HOUSTON -- High commodity prices have allowed the oil and gas industry to develop resources that would have been far too costly 15 years ago. But despite accusations of “obscene profits” from the uneducated public, many companies are finding their return on capital employed (ROCE) shrinking despite truly amazing discoveries. In addition to the increased complexity of modern projects, service and supply costs have escalated, squeezing margins and endangering long term investment.

This situation was the topic of the “E&P Strategies: New Challenges, New Business Models” panel at the recent CERAWeek event. Two operators and two service companies shared their views on the challenges and possible solutions.

Yves-Louis Darricarrère, president, upstream for Total SA (NYSE: TOT), outlined several challenges, among them a growing population and the emergence of developing countries. These factors will push worldwide oil demand to 55 million barrels a day (MMbbl/d) by 2029. Natural gas demand is expected to grow even more.

“The resources to fulfill this demand do exist,” Darricarrère said. “The industry has shown its ability to unlock shale oil and gas and has demonstrated that frontier exploration brings significant discoveries.”

“The major question is whether or not we’ll be able to develop these resources at the right pace to meet the demand.”

Other challenges include societal and governmental expectations in terms of safety, environmental impact and social responsibility, he said. While the industry has proven itself up to these challenges, it also will be contending with larger, more difficult projects. And costs continue to rise.

“Costs to develop have increased dramatically since 2005,” he said, “escalating to the point where sustainability is at stake.” He added that Total’s ROCE dropped from 16% in 2012 to 13% in 2013. “We wonder if our investment risks are adequately rewarded,” he said.

Lars Christian Bacher, executive vice president, development and production, international for Statoil ASA (NYSE: STO), had similar concerns. The company is expanding its footprint in North America, employing 2,000 people. “[International oil companies] are struggling to deliver returns,” Bacher said. “Increasing capital intensity is an issue that is preoccupying the industry and investors these days. I believe we can all agree that our industry has not had the best track record when it comes to cost and capital discipline.”

He noted that Statoil’s total oil and gas production has declined for 12 consecutive quarters, while capital deployed has doubled. “Returns are down 40%,” he said. “We’re spending more to stand still.”

The goal is to balance short term profit with long term success, Bacher said, which will require more standardization and industrialization in oil and gas operations. “We need to be better at handling the complexity of our operations and in dealing with our different stakeholders and the public at large.”

Both Darricarrère and Bacher stated that the solution to this problem is better industry collaboration, both between oil companies and between oil and service companies. Patrick Schorn, president, operations & integration for Schlumberger Ltd. (NYSE: SLB), suggested a business model that is gaining traction and can help in this regard.

Schorn showed a chart outlining different service levels, from discrete services (a sort of shopping cart approach to obtaining services) through bundled services and integrated services into integrated project management. “Integrated operations is one model where the interactions are fundamentally different than those in discrete or bundled services,” he said. “It’s more streamlined and coordinated, like a cohesive system with a single objective.”

So far the approach has worked well for Schlumberger’s clients. In unconventional plays, moving to a concept of “engineered wells” increased the number of productive perforations from 36% to 82%. “Spending $100,000 in lateral well measurements nets $1.5 million in year one,” he said.

Deepwater wells also benefit from this arrangement. Service companies can provide competency assurance, planning and risk management, a wide technology portfolio and integrated project management. “This type of integration can result in a 40% reduction in nonproductive time vs. discrete services,” he said. “In complex environments, the combination of these items translates into 20% [authority for expenditure] savings.

“Integration leads to improved efficiency, reliability and cost.”

Bruno Chabas, CEO of SBM Offshore N.V. (Amsterdam: SBMO.AS), said that the “recipe” that the industry has employed for the past 20 years in trying to manage costs is outdated. While his co-panelists championed collaboration, he commented, “It’s certainly one way to go, but it will take a lot of courage for all of the parties to get to the next level.”

Chabas noted that national oil companies and the governments of resource-rich countries want to transfer more technology and know-how and to have more influence. “This is putting pressure on the international oil companies and the supplier market,” he said. “We need to find different ways of working.”

SBM Offshore relies on a collaborative tendering process to control costs. This has resulted in the tons required, per barrel of oil produced, being 30% less for it than for other companies that provide floating production, offloading and storage solutions.

“There is opportunity,” he said. “Other industries have done this. The car industry, for example, has gone through the same cycle. It can bring value to the industry.”

“Relationships can be tense, and that’s not the best way to work. The challenge the industry is facing is to find collaboration and new business models. This will reduce the cost.”