Global oil producers slash costs as low commodity prices bite

In a bid to remain operational, globally oil companies have been forced to decrease operational costs by 29% on average, with around 50% of cost cutting likely to be sustainable in the longer-term. The low cost of oil has resulted in producers' margins being squeezed, and in some segments, considerable upheaval, according to a new study.

A recent glut in oil production has seen prices fall to record lows, with an average price of $43 per barrel last year and a projection for an average price of $52 for the coming year. For producers, particularly of relatively high cost operations, such as oil rigs and fracking, the effect has been a protracted period of loss, the closure of capacity and redundancies.

In a bid to at least break even as demand falls amid improving renewable energy and performance enhancing technologies meaning less oil is required, companies have begun to focus on cost reduction. In a new report from McKinsey & Company, the consulting firm considers the current trends in production costs in the UK's North Sea operation to assess the sustainability of this strategy.

The research, which looked at 37 large players producing around $40 million barrels per day, finds that globally, the cost of production has fallen steeply since a recent peak in 2014. Production has fallen 29%, from more than $150 billion to around $110 billion. All categories saw decreases, although the major producers and NOCs saw the biggest drop in costs.

Aside from a reduction in production costs, the research also noted that producers have in one way or another reined in the number of injuries per million hours worked. Injuries fell from 1.6 per million hours in 2013 to 1.21 2015, while list time injury frequency fell from 0.45 to 0.29. The research also notes that process safety performance, in terms of events per million hours worked, fell from 0.61 at tier 2 producers in 2013 to 0.44 in 2015, while among tier 1 producers it fell from 0.19 to 0.14.

The research also noted that operators of offshore facilities (400 in the sample from across the globe) have seen their production losses fall by 15% on a 4Q rolling average. The most recent average stands well below long-term trends, and began its decent during 2014. The drop in production losses is attributable, the firm notes, to a reduction in unplanned outages, as well as a 25% reduction in planned outages – with operators reducing the frequency of planned outages as well as the scope of work during outages.

Sustainable reduction

To better understand the sustainability of operational cost reduction, the firm broke down the overall operational improvements into four categories, operational change; eliminated demand; deferred demand; and price reduction.

To understand the sustainability of efforts the firm researched the UK North Sea operation. The operation has, since 2014, seen costs fall from £9.7 billion to £7.1 billion (27%) from 2014-2016. In addition a range of operational efficiency and safety procedures were implemented.

In terms of sustainability of savings, the firm notes that around 25-35% result from deferred demand and price reductions, these related to putting off work, freezing hiring and delaying system upgrades as well as benefiting from reduced diesel costs and vessel standby charges. The sustainability of these factors are by no means guaranteed.

The elimination of demand, including the permanent removal of planned activity saves around 40-50% of total savings achieved. In so far as these pertain to divestment or elimination of redundant operations, the elimination is considered sustainable. An additional area in which gains are derived is change in specification or approach to achieve lower costs, such as reduced preventative maintenance, cheaper added value options and switch in materials used. Other studies meanwhile suggest that peak energy brought forward by improving technology and clean energy infrastructure may hasten the demise of the fossil fuel industry.

The authors of the report added, “Simply put, future spending across the world’s oil and gas producing fields will depend on just two things; first, the level of economically viable activity required to maintain existing production and to capture new opportunities at the current prices and; second, the cost of executing that activity, driven by market prices and the efficiency and effectiveness of the industry.”