Operational Excellence can help Oil & Gas reduce costs

10 March 2016 Consultancy.uk 5 min. read

The sudden and dramatic plunge in global oil prices determined mainly by supply, demand and partly by expectation has also been compounded by pockets of regional instability. This combined with political pressure to shift to renewable energy sources means many of the industry's most established players - and governments, because of their reliance on oil revenues to balance national budgets - are intensely focussing on rigorous cost discipline. Waves of redundancies cutting payrolls and saving cash, large-scale asset disposals and sharp reductions in capital expenditure have become the norm and still continue throughout the industry supply chain.

While this cost-cutting formula has borne some fruit in terms of reinforcing balance sheets there are, as Saudi Arabia's Minister of Petroleum and Mineral Resources warned recently, inherent risks in this approach. Ali Al-Naimi sounded a note of caution about the trend towards reduced investment when he spoke at a November energy conference in Bahrain, saying that the world must continue to invest in oil projects if the international energy community is to guarantee stability, safeguard energy security and meet demand in the long run. There is a need for companies to find ways of generating immediate but sustainable cost savings without jeopardising critical long-term investment in jobs, skills, infrastructure and energy supply.

The need for Innovation and Sustainability
The impact of the oil price crash has been dramatic, with much of the industry still coming to terms with the effects of a five year low continuing to decimate budget and investment forecasts.

Oil fields

Conventional wisdom dictates that in times of high uncertainty, speed and a sense of urgency are crucial and the cumulative effect of year-on-year cost inflation, poor production efficiency and demand shift helps to explain why so many operators are being forced to take drastic action. Cost reductions and operational efficiencies are taking precedence over growth however a 'cost-savings only' strategy does not lay the ground for long-term returns. The companies that emerge in a stronger position from this period of turmoil will be those that use the market conditions to drive transformational organisational effectiveness by deploying innovative ways to streamline operations and drive culture change through sustainable business practices which go hand in hand with efficient business practices. Continued investment needs to be made in capacity building and skills development of the workforce, retention of corporate memory and knowledge transfer supported by the implementation of operational excellence programmes.

Advancing to the next level of Operational Excellence (OE)
Much of operational excellence involves objectively stepping back to see the bigger picture. An approach we use called 'Rapid Cost Optimisation', which facilitates quick identification of possible savings and efficiency gains through a combination of internal business knowledge, external performance comparisons and by encouraging individuals and teams to think creatively. Compared to more 'traditional' methods, Rapid Cost Optimisation has been shown to generate great results.

The reason for this is quite simple - traditional methods tend to focus purely on identifying 'gaps' and try to find ways of improving the way things currently work. Rapid Cost Optimisation, on the other-hand, removes the boundaries that often constrain innovative thinking and limit an organisation's ability to consider what might be possible and what could be done differently. It is also important to convert urgency into focussed action in a way that keeps individuals engaged, motivated and energised. Clients are often surprised by how ingenious and inventive their people can be when they are given the opportunity and the tools to do so.

Philip Camp - Hitachi Consulting

Building Confidence for the Future
Options for reducing costs should be evaluated from the perspectives of financial and practical viability fully taking into consideration any requirements for risk mitigation. As opportunities are more closely scrutinised they can either be accepted or rejected. If accepted and signed off, it is important for them to be categorised, ranked and measured. Each opportunity needs its own business case providing insight into the nature and detail of the proposal so its true potential to guard against the impact of a low oil price can be fully assessed.

Our credentials and experience with oil and gas organisations around the world have helped companies incubate new ideas and insights that can be applied to tackling the most pressing issues facing the oil and gas industry today. Operational Excellence programmes challenge conventional thinking around business improvement addressing how to release locked away cost savings while ensuring sufficient investment is maintained to tap into tomorrow's potential and preparing the organisation now for the next cycle of economic growth.

An article from Philip Camp, Vice President Energy EMEA at Hitachi Consulting.