ANALYSIS
OPERATIONS
Navigating the
lower-for-longer
oil price cycle
Senior analysts at consultancy firm, Oliver Wyman, suggest five steps for
achieving sustainable cost optimisation in the oil and gas industry
About the author: Bruno Sousa is
a principal at consultancy firm Oliver
Wyman, and is based in Dubai.
Co-authors: Bernhard Hartmann, Saji Sam and Volker Weber
O
8
il and gas operational
excellence is composed
of several critical factors
that must be managed
in an integrated way to sustain
a high level of operating performance. The main factors are safety, reliability, well productivity,
operational efficiency, and cost
optimisation. These all combine to determine the economic
viability of a well or a drilling
programme under a given set of
market conditions.
It is crucial to have a welldefined strategy on the journey
towards achieving meaningful
operational excellence. Here,
analysts at Oliver Wyman make
five key observations.
140
1. The oil price downturn increased profitability pressure
Since 2014, the oil and gas industry has found itself in a new
market environment, with oil
prices dropping by more than
60%. In an industry accustomed
to prices in the US $80-$120 per
barrel range, the new price cycle
of $40-$60 per barrel led to a significant decrease in profitability,
impacting shareholder value.
Companies with the lowest
break-even prices will be the
winners in the long run. For
national oil companies (NOCs),
the oil price drop adds to the
pressure on profits, given the
important role oil plays in supporting the local economy and
Figure 1 :
Evolution of Brent
crude prices
2012 – 2017,
US$ per barrel.
2. Operations excellence and
cost optimisation are critical
NOCs are increasingly implementing ambitious cost optimisation programmes, with the
objective of reducing their cost
base by at least 20%. In Europe,
Statoil has already achieved a
20% OPEX reduction through
right-sizing, and reorganisation.
In Russia, Gazprom has reduced
the cost of gas production by
more than 30%, taking advantage of its share of Ruble-based
contracts. In the GCC, the Abu
Dhabi National Oil Company
(ADNOC) has set an ambitious
cost optimisation target of 20%,
having already started to deploy
initiatives such as right-sizing,
and taking advantage of the supply base market opportunities to
renegotiate contracts.
Figure 1
120
Then
100
80
Now
60
40
20
0
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JUNE 2017
1/2/2013
1/2/2014
1/2/2015
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government budgets. Indeed,
some oil exporting countries
have seen oil revenues drop by
more than 50%.
1/2/2017
3. Sustainable cost optimisation has five characteristics
Analysing this and previous
downturn cycles, Oliver Wyman
has identified five levers that are
common in oil and gas companies
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ANALYSIS
that thrive at achieving sustainable cost optimisation. The firm
developed a pragmatic cost
optimisation approach based on
these levers. The deployment of
this approach should be adjusted
to each company’s situation, objectives, capabilities, and culture.
a. Set ambitious targets and
obtain top management buy-in
Perform a high-level cost due
diligence, across assets and peers,
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NOCs around
the world are
implementing
ambitious costoptimisation
programmes.
to set a cost optimisation target,
and then promote it throughout
the organisation.
b. Plan which areas to optimise
using pragmatic methodologies
Follow a structured and systematic approach to identify key
areas for improvement and
potential quick wins. One pragmatic method is to develop a profitability tree, mapping the key
cost drivers and identifying the
areas to focus on. It’s important
not to cut costs equally across
the board.
c. Develop pragmatic cost
optimisation initiatives
These must be impactful and
implementable, such as initiatives that:
• focus on eliminating redundancies, reducing demand,
and finding alternative
supply options.
• focus on renegotiating
supply contracts, consolidating volumes across sites,
standardising specifications,
and deploying total cost of
ownership (TCO) for key
spending categories.
• focus on localisation, lowcost country sourcing, or
outsourcing. These types of
initiatives are being deployed
across the board.
4. Ensure delivery using robust
performance management
Cost optimisation initiatives and
targets should be monitored to
ensure the savings are captured
and not spent elsewhere. As
an enabler, it is also important
to create the right level of cost
transparency in the organisation.
For example, the CEO of one
GCC NOC
Continued on page 10>>
JUNE 2017
9
ANALYSIS
Figure 2 – NOCs’ cost optimisation target and initiatives (based on public information)
ADNOC
25%1
• Cost reduction target for
OPEX and major Oil
Projects of 25%
• Cost Optimization
program (Category
management , etc.)
Saudi Aramco
• Business units
consolidation
(e.g., ADMA/ ZADCO)
K-Companies
20% Estimated2
• Reduce spend budgets
and renegotiate
contracts
(e.g., OFS 20% disc.)
• Reduction and
reassessment of noncritical investment
• Large workforce reduction programs
of over 5,000 employees
• Retender to drive
• HR and performance
CAPEX down
initiatives
(e.g., Ras Tanura)
• Procurement
centralization
QP
• Assess reforms to
energy and utilities
subsidies
15-20%3
• Large workforce
reduction of over 3,000
employees in 2015
• Reintegration of
subsidiaries
(QPI, TASWEEQ)
• Shut down or
Outsourcing of
non-core services such
as insurance and
catering and increase
the focus on its core oil
and gas activities
Gazprom
20%4
30%4
• Reduction of OPEX of
• Sell non-performing
• Over 37% reduction in
20% per barrel –
assets such as the
OPEX (in USD)
Europoort refinery in the achieved helped to offset
Netherlands or a
the oil price drop in terms • Review and project
configurations,
fertilizer plant in Kuwait
of profitability
• Plans for reduction of
wages, benefits and
incentives to 20,000
workers
• Merge state-owned
LNG producers
Qatargas and RasGas
Statoil
• Assess privatization
options for downstream
assets
• Large workforce
reduction of over 1,500
employees
• Reorganization and
consolidation of
operations
• Delay large projects
(e.g., Vladivostok LNG)
• Reduction of 33% in 10yr
investment plan (in USD)
• Review of Dividend
policy
• CAPEX Optimization
and reduction by 10%
1. Announced by ADNOC’s Director of Strategy and Coordination; 2. Estimated and non-confirmed based on press search; 3. Announced by KPC CEO as achieved cost optimization range;
4. Based on investors presentations
Source: WSJ Journal; Companies websites; Press, Reuters, Gulf News; Statoil, Petrobras and Gazprom investor presentations;
Petrobras
25-30%
Capex/Opex
• Large workforce layoff
of 12,000 employees
and 114,000 service
contractors
• Divestment from
USD 19.5 bn assets
(upstream acreage,
Argentina BU,
midstream terminals)
• Reduction of OPEX by
over 30% from 14.6
USD-boe in 2014 to 9.6
USD/boe in 2017-2021
NA
• Cost reduction and
efficiency initiatives
under review
Sonangol
NNPC
50% Capex
• Reduced CAPEX by
50% mainly through
reduced contractor
spending
• Production costs
quadrupled since 2003, • Delay/ Review of
planned projects
due to underinvestment
and excessive spending
• Organizational
on non-core activities
restructuring to improve
efficiency
• Potential sale of non-oil
interests
Pertamina
Petronas
30%
NA
20%
Capex/Opex
Capex/Opex
• Plans to split into 30
“profit-making”
independent companies
• 2015 Capex and Opex
reduced by 40% and
19%, respectively
• Launched the Cost
Reduction Alliance (i.e.,
CORAL 2.0)
• Cut top management
staff by 30%
• Target to reduce 2016
OPEX by USD 1-2 bn
• Overhauling inefficient
refinery operations
• Review of preapproved Capex &
workplan budget
• OPEX reduced by
USD 0.8 bn, primarily
through enhanced
drilling & completion
• Reduce crude oil term
contracts by half to
reduce cost
• Considers listing its
non-core unit
• Plans tenders for fuel
imports to cut costs
• Plans to reduce CAPEX
by USD 11.2 bn by
2019
• Plans to cut 1,000 jobs
• Initiative to reduce staff
compensation by 20%
at certain levels
Source:, Petrobras strategic plan; Pertamina investor presentations, Petronas investor presentation and CORAL 2.0- program; Press research
Case study
In response to rising costs and
declining oil prices, Petronas
launched an industry-wide
programme, CORAL 2.0 (Cost
Reduction Alliance), involving
25 operators. Under CORAL 2.0,
there are 11 identified initiatives
to activate three value levers –
proactive demand management,
spend consolidation, and driving
innovation. CORAL 2.0 aims to
inculcate a cost-conscious culture across the industry, to promote international performance
benchmarking, and to increase
collaboration in exploration and
production. This programme
has a targeted potential annual
cost saving of $0.9bn to $1.7bn
by 2019, has already enabled
Petronas to reduce CAPEX by
28%, and OPEX by 9% from
2015 to 2016.
Figure 3 - Oliver Wyman’s cost optimisation approach
1
Set an ambitious target and obtain top management buy-in
Plan
5. Implement a company-wide
cost-performance culture
To ensure cost optimisation
targets are met, it’s important to
involve all levels of the organisation, particularly operational
teams that have key insights on
where and how to optimise costs.
Create a suggestions box and a
web-based savings tool that are
accessible to all employees so
that they can help to identify
potential cost optimisation initiatives, or organise workshops with
2
3
Building blocks
Continued from page 9>> systematically
asks his team what their profit
per barrel is, and some companies display their daily margin
per barrel prominently for all
staff to see.
Enablers
10
• Reduction of 25% in 5yr
investment plan to
US$ 74 bn (e.g., Presalt Deepwater)
PDVSA
operational asset teams to create
a case for change and get buy-in
across the organisation, which
is critical in implementing and
delivering any cost optimisation
programme. Of all five levers, this
is perhaps the most important.
Use pragmatic methodologies and identify which areas to optimize (no-one size fits all)
Develop pragmatic cost optimization initiatives
3.1
Do Less
Eliminate processes/
layers/ services/ product
Downsize / reduce
demand (freq./ quantity)
Adjust service level
Find an alternative /
innovative solution
3.2
Do better
Optimize asset footprint /
portfolio
Consolidate spend/
standardize/ Right-size
specs
Optimize TCO1
Automate
3.3
Do Cheaper
Switch to cheaper
sources
Tap into supplier margin
Collaborate with
suppliers
Outsource non-critical
activities
4
Ensure delivery through a robust performance management and communication
5
Align organization ensuring buy-in and deploy a cost performance culture
1. Profitability tree breaks down a company’s free cash flow into its main drivers (i.e., revenues, OPEX, capex, and working capital).
2. TCO - total cost of ownership considers all direct and indirect costs associated with a given purchase throughout its life cycle.
3. IKTVA – In-Kingdom Total Value Add Program to baseline, measure, and support increased levels of localisation in the Kingdom of Saudi Arabia.
4. Based on investors presentations.
JUNE 2017
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