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DRILLING FOR SUSTAINABLE COLLABORATIVE SOLUTIONS IN THE OFFSHORE DRILLING INDUSTRY A study on how a drilling contractor can increase its competitiveness through market shaping and co-creation in the offshore drilling industry By Jonathan Blangstrup Johansen Student number: 92098 MSc. International Marketing and Management Simon Emil Gøbel Student number: 92652 MSc. Strategy, Organization and Leadership Master Thesis Submitted: May 15, 2019 Supervisor: Karin Tollin Characters/pages: 273.000 /120 Abstract The purpose of this thesis is to understand how market shaping through co-creation solutions can increase a drilling contractor’s competitiveness. The thesis applies and expands on fairly novel theories in conjunction with conventional market theories, as they enable an understanding of the complexity of markets, the dynamics of and between actors, and how opportunities for co-creation can be leveraged to drive competitiveness. To that understanding, Maersk Drilling, a market leader within the offshore drilling industry, will be applied as a case firm. In the researchers’ approach to uncover these phenomena, an abductive approach is utilized to move between theory, qualitative interviews with senior managers from Maersk Drilling and an external party, surveys, and secondary data on the industry. The thesis takes its point of departure in the New Oil Reality and how it demands cost-efficiency. It is found that the cyclical nature of the industry, as well as the path dependency, results in the levels of co-creation and innovation negatively correlating with the oil price. Consequently, collaborations are abandoned and formed in upturns and downturns, respectively, which causes a loss in value capture as actors submit to the paradox of co-creation. Increased competitiveness is found in the ability to sustain collaborative solutions and maintain a Pareto equilibrium, where the increased focus on digitalization enables the industry to adopt an industry-wide cooperative mindset. Further, the success of collaborative solutions is crucial for Maersk Drilling if it is to increase competitiveness. It is found that Maersk Drilling possesses excellent dynamic and co-creation capabilities; however, the business model in the industry does not strictly allow for collaborative paths, and thus, it is found that it should be included when formulating strategies, dynamic capabilities, and business models. Maersk Drilling must conduct market shaping at the system level by relying on more powerful players, at the market offer level by developing collaborations that align with all actors’ interests, and at the technology level by demonstrating success in new commercial setups. In the latter, it is found that Maersk Drilling must include data gathering in its innovation processes, as it diminishes information asymmetry in relationships and increases the likelihood of success in its new market offerings. Also, the four value processes in these relationships must be clearly defined. Conclusively, this thesis suggests a concrete strategic suggestion for how a drilling contractor can engage in sustainable collaborative setups through a revised compensation model that addresses individualistic behavior, fluctuations in the industry, and the antecedents for sustaining collaborative solutions. 1 Table of Content ABSTRACT 1 1 INTRODUCTION 5 2 EMPIRICAL CONTEXT: CASE PRESENTATION 7 2.1 THE OFFSHORE DRILLING INDUSTRY, CUSTOMERS AND THE VALUE NET 7 2.1.1 BREAKEVEN LEVELS OF DRILLING PROJECTS 10 2.1.2 SERVICE COMPANIES AS COMPLEMENTORS 11 2.1.3 COMPETITION 11 2.1.4 SUPPLIERS 12 2.1.5 DEVELOPMENT AND OUTLOOK 12 2.2 MAERSK DRILLING 14 2.2.1 JOURNEY OF MAERSK DRILLING – 1962 TO 2019 14 2.2.2 MAERSK DRILLING’S CURRENT COLLABORATION INITIATIVES 14 2.2.3 MAERSK DRILLING’S BUSINESS MODEL AND STRATEGY 17 2.2.4 THE FUTURE OF MAERSK DRILLING 18 3 METHODOLOGY 19 3.1 THE ABDUCTIVE APPROACH 19 3.2 THE CASE FIRM: MAERSK DRILLING 20 3.3 RESEARCH DESIGN 22 3.4 DATA COLLECTION METHOD 24 4 THEORETICAL FRAMEWORK 27 4.1 A SYSTEM VIEW OF MARKETS 27 4.1.1 FROM PARTS TO THE WHOLE 28 4.1.2 FROM OBJECTS TO RELATIONSHIPS 29 4.1.3 FROM STRUCTURES TO PROCESSES 31 4.1.4 FROM MEASURING TO MAPPING 31 4.2 MARKET SHAPING 32 4.2.1 SYSTEM LEVEL 34 4.2.2 MARKET OFFER LEVEL 35 4.2.3 TECHNOLOGY LEVEL 36 4.3 DYNAMIC CAPABILITIES 37 4.4 CO-CREATING FOR BETTER VALUE 41 4.4.1 WHY SHOULD COMPANIES COLLABORATE? 42 4.4.2 THE PARADOX OF CO-CREATION 44 4.4.3 CO-CREATION CAPABILITIES 52 2 4.5 INNOVATION 56 4.5.1 CLOSED INNOVATION 56 4.5.2 OPEN INNOVATION 58 4.5.3 CO-INNOVATION AS A FORM OF OPEN INNOVATION 60 4.5.4 VALUE OF OPEN INNOVATION: FOUR VALUE PROCESSES 61 5 PRIMARY DATA AND RESEARCH FINDINGS 63 5.1 FOCAL INTERVIEW QUOTES 64 5.2 MAERSK DRILLING SURVEY RESULTS 65 5.3 TREE OVERVIEW OF RESEARCH FINDINGS 66 6 ANALYSIS 67 6.1 THE INTERCONNECTEDNESS AND SHAPING OF THE OFFSHORE DRILLING INDUSTRY 67 6.1.1 MACROPHENOMENA IN THE OFFSHORE DRILLING INDUSTRY 68 6.1.2 DYNAMICS OF ACTORS IN THE OFFSHORE DRILLING INDUSTRY 73 6.2 DYNAMIC CAPABILITIES AND COMPETITIVENESS IN THE OFFSHORE DRILLING INDUSTRY 76 6.2.1 THE SYSTEM LEVEL 77 6.2.2 THE MARKET OFFER LEVEL 78 6.2.3 THE TECHNOLOGY LEVEL 80 6.2.4 COLLABORATION AND THE BUSINESS MODEL 81 6.3 CO-CREATION IN THE OFFSHORE DRILLING INDUSTRY 83 6.3.1 INHIBITORS OF COLLABORATION 83 6.3.2 DRIVERS OF COLLABORATION 85 6.3.3 IDENTIFYING MAERSK DRILLING’S CO-CREATION CAPABILITIES 89 6.4 INNOVATION IN MAERSK DRILLING 94 6.4.1 OPEN AND CLOSED INNOVATION 94 6.4.2 CO-INNOVATION IN MAERSK DRILLING 97 6.4.3 CURRENT INNOVATION PROCESS: THE INNOVATION FUNNEL 98 6.4.4 INCORPORATING DATA IN THE INNOVATION PROCESS 100 6.4.5 THE FOUR VALUE PROCESSES OF OPEN INNOVATION 102 7 DISCUSSION 106 8 CONCLUSION 112 9 STRATEGIC RECOMMENDATION 115 9.1 THE NEW COMPENSATION MODEL 116 10 FUTURE RESEARCH AND LIMITATIONS 119 11 REFERENCES 121 3 12 APPENDIX 132 APPENDIX A: TABLE OF FIGURES 132 APPENDIX B: ACKNOWLEDGEMENTS 133 APPENDIX C: EXECUTIVE SUMMARY OF BACHELOR THESIS 134 APPENDIX D: TRANSCRIPTIONS OF INTERVIEWS 135 APPENDIX D1: RICO BRUUS – DIRECTOR, HEAD OF THE SEAPULSE ALLIANCE 135 APPENDIX D2: KENNETH CHRISTENSEN – HEAD OF INNOVATION PORTFOLIO & DELIVERY 146 APPENDIX D3: FREDRIK TUKK – HEAD OF INNOVATION PARTNERING 156 APPENDIX D4: MIKE SIMPSON – CEO OF WELL EXPERTISE 164 APPENDIX E: MAERSK DRILLING’S INNOVATION FUNNEL 176 APPENDIX F: INTERVIEW GUIDES 177 APPENDIX F1: RICO BRUUS INTERVIEW GUIDE 177 APPENDIX F2: KENNETH CHRISTIANSEN INTERVIEW GUIDE 178 APPENDIX F3: FREDRIK TUKK INTERVIEW GUIDE 179 APPENDIX F4: MIKE SIMPSON INTERVIEW GUIDE 180 APPENDIX G: SURVEY TEMPLATE 181 APPENDIX H: E&P DEMAND FOR DRILLING RIGS 182 APPENDIX I: TYPE OF DRILLING RIGS ACROSS DRILLING CONTRACTORS 183 APPENDIX J: DICTIONARY FOR TERMS IN THE DRILLING INDUSTRY 184 APPENDIX K: ALL CODED QUOTES 187 APPENDIX L: SURVEY INPUTS 195 APPENDIX L1: SURVEY INPUT – TOMMY SIGMUNDSTAD 195 APPENDIX L2: SURVEY INPUT – ROB MUNGER 196 APPENDIX L3: SURVEY INPUT – RAHMAN KHANANI 197 APPENDIX L4: SURVEY INPUT – MIKE SIMPSON 198 APPENDIX L5: SURVEY INPUT – GEORGE STAMPLEY 199 APPENDIX L6: SURVEY INPUT – BJØRN THORE RIBESEN 200 APPENDIX L7: SURVEY INPUT – ANONYMOUS 201 For the Reader’s Reference: Table of Figures can be found in Appendix A Acknowledgements can be found in Appendix B 4 1 Introduction 1 Introduction In 2008, the financial crisis resulted in a market downturn due to the crude oil price dropping from 133$ per barrel to just over 40$ by the beginning of 2009 (IndexMundi, 2019). Immediately after, the price started climbing again and had already recovered to above 100$ per barrel in April of 2011. Fluctuations in upturns and downturns such as this have historically been a common occurrence in the oil and gas industry, including the offshore drilling segment, which is the focus of this thesis (from here on referred to as the industry). The industry is highly dependent on the oil price, which makes the actors inherently susceptible to market fluctuations and the underlying consequences. Most recently, in June of 2014, the oil price plummeted once again, this time from 108$ to around 47$ in just six months. In 2016, the oil price had reached its lowest in thirteen years (30$) and is today at merely 63$, five years later. Consequently, two issues arose; Firstly, the oil price is not recovering as fast as it has historically and secondly, it has been predicted that it will most likely never recover to over 70$ per barrel. These new market conditions are referred to as the New Oil Reality (Qvarts, 2016b, 2016a, 2016c). As an immediate reaction to the downturn, actors within the industry shifted their focus from operational performance and utilization rates to lowering costs. This strategic shift was not a radical change for the actors, as there has always been a focus on cost efficiency; however, given the outlook on the oil price, they are under a lot more pressure than before. Some companies responded by consolidating with each other and others seem to persevere by either becoming even more cost-efficient or by exploring innovative solutions. It is these market dynamics and reactions that are to be investigated within the industry. Multiple drilling contractors have defaulted and, the prolonged downturn is pressuring the profit margins of actors. Logically, higher profits derive from increased revenue or decreased costs. In the industry, there is full transparency in the availability of drilling rigs and day rates (demand and supply), and little differentiation exists in the industry, which makes revenue optimization virtually impossible when the oil price dictates the market. Thus, the cost aspect becomes the lever for actors to use to create profits for themselves and other actors.

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