. Despite recent falls, the oil price remains high and volatile by historical standards, as the chart shows. I contend that prices are not being driven by a lack of resource, because there is plenty of oil and gas around.

In fact prices are being driven by a confluence of factors. The first of these is the recent period of exceptional worldwide economic growth. Although the short term outlook for worldwide economic growth is evidently deteriorating, the fundamental drivers of long term growth in demand for energy remain in place. We have entered a new phase in global industrialization, led by China and India.

When Europe industrialised, it involved 50 to a 100 million people moving from a rural to an urban way of life. The US industrialisation involved 150 to 200 million people. And those changes took centuries. But in the next decade, in China and India alone, over 1 billion people will be moving from a rural to an urban way of life. This will result in a dramatic increase in energy consumption - to provide light, heat and mobility.

According to the IEA, by 2030, world energy demand will be 50% higher than today and non-OECD countries are expected to contribute 85% of the total world energy demand growth between 2005 and 2030.

Contrary to what you may hear from some quarters, there are more than enough resources to meet that demand.

At the end of 2007 total remaining proved oil reserves stood at around 2.3 trillion barrels of oil equivalent.

At today's consumption rates, we believe we have around 40 years of proven oil reserves, 60 years of natural gas, and 130 years of coal.

And let us not forget that enhanced capability would improve that resource-to-production ratio further. For instance, the worldwide average recovery factor for conventional oil reservoirs is around 35% of oil in place. If, as an industry, we can raise that by just 5%, it would add around 170 billion barrels to world reserves, enough for five years supply.

The task facing the industry is to ensure supply rises adequately to meet demand by bringing this oil and gas endowment to market. These resources are found in increasingly challenging environments - in the deserts of the Middle East and North Africa; in the deepest waters of the Gulf of Mexico, West Africa and Brazil; and in the Alaskan and Russian Arctic. Furthermore, many of these resources are controlled by NOCs which do not always have the same capability at their disposal as IOCs.

Our industry needs the smartest engineers and geoscientists. Increased computing power and better technology will also make a huge contribution – as I will explain – and they mitigate the issue – but they are not a magic bullet. State-of-the-art software programs and sea-bed monitors are fantastic – but I’m not expecting them to walk into my office with a solution to the problem. Technology is only as good as the people who design and operate it. With capability, it is people who make the difference.

Turning these resources into reserves and then production is going to require leadership, ingenuity and innovation as well as technology. That is the capability challenge.

The capability challenge

Let me now explain in more detail what I mean by that – and then I’ll explain what we in BP are doing to address it.

The first point to consider is the demographic pressures of our industry.

This slide shows the membership of the Society of Petroleum Engineers over the past 10 years, categorised by age. It is not too much of a stretch to use this as a proxy for the age distribution among technical workers in a typical oil and gas company. Looking specifically at averages, the average employee working for a major operator or service company is 46 to 49 years old.

However, this is a problem we have been aware of for several years and which we have been addressing. The good news is that we see an increase in the 20 to 34 year old bracket – reflecting more intensive recruiting in the last 10 yrs.

The fall in the percentage of 35-49 year olds reflects a lack of recruiting during the years of lower prices, when the industry saw the main strategic challenge to be increasing efficiency through consolidation and mergers as opposed to building organisational capability.

Well, come to think of it, I’m approaching 50 myself, and I am in that age group. And in some ways my own experiences are typical.

I joined BP in 1980, and in 1990 was told that Mechanical Engineering was not considered core to BP’s strategy, that we would follow a track of outsourcing and use of the contracting industry. This caused me to broaden into other disciplines and areas. I’m happy to be now back in the core of E&P. I have kept my technical roots, I’m a chartered engineer, very proud of it, and very passionate about ensuring we do not repeat the mistakes of 20 years ago.

The second point is that despite our best efforts we have to admit that we are not attracting enough graduates from traditional recruiting areas such as the US and Europe. This chart shows the US workforce of petroleum engineers in the year 2000 – in green at the left – and traces how their numbers are declining over the two decades to 2020. The yellow columns show the cumulative numbers of graduate engineers coming into the industry over the same 20 years. And the message is clear – the new entrants are insufficient to offset the leavers and the overall workforce of engineers in the US is declining.

In the UK, too, we are seeing shortfalls in graduate intakes. In 2006 for example, around 1 in 10 vacancies were unfilled.

Even when people enroll on engineering degree courses intending to join the engineering ranks, this does not mean they will follow through. One recent study found that of the 90% of students who originally aspire to work in the sector when they began their degrees, only 65% actually do so . A large proportion of the leakage was into the investment banking sector and I encounter them at investor road shows.

Well, that was true up until a couple of weeks ago. Maybe some will now be reflecting on their choice!

The overall impact of these pressures has been estimated by CERA as a potential 10 to 15 percent “people deficit” by 2010, compared with the estimated number of staff needed to deliver projects.

This is being felt across the industry – in oil and service companies alike. The issue is leading to project delays or deferral. Goldman Sachs’s study of the top industry projects shows that more than 40% have experienced a delay of a year or more.

The reasons for the capability challenge

So that’s the ‘what’? – the data on the issue – but what about the ‘why?’ – why is this happening.

I believe the oil and gas industry is suffering from a number of what I would regard as misconceptions. Some of these misconceptions were true, but are now outdated.

The industry suffered a boom and bust in the 80’s and early 90’s that left many with an impression of instability and a sense that there was no prospect here of a ‘career for life’. My earlier story regarding the outsourcing of engineering is evidence of that.

The industry is also perceived as low tech and out of date when set against other hi-tech areas such as IT, media and pharmaceuticals. As I am sure you know, nothing could be further from the truth.

Historically, this was also a very white and very male industry so it has been perceived as lacking in diversity – an industry which lacked meritocracy and opportunities for women and people from ethnic minorities.

As an industry we must address and correct these unhelpful and old-fashioned misconceptions, so that we can be competitive with the other opportunities graduates have in say, banking – well, maybe not banking- but consulting, pharmaceuticals and the media.

What BP’s doing in response

So now we have seen what the challenge is, and how it is we have gotten to where we are, I would like to discuss four approaches which illustrate how we at BP are seeking to build our pipeline of professional talent – a capability plan that is reviewed annually by the Board.

In our case, this is a plan that needs to deliver a wide mix of competencies, ranging from drilling and reservoir engineering to commercial analysis, finance, communications and HR; working in locations from Anchorage to Jakarta to Luanda.

1. Attracting and retaining talent
First we need to retain the talent of our experienced employees. People are working later in life today - certainly later than the traditional industry retirement age of 55; but this cadre of employees also demands more flexibility – At BP we have a scheme in place to access the skills of our retired staff for specific challenges and projects of interest to them. We offer flexi hours and part-time working to encourage individuals to work beyond the statutory retirement age. We have to be accommodating to continue to access this talent.

Then, looking at the other end of the age spectrum, we also need to be sensitive to the aspirations of people in their mid-20s – often described as ‘Generation Y’.

From our own interviews with new graduate entrants, we know that their top motivations are quite distinctive and in many ways different from past generations. For example, there is much less emphasis on having a job for life and much more on the quality of experiences and the chance to make a difference. We found that the top five motivations among Generation Y graduates were:
• The opportunity to see the results of their work
• The opportunity to learn new things
• Clear avenues for career advancement
• Rewards for exceptional performance
• And the chance to work with talented co-workers

To attract and retain the top graduate talent, BP offers a development programme I am very proud of, called the ‘Challenge’ programme. This began in 1993 with 30 people from the UK and US. Today the programme has graduated over 3,200 people and we currently have 1,200 Challengers from all over the world in the programme.

This programme is about building deep petrotechnical skills through a combination of on-the-job work experience, dedicated mentoring from experienced employees, clearly defined training and course curriculum, and crucially field and operational experience. Graduation and intermediate reviews are based on competency assessment. This creates self standing individuals, carefully placed into the right next roles with access to further learning offerings such as accelerated development programs.

We also need to get closer to talented students, earlier, as they make their way through university. That’s the time at which we need to be there to correct misapprehensions and ensure the full attractions of a career in energy are made clear.

We do that through partnerships with major academic institutions – of which more in a moment – but also by raising our profile on campus. To be honest, I think we have more work to do here.

2. Our diverse workforce
Secondly we need to correct some of those outdated misconceptions, by continuing to diversify our workforce and celebrating that process. After all, that is simply a reflection of globalisation in action.

By 2020, over 50% of BP’s operated production will come from non-OECD countries, giving us much more geographical breadth and depth than in the past.

Many governments want to see greater local participation in the development of their country’s resources and we fully support their aims. Over the last decade or so our operations have grown rapidly in countries such as Angola, Colombia, Egypt, and Trinidad. In all of these countries and many others, we have made an early priority of developing local leaders as well as local front-line workers. We adopted an approach of developing local talent, using the global capabilities of the firm.

Let’s look at the example of Azerbaijan.

BP has been in Azerbaijan since 1992 and is the largest foreign investor in the country.

We operate more than 1 million barrels of oil a day equivalent in Azerbaijan from two giant fields in the Caspian Sea – ACG, an oilfield, and Shah Deniz, a gas-field. We also had a leading role in the construction of the BTC pipeline which takes oil from the Caspian to the Mediterranean. In total an investment of $28bn by BP and our partners.

At $100/bbl, this production is projected to generate more than $25 billion of revenue for Azerbaijan during 2008. But we also want to generate human capital for the region by accessing and developing local talent and using local suppliers.

Over the last 15 years we have built up a workforce of 2,700 BP staff and 1,100 contractors and we have made a priority of employing and developing local talent. Today 83% of that workforce is Azeri, and we are aiming to reach 90% by the end of the decade.

This has been achieved through a number of initiatives including:
• Special entrance and development programmes for graduate recruits – this is through the Challenge programme, which I discussed earlier; 50 Azeri graduates completed the programme last year
• The Caspian Technical Training Centre – this is a $12 million world class training centre dedicated to training technicians to work in our Caspian operations – today we have trained over 1,000 technicians, with a steady state now of 100 per year
• Professional development of national staff – in 2007 more than 100 employees were supported by BP in their professional education; whether that is attaining chartership accreditation, or advanced degrees at UK and US universities
• And lastly, overseas assignment in other BP operations, where our Azeri staff can learn best practices from other operations to bring back to Azerbaijan

What we are creating in Azerbaijan is a replica of what occurred in Colombia over the last two decades. Today in Colombia more than 95% of the staff are locals, including all senior management positions.

3. Improved efficiency through technology
Thirdly, let me move to technology as a means to plug the capability gap. Technology improves productivity, by enabling us to perform tasks faster and with greater effectiveness and efficiency.

Let’s start with the basics in my own business. Historically our Production Engineers have spent up to 40% of their time looking for data.

A quick win for us was to create a web based information management system which allows our PEs to quickly access the data they need to do their jobs. Piloted in Alaska, and now available across our operations, this tool has allowed us to reduce the amount of time spent on accessing data to less than 10% of the time; releasing our PEs to spend more time managing our wellstock and operations, increasing their ‘wrench time’.

Go back not too many years and our reservoir engineers would spend a week doing one history match, it may have taken 6 months to run say 25 cases to find the one deterministic answer that matched. Now, with improved workflows and computing power, we can do well over 1,000 history matches a week, a huge step change in efficiency, and importantly allowing multiple solutions to be found which in turn has greatly improved our understanding of risk and uncertainty.

Remote monitoring is another technique which enables us to achieve better performance with less labour-intensive processes.

We are using remote monitoring for instance on a number of our turbines in the GoM. Our vendor who is located in California, monitors the operations 24 hours a day. We have been able through remote monitoring to increase the intervals between service shut-downs and push the operational limits of the machines.

Benefits include:
• real-time troubleshooting of the equipment by internal and external subject matter experts from around the world
• production loss avoidance due to sustained equipment uptime; and
• deferred costs by extending the equipment lifetime through increased monitoring

In the past, one individual was able to monitor 40 engines. Today that person can monitor 4,000 - a 100 fold increase, because the system works by exception, flagging up potential problems, rather than by constant surveillance of all the equipment.

As an industry we are beginning to understand the full potential of predictive analysis as the next evolution of this technology. Anticipating events and hazards ahead of time, creating intelligent software to advise of, and in some cases make, corrective actions and adjustments.

The final efficiency example I would like to discuss is the use of Advanced Collaborative Environments - or ACEs - where real time data gathered from oil and gas fields is analysed by engineers and technicians offshore and onshore simultaneously.

The ACE is a high-tech environment where drilling, reservoir, facility, and petroleum engineers can sit together and collectively analyse the data to maximise operating performance.

An example of this in operation is a recent situation on our Atlantis platform in the GoM.

A control responsible for the start-up of automated equipment failed, resulting in the shut-down of instrument air systems and gas compressors. Onshore and offshore personnel working through the ACE were able to assemble a team of engineers and automation specialists and troubleshoot the issue. Within 30 minutes, engineers onshore were able to lead the automation team offshore through the reset process and bring the failed system back online. If another ten minutes had passed without functioning water or air cooling systems, the team would have been forced to shut down production. The savings through lost production avoided was nearly $3 million.

Today in BP, more than 35 of our assets now have ACEs. Cost savings run to the tens of millions of dollars – through reducing engineer and vendor trips offshore, as well as reducing non-productive time.

These are early days for many of these technologies and we are learning more all the time, finding ways to increase further the productivity of our scarce human capability.

4. Powerful Learning Offer – University relationships
The fourth part of our strategy is to underpin the development of our staff with a world class learning offer for all levels and ages of our organisation. I talked earlier about one aspect of this, our Challenge entry programme for graduates and our goal is to provide the same learning opportunity at every stage of a career. To deliver this strategy we have chosen to partner with the best educational institutions in the world, one of which is, of course, Rice – which is why I am here today.

We all benefit from these partnerships. BP gets to teach the ‘BP Way’, in partnership with world class educators. Our staff get the chance to develop as individuals. And I hope our academic partners benefit to.

I am delighted to say that Rice University is playing a part in a new and innovative collaboration with academia in which we have built an impressive consortium aimed at building our capability by advancing our technical learning and development.

This consortium involves five universities – Rice, Baylor College of Medicine, Imperial College London, Herriott Watt in Edinburghn and the University of Manchester – each of which has its own distinctive area of expertise.

With BP, the consortium currently has five areas of focus. These are:
• First, the principle of global access to learning – allowing us disseminate learning throughout our organisation, from and to every part of the world
• Second, the creation of a Learning Center here in Houston
• Third, assessing the impact of learning, which is about developing tools to assess how effective our learning is to our employees
• Fourth, knowledge Capture – a programme which is a specific response to those who worry that “The Changing of the Guard” is a potential catastrophe. As a large number of experienced employees approach retirement, this programme examines how we can best capture and share their knowledge and years of experience. So once they leave it is not lost forever And lastly, learning methodology. We are moving away from learning by PowerPoint to one of eLearning and more experiential and simulation driven learning

On Friday of this week I will travel to Boston to visit some of our employees attending a course at the MIT campus. BP has partnered with MIT to create bespoke programmes. One is called the Projects Academy, intended to train the world class project managers required for our multi-billion dollar projects around the world.

Another programme is called the Operations Academy, created for our operational leaders from all levels of the organisation. There are tailored offerings for the Executive level, myself included, for our operational leadership, and most importantly for the frontline.

Conclusion

University partnerships brings us right back here to Rice and that seems a good place to conclude.

BP is not alone. Capability and managing talent have to be at the core of strategy for every company in our industry right now, and at the front of the deliberations for all Boards. Sure, the Guard is Changing and that creates a major challenge for us. But it has to be seen as part of a far bigger picture.

Our industry brings energy to markets from some of the most difficult places in the world. We are used to challenges. In fact we relish them. And we are managing the Changing of the Guard by seeing it as part of a bigger strategic challenge: plugging the Capability Gap.

At BP we are addressing this challenge in four ways:
• Attracting and retaining talent
• Developing a diverse workforce
• Leveraging technology to increase the efficiency of our organisation
• And offering a powerful learning culture, notably through partnerships with some of the world’s leading academic institutions
There is always more to do, but we know that building organisational capability goes right to the heart of our competitive advantage.