EY: Current Downturn Offers O&G Chance to Achieve Operational Excellence

The need to boost operational efficiency and productivity while maintaining health, safety and environmental (HSE) standards in a time of low oil prices has created a unique opportunity for the oil and gas industry to realize the promise of operational excellence, according to a new Ernst & Young (EY) report.

The expand-and-contract model that the oil and gas industry has used creates great instability in the industry. In periods of prosperity, organizations spend big money for new assets, hire many employees – often at an inflated rate – and push for growth, often at the expense of current asset performance, according to recent report by Ernst & Young (E&Y), Driving Operational Performance in Oil and Gas. Instead, an approach that brings stability is needed, rather than rapid reduction of cost through downsizing or budget cuts throughout an organization.

Oil prices of more than $100/barrel had masked the eroding profits and operational efficiency in exploration and production that occurred due to the increase in global exploration and development costs in harsher, more remote and complex basins. The challenges of executing these projects, and the fact that more than 50 percent of global production comes from assets beyond their midpoint of the asset life cycle, add to the complexity that the industry faces. As a result of these challenges, E&Y reports that an 11 percent year over year decline occurred in exploration and production operating efficiency from 2008 to 2012. At the same time, costs are rising. From 2007 to 2014, the operating costs per barrel for majors, national oil companies, and independents have steadily increased.

These performance gaps have become more prominent in the current low oil price environment due to heightened awareness among investors, stakeholders, and employees. To address these gaps, oil and gas companies need to improve their operational performance and economics to maintain their long-term growth and viability in a sustained low oil and natural gas price environment.

“Industry analysis suggests operational performance gaps begin at the strategic level and carry through to a specific process breakdown within assets,” E&Y noted. “In addition, operations functions often lack continuous improvement efforts targeting these inefficiencies and failure modes.”

Operational excellence can help oil and gas companies realize cost savings. According to E&Y, top-performing companies have only achieved a compound annual opex/bbl cost escalation rate (CACER) – similar to a compound annual growth rate – of 2.25 percent. But E&Y estimates that savings of US$30 billion are possible over five years between best in class and average performance, assuming a model for the majors of 93.5 million barrels per day of production, a starting cost basis of US$6.80/barrel and a cost escalation at 2.85 percent and 2.25 percent.

“Given that the majority of companies have a cost basis higher than US$6.80/barrel, and that NOCs and independents have much high cost escalation, the US$30 billion can actually be considered quite conservative, displaying the huge opportunity that exists across the industry,” E&Y said.


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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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