DNV GL: Industry Needs to Stop Repeating Mistakes of the Past

DNV GL: Industry Needs to Stop Repeating Mistakes of the Past
The oil and gas industry needs to stop repeating its history of layoffs and traditional cost-cutting measures, and focus on real change to achieve lasting, lower cost levels.

The global oil and gas industry needs to stop repeating the mistakes of the past, such as layoffs and traditional cost-cutting measures, and pursue real change, such as cutting complexity, increasing collaboration and driving standardization, to achieve lasting lower-cost levels during downturns.

This conclusion comes from the findings of a recent survey conducted by DNV GL of 921 oil and gas professionals worldwide. Industry technical adviser DNV shared the findings of this survey in its new report “A New Reality: the outlook for the oil and gas industry in 2016”.

The downturn in global oil prices has resulted in massive layoffs in the oil and gas industry and cutbacks in spending. The oil price downturn had claimed over 200,000 jobs worldwide as of October 2015, according to Forbes. Industry layoffs continue as the industry grapples with oil prices that have dipped below $30/barrel. Low natural gas prices are also prompting layoffs – Southwestern Energy cited low gas prices this week when it reported plans to lay off 376 Houston-Area workers.

With seventy-three percent of senior oil and gas professionals preparing their companies for a lower for longer oil price environment, industry officials believe a new phase of cost management is needed. The downturn in oil prices means that cost management will be a top priority for 41 percent of survey respondents in 2016, with companies focusing on reducing capital expenditures (CAPEX), laying off workers, and squeezing their supply chains to manage costs.

While 74 percent of global professionals surveyed said they achieved their cost-efficiency targets last year – and 65 percent believe the industry will be successful in cutting costs this year – not all portions of the sector have been able to achieve lasting lower cost levels. The survey results also suggested that opportunities for further CAPEX reductions are limited, with 31 percent of survey respondents saying they would focus on tougher CAPEX decision, down from 44 percent last year. And the fact that 27 percent of respondents said they would increase pressure on supply chain – compared with 31 percent in 2015 – suggests that suppliers have been squeezed as much as possible.

For this reason, real change is needed that “will enable industry to adjust to the new reality and put it on a sustainable growth path for the long-term,” said Elisabeth Torstad, CEO of DNV GL Oil & Gas, in a Jan. 25 press statement.

DNV did note that it was seeing signs that the industry is adopting longer-term thinking on cost management. Sixty-one percent of survey respondents agree that operators will increasingly push to standardize their delivery globally, up from 55 percent in 2015 and 52 percent in 2014. Forty-nine percent of respondents said their company was taking a long-term approach to innovation and research and development (R&D). However, nearly one in five global respondents said their organization didn’t have a strategy in place to maintain innovation.

Thirty-eight percent of U.S. respondents said they believed their company was still taking a long-term approach to innovation and R&D. A similar trend was seen among U.S. respondents. However, one-third of U.S. respondents are concerned that they don’t have the strategy to maintain innovation in a down market.

To cope with lower budgets, 45 percent of respondents said they were increasing collaboration with other industry players, and 30 percent plan greater involvement in joint industry projects in the upcoming year.

“Innovation and collaboration are even more important in this current price environment,” Torstad commented. “It isn’t just about finding the breakthrough technologies – although that’s important too – it’s also about making things simpler and more efficient and ultimately helping the industry to safely cut costs.”

Believing R&D to be a key enabler for sustainable long-term competitiveness, DNV GL is continuing to invest 5 percent of its revenue in this area.

“While the industry is understandably preoccupied with generating shorter-term value, we must also keep an eye on where longer-term value and permanent efficiency gains can be achieved,” said Torstad.

Both global and U.S. respondents said they believed their organizations are taking short-term approaches to skills and career development. But average among U.S. respondents was higher with 52 percent, compared to the global average of 43 percent. A higher number of U.S. survey respondents, 21 percent, also see skills shortages and the aging workforce as barriers to growth, compared to the global average of 14 percent. Twenty-eight percent of U.S. respondents expect additional job losses to occur, especially at publicly traded companies.

The same factors cited as a hindrance to growth in 2016 – low oil prices, a weak global economy and uneconomic gas prices – are the same this year. But 81 percent of U.S. respondents said they believed increased consolidation will occur in the sector, compared to 72 percent of global respondents. Twenty-one percent of U.S. respondents also saw a growing regulatory burden as a major barrier, higher than the 11 percent for global respondents.

One third of U.S. respondents also see subsea technologies as the top new or emerging technology impact areas for 2016, DNV reported.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com

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Alan Williams | Jan. 27, 2016
Thanks for sharing. Quote ... real change is needed now - cutting complexity, increasing collaboration and driving standardization. Nothing that could not have been written 10 years ago. So why has it not happened earlier when ironically the cost savings per barrel profitability would have been higher than on today's margins? And do Operators really believe current supply chain costs cannot be squeezed further as is implied? Most Operators and Service Companies are frankly terrified of cutting either internal process steps (i.e. reducing number of stage gates or shortening decision timings) or the ever-expanding HSE bureaucracy/regulation. Dividend payments still take higher priority than proper debt servicing or investment, whilst contracts are designed with minimal rate flexibility to accommodate market changes - how many staff/contractors/equipment suppliers found their services terminated without any option to discuss pay/rate reductions? Knowledge transfer/key skills retention is rarely a downturn priority - witness the deep cuts made to corporate training programmes (compounded by the refusal of training suppliers to reduce charges).

Hector | Jan. 27, 2016
Yes, that should be the way it should be, but: - When the purchase staff of the various project involved parties does not have the right experience or project scope the basis for not repeating the same mistakes from the past is not there; - Too [much] subcontracting is definitely is basis for repeating mistakes from the past. I have never experienced that project requirements from the main contract are subcontracted all the way down to the last project supply chain member; - ... Project design experience a vital factor and not at least being aware of the latest requirements; and - What to do when relevant requirements do change during the project production phases. The time scheduling factor is - and or can be - a basis to repeat mistakes from the past. A good project time scheduler is of vital importance for a project. The ideal project time scheduler should be an elderly production manager with the correct IT skills to manage the various digital time scheduling programs. - Not at least are cultural differences an important factor during the various project execution phases. Not all cultures do have the same attitude regarding various project requirements, which need to be taken in account, when one chooses to execute its project abroad. - Typical project related issues: Time management, documentation, interface management, QC activities, like but not limited to: Inspection & Test plans, information and communication between the various project related parties. Have a nice project.

Philippe | Jan. 27, 2016
The O&G business model we knew is arriving to term. Mohamed El-Erian, an accomplished economist, which appears on TV (CNBC) regularly, describes this phenomenon as arriving at a "T" intersection. Going right, our economy continues to be based on borrowing for the future, and turning left, our economy will be based on real present value. Until recently, budgeting an offshore deep water project required a multibillion dollar investment. No O&G corporation alone can finance such an investment, to make things worse many such projects are Joint Venture with third world state-owned O&G corporations, where the financing burden is bearded by the independent O&G corporation and the JV split is 49%/51% for the state-owned corporation. Crude oil prices approaching $100 per barrel was acceptable. Assuming that an O&G business cycle is 5 years on average, the financing was possible within a business cycle. Today it has become too risky to finance these amounts of investment, hence the political instability with many government, where the JV terms may have to be renegotiated. The alternative is to invest smaller amounts, but over time. LTO-Shale makes this business model possible. The cost of drilling LTO has drastically decreased. One well used to cost $4 million 3 years ago; today it costs $2.5 million. This new business model will change the O&G business as we know it.

Paul Guirlet | Jan. 26, 2016
After 25 years in the O&G, this is my 5th downturn! What everybody is doing: layoff personnel. What was the major threat to the industry a year ago: lack of experience and the big crew change coming. With the packages offered in the O&G being between 4 and 10 times the packages in other industries, maybe there is some alternative to retain expertise and train for the boom that will happen when things will restart. But for this, some will have to cut their own package...


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