Sustainable development, an increasingly necessary corporate commitment, requires a collaborative effort.

As oil and gas companies struggle to meet increasing social, economic and environmental responsibilities, they need the full cooperation of their contractors. Service companies can be surprisingly resourceful allies, bringing valuable support and creative solutions for sustainable development (SD). The only question is whether it is possible to take full advantage of this value in a traditional operator/contractor relationship - or whether that type of relationship itself is unsustainable.

The need to practice SD is a reality for oil and gas companies today. Although many initially resisted the concept, it has become impossible to ignore the swelling chorus of voices - backed by scientific facts about global warming - that insists on a more sustainable approach to energy development.

Pressure for change

The pressure to change comes from Wall Street, where investors are choosing to place their funds in ethical investments. It comes from governments and regulatory agencies, which continue to raise the bar for compliance and even the right to operate. It comes from industry insurance rates, which reflect the soaring cost of litigation and other inherent risks. And, of course, it comes from non-government organizations that sometimes try to disrupt our operations while using the voice of the media to sway public opinion. Our own employees are joining with ordinary citizens everywhere to call for a more sustainable approach. Perhaps most significant, some of our customers now require a substantial commitment to SD.

The oldest definition of SD is, "Meeting the needs and aspirations of the present without compromising the ability to meet those of the future." But for corporations, the real challenge is to balance the triple bottom line of social responsibility, environmental responsibility and economic profitability. It is a careful symbiosis, with each of these three areas contributing to the others, and none thriving at the others' expense.

Maintaining this balance means that energy companies need more than just an SD policy: they need an SD culture. Every goal, every decision and every activity must be informed by SD principles. The only way to achieve such focus is to enlist the support of contractors, suppliers and other service companies, synergistically leveraging the full power of our collective skills and technologies to boost the triple bottom line in all three areas: social, environmental and economic.

Safety model

A model for such collaboration already exists in the area of safety. Most operators require contractors to demonstrate strong safety performance. This helps the operator reduce liability, manage health care costs, attract and retain employees, minimize downtime on the rig site and maintain a better reputation in the community. And this approach is truly collaborative, where all work is toward a common goal of causing no harm to people.

Operators can take advantage of the service company's other good practices along with safety. In the area of social sustainability, for instance, if the service company provides local employment and training opportunities, rather than merely using expatriates for the job, this might help the operator meet government requirements for local content.

Service companies can also help operators demonstrate the good citizenship that governments expect from international companies operating within their borders. Many service companies have active global community relations programs. These may include everything from corporate philanthropy to employee volunteerism and community outreach. Highly visible activities - such as holding blood drives, equipping schools and building health care facilities - not only help promote goodwill in the community, but also help corporations meet their social responsibilities as good neighbors and engaged corporate citizens. Oil and gas companies can magnify their own efforts by supporting their service company's programs or by asking the service company to support theirs.

The safety model can be applied directly to improving environmental performance. A service company's commitment to environmental excellence should be considered in all requests for proposals. A well-developed culture, along with proven processes to prevent incidents and handle them transparently, is essential.

Contractor expertise

Operators might also ask what knowledge, skills and technologies a contractor could bring to environmental challenges in the oil sector. After all, it is the service companies that in recent years have assumed primary responsibility for developing new technologies. And for major issues, there is clearly a case for all who work in the sector - oil companies and their contractors - to collaborate openly for the greater good.

Today, thanks to an enormous and continuing investment in R&D, large service companies offer alternative products and services that can solve a number of environmental problems. Boreholes can be slimmer to reduce cuttings. Multilaterals can tap a greater volume of hydrocarbons with less drilling, thereby reducing material use, waste disposal and environmental risk. Gas reinjection can reduce the wasteful flaring of associated gas. The list continues to grow.

Sustainable solutions may not, in the short term, seem to be the most economical, even though their value becomes apparent over the long term. On any project, social and environmental imperatives are inextricably intertwined with economic realities. Finding the right balance may be difficult.

All too often, procurement departments buckle under pressure to reduce short-term costs by choosing low-end discrete services. Of course this precludes service companies from bringing their full value to the table, and, in time, may discourage technological innovation. The real shame is that important corporate decisions on society, the environment and profitability - decisions which arguably should be made at higher levels - boil down to the price of a single service.

To take advantage of the full value service companies can bring, energy companies need to ensure the relationships themselves are sustainable. This means that contracts are win/win; that service companies are allowed to help the customers win; that operators extend the trust, cooperation and access that service companies need to do their jobs; and that service companies earn this trust.

Traditional price-based, fee-for-service relationships often fail to accomplish these objectives. We would like to propose some alternative arrangements.

This advice sounds obvious, but it meets with surprising resistance. A prospective homeowner would never design her own house, then hire the architect just to draw it to scale. The house would be limited by the homeowner's architectural abilities rather than the architect's. Yet in the oil and gas industry, more often than not the operator approaches the service company with a specific task or piece of the development, awards the job based on price, then spells out in detail how the contractor is to do the job.
Whether large or small, the service company can bring specialized knowledge that adds to the value of an asset. Instead of instructing a company to provide a particular product or service, it may be worthwhile to explain the need, and then ask what solutions the experts would recommend.

Integrated solutions

One problem we often see today is a disconnection between geology and engineering. Engineers need to be involved up front in the planning phase, and geologists need to be involved in designing the well architecture. An engineered design that fails to consider every characteristic of a formation can cause more than a minor production problem: it can squander a one-shot opportunity to extract maximum value from a precious, non-renewable natural asset.

Larger service companies can avoid such issues by participating across the life cycle of the well: up front, in understanding the reservoir and its challenges; during development, while engineering solutions; and down the road, when stimulating production with appropriate technologies.

Relationship incentives

Contracting for integrated solutions can admittedly be messier than issuing a simple request for a single service. To keep prices in line and obtain the best social, economic and environmental performance from contractors, many companies have found it helpful to develop performance-based compensation plans.
Compensation may be based on achieving specific goals, such as environmental and safety targets, or on bottom-line reservoir performance and economics. Either way, the compensation plan balances the costs with the resulting benefits. The important thing is that both parties use the same scorecard.

Partnerships

Working in partnership, customer and contractor can extend the partnership to share resources and results in many areas: environmental initiatives and community relations programs are obvious examples, and so is safety. But we could take this further. Why is it, for example, that, in the same basin, operators and service companies each maintain their own separate safety organizations, each with their own standards and procedures?

Collaborate on technology

Today, a significant proportion of new technologies emerges from the service industry. This has answered customer requests for service companies to assume the burden of research and development. Those who bear the risk should rightly expect to enjoy the rewards.

The oil and gas industry is notoriously adverse to the risk of applying new technologies. This makes it difficult for providers to capture a return on their research and development (R&D) investments. Risk avoidance also has the unfortunate result of discouraging management from long-term funding. No matter how useful a technology may be, unless it has a reasonable chance of commercialization, it may never be developed. And that is the real risk facing our companies - the risk that technologies critical to our industry's sustainable development may never be invented.

Real-word examples

Here's a real-world example. A major service company has developed, at significant expense, a drilling fluid that is biodegradable. It is becoming increasingly popular in areas where specific regulations demand strict adherence to discharge limits. Because of the potential liabilities in these areas, the need for caution - and the biodegradable fluid that answers this need - has the attention of key decision makers within the operating companies. It is, however, remarkable that, in less-regulated areas, this fluid is not being adopted. The higher cost of the product either precludes its use or, arguably, confronts lower-level, price-driven decision makers before any discussion of risk and liability can take place.

Here's another example. Given the current focus around proven reserves and the need to demonstrate producibility before booking reserves as proven, increasing attention is focused on well testing. After a significant investment in R&D, one company developed a solution that allows flow testing without producing fluid to the surface. This eliminates the associated environmental problems. Yet takeup of this technology has been very slow. Is this because it is priced as a premium service, or, again, because the contract decision makers are unaware that it is now critical to ensure reserve booking compliance through flow testing without harming the environment?

Many of the alternative business relationships proposed in this article could contribute to faster product commercialization while reducing the risks associated with R&D investments. For instance, encouraging integrated solutions may provide opportunities to develop new problem-solving technologies - and to test them under real-life conditions. Extending the partnership to include collaboration on specific R&D efforts may result in fit-for-purpose technologies that solve the customer's most critical problems. And establishing performance-based compensation plans may help service companies absorb the cost of developing those technologies that offer the greatest pay-off for customers.

In the close-knit oil and gas industry, everyone brings important contributions to the table. When we abandon the traditional notions of who does what and how, we may come up with some surprisingly effective new solutions. We can leverage each other's strengths, knowledge and experiences to make the best use of our industry's resources. By building sustainable relationships with each other, we can contribute to the sustainability of our industry, the sustainability of our companies, and the sustainability of energy - the prerequisite for economic development.

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