Oil and gas industry resorts to tighter cost control


Rising costs and a tighter squeeze on margins are driving an urgent need for creative ways to save money, including the adoption of new technologies in the oil and gas industry, a report says.

The report ‘A balancing act: the outlook for the oil and gas industry n 2015’ details the steps taken by the industry in trimming their costs effectively.

It is based on a global survey, incorporating the views of more than 360 senior industry professionals and executives, along with 18 in-depth interviews with a range of experts, business leaders and analysts.

The research was carried out on behalf of DNV GL by Longitude Research.

The report states that three-quarters of respondents (72%) plan to become stricter on cost control in the year ahead. It quotes one example:  oil-services company Schlumberger has already reported “much stronger customer-capital discipline and focus on cost”, as well as its intention to cut 9,000 jobs.

Project complexity is also the reason why companies are resorting to tighter cost control.

Two-thirds (64%) of multi-billion-dollar, technically and operationally demanding mega projects continue to exceed budgets, with three-quarters (73%) missing project-schedule deadlines. On average, current project estimated completion costs were 59% above the initial estimate.

“Projects are getting more complex, not only in technology terms, but also because of the business environment, and complexity has a cost,” Rob Van Velden, Finance Director at Sakhalin Energy was quoted as saying.

“We’ve invested much more, and the return, on average, has gone down,” he added.

One insider says the key lies in long-term profitability analysis from beginning to end of the project.

Below are some of the cost-effective measures undertaken:

  • Tougher decisions on what capital expenditure decisions are actually approved
  • Improved workflow/work processes
  • Increase pressure on supply chain to reduce costs
  • Reduce exposure to riskier/costlier projects Reduce size of labour force Increased standardisation of tools and processes Increased collaboration with other firms, especially on major projects
  • Sustainability initiatives that also deliver cost operational savings
  • Reduced reliance on outsourcing

Fewer headcounts

Nearly half (47%) of the survey respondents say their company plans to reduce headcount during 2015, sharply up from 16% last year, and just 11% in 2013. Various companies have already begun implementing layoff programmes. Canada’s Nexen Energy, acquired by China’s offshore giant, CNOOC, announced in summer 2014 that it would reduce headcount, starting with senior management and progressing down through the organisation. BP has announced that thousands of redundancies are to be made by the end of 201514. Statoil and Schlumberger have announced staff cuts too.

“For the major producing companies, their revenues are well down, so their budgets are being cut substantially and they’re hiring much less,” says Simon Hatield, the Canadabased CEO of independent oil company, WesternZagros Resources.

This adds to the worry of losing skilled professional workers, especially among contractors.

Other findings of the study

The study also found that companies are tightening the belt on investment. Rising investment yields lower result.

Some companies, such as Repsol, argue that they’ve long practised making investment decisions based on a range of price scenarios. “We make investment decisions based on profitability of the entire life cycle of projects, and continually work to review all of our investment opportunities,” says Rix. “This price environment makes us very disciplined in capital allocation, combining the organic growth with selective inorganic acquisitions. Therefore it’s possible to complement the business sustainability with the access to inorganic growth opportunities under attractive financial conditions.”

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