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Operational excellence in oil and gas
Cost containment strategies for the oil and gas industry
A critical component of operational excellence in the oil and gas industry is effective cost containment practices. The current oil and gas landscape has driven the entire industry to reevaluate its operations. While important and timely, sustainability is achieved by adopting long-term strategies to manage costs.
- Cost containment
- Oilfield service companies
- Exploration and production companies
- Cost containment considerations
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Aligning cost containment strategies and measures with key bottom-line metrics will help stabilize businesses in the current cost-conscious environment and stay competitive in the long run.
Oil and gas operational excellence is composed of several critical factors that must be managed in an integrated way to sustain a high level of operating performance. The main factors are safety, reliability, well productivity, operational efficiency, and cost optimization. All combine to determine the economic viability of a well or a drilling program under a given set of market conditions.
When market conditions change, such as in the case of the 2014/15 downshift in crude oil prices, the challenge for operators and service companies is to realign their cost structures, while making the minimum negative impact on the other components of operational excellence. Success in achieving this is usually the main factor if new resource development can continue or if it should be deferred. The challenge for the upstream sector is to take a more strategic view of cost structures so the necessity for tactical and reactive cost reduction measures as oil prices drop is minimized.
Oil and gas companies should actively and continually build in structurally sustainable cost management practices in order to lock in the competitive advantage of being the low-cost operator or the low-cost service provider, while maintaining high achievement levels along the other parameters of operational excellence. Smart well design, real-time reservoir management and data analytics, lean operations, a supply chain strategy aligning companies along the chain, and flexibility in contractual commitments all contribute to a cost management culture that supports sustained operational excellence.
Oilfield service companies
The recent oil price downturn has put oilfield service (OFS) companies on the frontline of activity cutbacks, service price renegotiations, and vanishing commitments to future services. Systems and structures, suppliers, contracting models, and staffing levels are all key elements in resolving the challenges faced by the sector. OFS providers risk bearing the brunt of reactive cost-cutting measures driven by operators, reducing activity in a low-price environment. Strategically, this should push OFS companies to manage their service offerings and relationship portfolios in a more focused way, allowing them to concentrate on higher margins, differentiated services, risk-and-reward sharing contractual arrangements, and long-term partnerships with both operators and equipment suppliers. Additionally, they should ensure back office and administrative functions are efficient, cost-effective, and state-of-the-art.
Exploration and production companies
Exploration and production (E&P) operators are scrambling to refocus on a smaller number of developments where they can see a way to reduce costs to a lower break-even level in the current price environment. Being the low-cost operator in a play or a basin ensures an E&P company can not only weather a commodity price downturn better than its competitors, but also affords higher margins when prices rise. The key to achieving this is ongoing visibility into all of the cost component details and how they interact. This allows for identification of cost optimization measures through a variety of tactics, such as changing equipment and operating practices and adjusting service and equipment procurement strategies.
Cost containment considerations
Companies need to move rapidly to take unproductive and non-strategic costs out of their systems and focus on building a sustainable cost structure that can adapt more smoothly to the inevitable volatility of the commodity price environment. Options for companies to consider include:
- Reduce headcount while retaining core skills
- Explore global mobility options and implement effective cost management practices
- Design risk-sharing arrangements with suppliers and customers
- Apply supply chain analytics to quickly identify cost savings and improve efficiencies
- Evaluate maintenance of presence in existing markets/locations and shift activities/services to lower cost locations
- Consolidate and streamline functions
- Evaluate role and size of corporate center
- Outsource and/or automate processes and workflows
- Divest or slim low-margin or low-growth business/service lines
- Analyze tax efficiencies of divestiture efforts and project tax implications of restructuring alternatives
- Ensure demonstration of value delivery to customers in meeting their objectives
- Assess cost savings in annual software maintenance spend through non-intrusive review of software licenses
- Rationalize real estate footprint to gain visibility into related spend and optimize cost savings
- Recover costs through analytics-driven vendor contract audits
- Enlist aid of data analytics program to review invoice compliance with contract terms