The oil and gas industry is feeling the pressure in places other than reservoirs as focus remains on sustaining lower operational costs and efficiency gains.
Strides have been made as E&P companies have adjusted to today’s oil prices, having cut spending, revamped portfolios and developed new technologies and techniques to add value. Some have also steered focus to brownfield developments.
But there’s still room to get costs even lower, according to KPMG.
The question is whether the operational changes and cost reductions will be sustainable in the long run as global energy demand grows, the service market tightens and rates increase.
“They realize the material risk of losing the hard-won gains. Many operators are also targeting further improvement from more sustainable traditional areas,” said James Albert, an associate director for KPMG UK. He noted these include improving reliability and supply chain efficiencies. But “In a world where the oil price remains close to $50 to $60 per barrel for the long term these opportunities will not allow mature basins to remain competitive globally to attract the capital they need for long-term survival.”
However, there are several areas where companies can realize long-term value. Speaking during a recent webcast, Albert highlighted areas where operating costs could be lowered by a further 30%. One way is to tailor standards to different assets.
With more attention on breakevens and play economics, some companies are finding that standards put in place during a drive toward “engineering and functional excellence” are no longer suitable for some assets. One example is applying standards designed for an asset in mid-life to an ultra-late life project that is approaching decommissioning. As an alternative for the latter project, a more simplified capex process could be used where the goal is to reduce costs slowly without jeopardizing safety. This speeds up the decommissioning process and saves money on maintenance, he said.
Companies using this way of thinking are already delivering results.
Albert said one major achieved a 25% cost reduction across a number of assets, mainly by tailoring processes such as field development to different asset classes. “Instead of a one-size-fits-all field development process where key decisions were taken almost exclusively by central technical teams, individual asset teams were allowed a much greater say in key variables such as rig selection, mud weight, crew size, topside design, etc. in line with their own economic needs,” he said.
Further reductions could be realized by using machines to make decisions, starting with performance outcomes, according to KPMG.
High-stakes day-to-day decisions should involve an assessment of a robust data before taking action; however, KPMG found that sometimes data are incomplete, of poor quality or inaccessible to the decision-maker, Albert said. Drilling execution decisions, such as when to trip during drilling or choke back a well, are often driven by time and cost. Such decisions are typically made by highly-experienced engineers who make decisions using past situations as a guide. Technologies such as data analytics and artificial intelligence could help decision-makers, he said, adding nearly all E&Ps that KMPG has spoken with recognize the potential of these technologies.
However, KPMG sees a potential risk in repeating cost mistakes when it comes to digital technologies. Albert used as an example how many companies are spending millions of dollars on data lakes not knowing how to drive value from the investment.
Instead of starting with Big Data, KPMG suggests beginning with a performance challenge. Focus first on the performance outcomes that the company wants to optimize and then work backward, looking at which levers to pull for the desired outcomes, specific individuals involved and existing tools and datasets available, Albert explained. “Only then do we assess the outstanding data requirements and decide whether to invest in any data infrastructure,” he said. “Once these dimensions are understood a decision support tool can be built to recommend potential courses of action and predict the associated outcomes across different parameters where tradeoffs are being made.”
Christopher Young, director of KPMG UK’s global strategy group for energy and natural resources, pointed out the heightened focus on digital nowadays. Talk is on what’s needed and how companies should be responding.
“Very often what that seems to feel like is a lot of technical solutions that are in search of a problem,” Young said. “Instead of saying the answer is digital, now let’s figure out what the question is. Let’s look at the toughest, most difficult business problems and ask whether there is some way we can make better decisions.”
Other areas where companies could reduce unit operating costs, according to KPMG included:
- Increasing collaboration and integration across the value chain;
- Automating transactional processes instead of outsourcing them; and
- Allowing value-based prioritization to take precedence over engineering excellence.
Albert pointed out that the list was not exhaustive and noted there are countless other opportunities. “But these are the key themes we have seen starting to emerge in wave three,” he said. Some companies are already carrying out these tasks.
KPMG put the industry’s response to commodity price swings into waves. The first, between 2014 and 2016, was characterized by companies’ initial reset to the low-price environment with steps that included headcount reductions; supplier negotiations and rate reductions; and capex rationing and deferrals. The second wave began in late 2016 to present day with companies addressing the drivers of sustainability and operational efficiency such focusing on lowering unit costs and moving from supplier confrontation to aligned risk and rewards, looking for long-term value, KPMG said.
The so-called “third wave” comes from a commercial mindset, instead of engineering excellence, and includes a willingness to look outside the oil and gas industry for solutions. In addition, new technology takes on a prominent role.
Velda Addison can be reached at email@example.com.
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