Getting cost and productivity challenges right critical in a world awash in oil

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Getting cost and productivity challenges right critical in a world awash in oil

18 May 2015: As operators move from investment and construction to operations and production, Australia’s LNG boom remains a transformative, once-in-a-lifetime opportunity – for both the national economy and for those active in the sector.

Yet just as the taps are turning on multiple mega-projects, uncertainty around commodity prices, and a number of other disruptive forces are presenting market participants with real cost and productivity challenges.

In a new paper, Energy strategy: The game has changed, prepared to coincide with the APPEA 2015 conference and exhibition, Deloitte national oil and gas leader Mike Lynn, and Deloitte Access Economics partner Matt Judkins, provide an overview of:

  • The geopolitical and economic forces at play for the oil and gas industry
  • The cost and productivity challenges for the Australian sector
  • Addressing rules, regulation and red tape as one way to deliver productivity benefits.

According to Matt Judkins: “The plunge in oil prices has significant economic consequences around the world and, while the challenges for the Australian sector are significant, as a net importer of oil, the implications for the Australian economy should be positive.

“Consumers benefit from the shift in income through direct savings on fuel purchases, and there is also a positive flow-on effect for Australian businesses, particularly those where fuel accounts for a large proportion of input costs.

“But while a lower oil price holds many benefits there are, of course, some negative consequences that merit serious consideration from policy-makers.

“Most LNG contract prices are indexed to the price of oil so, as demonstrated with the recent Federal Budget, government tax revenues will be particularly affected.

“While there may be some positives for resources companies – for example, through cheaper transport costs for iron ore operators – lower prices may make it challenging for higher-cost LNG projects to remain profitable.

“Until there is some sustainable recovery in the oil price, the key to long-term sustainability and success for local companies will be the ability to implement effective cost reduction measures wherever possible, while maintaining and maximising capacity.”

Mike Lynn said: “For now, the sector has to get used to operating in a ‘new normal’ environment where cost management and improved productivity will be increasingly important, for operators themselves and the sector that services them.

“Accepting, and winning, the cost and productivity challenge is a hot topic and needs to be a serious pursuit for the sector, across areas as diverse as strategy, finance, tax, people, processes, systems, performance, supply chain, assets, and organisation.

“High operating costs in exploration and production are compromising Australia’s competitiveness, so the sector needs to shift its focus inward and maximise operational efficiency and effectiveness.”

On the productivity side, Deloitte has identified a rich source of barely utilised efficiency savings – removing red tape and regulatory burden through the setting of better rules for ourselves.

Released late last year, the Get out of your own way: Unleashing productivity report identifies the costs to corporates and the nation of self-imposed red tape and compliance:

  • $250 billion – the annual burden on the national economy of rules and compliance by both governments and businesses
  • $155 billion – the annual cost to administer and comply with rules the private sector imposes on itself
  • $95 billion – the cost of administering and complying with public sector regulations

“This $155 billion figure identified by Deloitte Access Economics is a real killer for the private sector. But it also offers huge upside if it is addressed in the right way,” Lynn said.

“The self-imposed rules businesses impose on themselves cost $21 billion a year to administer and generate $134 billion a year in compliance costs.

“The pace at which Australia is employing new ‘compliance workers’ is a real issue. Between 2006 and 2011, for example, the share of compliance workers as a proportion of the oil and gas sector workforce grew by 30% – from nearly 1,230 people to more than 3,100 people.”

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Compliance Workers by Industry Size (GVA)

“This means that one in every seven oil and gas employees were compliance-based in 2011. And this figure relies on Census data, only available to 2011. Further growth is highly likely to have occurred since,” Lynn said.

“Of course, there’s no one-size-fits-all solution when it comes to breaking the burden of excessive rule-making, but the oil and gas sector certainly needs to approach risk, and the associated regulatory burden, in a different way if it is rein in costs.”  

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