The recent energy price dive, on the back of a considerably lower Brent Oil price per barrel, has presented the oil, gas and chemical (OGC) industry with a much lower than expected room to manoeuvre in their capital investment projects. To find out how projects have been managed and if there is a potential to save costs and thus increase margins on projects through developing a ‘cost culture’, AlixPartners initiated a global survey.
The AlixPartners survey, run by Oxford Research, asked 250 C-level executives and business-unit leaders* in the oil, gas and chemical (OGC) industry, to identify how, and how well, projects in the sector were run before the oil price crashed in Q3 & Q4 2014. The study found that the projects run by many of the companies surveyed, were generally run neither competitively nor cost effectively. In terms of competitiveness, only 12% said that their method of execution is better than that of competitors, while 29% of all the respondent companies completed projects within their budgets. Furthermore, of the companies surveyed, only 30% had explicit return-on-capital targets for projects.
To understand the reasons for these cost-ineffective project indicators, the survey asked respondents about the company culture toward their projects, finding that only 39% of the respondents have “a strong series of checks and balances to ensure projects stay on track.” Just 34% of the companies surveyed noted that projects were managed at the “company level” across all projects, suggesting, according to the authors, that many companies are missing out on “economies of scale, institutional knowledge, etc.” In terms of projects going over-budget, 39% of the respondents place a poor company culture for developing best practice in project management at the top of issues faced by companies.
“Strong energy prices in recent years have allowed companies to delay putting an emphasis on project management, as they focused instead on the urgent need of achieving greater throughput. But that was then and this is now,” says Dennis Cassidy, Managing Director at AlixPartners and co-head of the firm’s global OGC Practice. “In the current environment of falling prices, plus increasing geologic and technical challenges, a new focus on building a ‘cost culture’ into each and every project is mandatory.”
That creating a ‘cost culture’ is something good for the bottom line - and ultimately the return on capital employed (ROCE) - is not lost on the executives, with 58% of total respondents saying they are ‘focused’ or ‘highly focused’ on creating such a culture. However, while the impetus is there in words, the authors note that the right strategic moves to make the intention into best practice are not yet unfolding.
According to the study, the possibility of “cracking the code on efficient project management” to create an effective cost culture in a world in which lower energy prices presently prevail, is tied to ‘proactive leadership.’ The survey finds that the best companies, those with relatively high ROCE, are the most likely to create tighter criteria for project approval (36%, versus 29%), as well as having a proactive top leadership reviewing all projects on a semi-annual or annual basis (53%, versus 43%). Furthermore, expectations are that a cost culture inside their companies will create returns in the coming year, with 46% of respondents believing focus on such a culture will yield at least 5% savings for their firm over the next 12 months, compared to purchasing/resource acquisition (41%), higher subcontractor productivity (39%), SG&A improvement (27%) or technical-cost reduction (19%).
“The good news is that creating a true, soup-to-nuts cost culture can not only yield significant returns, if implemented properly it can be the approach that offers a lower degree of social impact, which of course can be of use once markets change yet again,” says Cassidy. “If history is any guide, companies that simply go into shut-down mode given today’s tough market will rue the day when the market turns yet again.”
* Over 75% of the surveyed companies have operations with revenues of more than $1 billion.