Operational excellence (OPEX) is not a new concept in the oil and gas industry but it’s come into much greater focus over the last two years since commodity price volatility drew attention to widespread ineffi­ciencies. They are so widespread, in fact, that it takes more employees and resources to produce one barrel of oil than at any other time over the past 20 years. That may have been acceptable at the peak of the boom period but isn’t any longer; especially when considering the number of aging assets and mature fields across the industry.

OPEX programs are about creating efficient and sustainable operations. They were orig­inally introduced to improve health, safety and environmental (HSE) performance or respond to an HSE incident, but they’ve since evolved to become much more focused on financial and operating performance. When implemented correctly, they can create a com­petitive advantage for companies. Adding the latest digital technologies—to infuse digital across the entire value chain—is the final step to achieving operational excellence.

Many companies embraced OPEX pro­grams following the drop in oil price but few, if any, are delivering on all efficiency oppor­tunities. There’s much more that can—and should—be done.

Research shows that companies can achieve immense cost savings from OPEX programs. Running a model using integrated, multinational oil and gas companies that assumes 93.5 million barrels per day (MMbbl/d), a starting cost basis of US$6.80 per bbl and cost escalation at 2.85% and 2.25% reveals potential savings of more than US$30 billion are available in the next five years. That’s only a conservative estimate.

Consider two basic examples where OPEX comes into play. Imagine a national oil com­pany (NOC) is seeking to improve the way its top management makes strategic decisions. The organization has multiple subsidiaries which makes it difficult to assess the impact of major decisions, M&A activity and other investments across the business. Inefficiencies with often severe financial consequences are inevitable if management doesn’t consider the implications of their actions on the company’s entities and at the consolidated level.

Or take an organization struggling to keep its assets intact while continuing to be a leading service provider and juggling internal spend. By introducing performance improvement measures the company could identify significant untapped cost savings.

These examples illustrate one very sim­ple point: OPEX is within reach. Tapping into these benefits requires a real grasp of the issues at hand. There are five common factors behind operational inefficiencies. They include:

Non-integrated business and activity planning

Integrated planning requires creating long-term business strategies that are effectively translated into short-term and medium-term operating plans. All these plans need to be sup­ported by appropriate frameworks and sponsor­ship. Instead, usually from a lack of leadership sponsorship, an ineffective strategy and frame­work is put together that makes it difficult to translate strategy into operations.

Finding the right risk ratio hasn’t been a strong suit of the industry in the past, either, when it comes to business and activity plan­ning. If you’re taking on a lot of risk then the returns should also be high. Instead, the indus­try has taken on a lot of risk when the returns are only moderate. Finding the right propor­tion of risk to returns is increasingly import­ant. Companies must prioritize activities that provide returns proportional to the risk they’re undertaking in today’s uncertain environment.

Lacking an effective operating model

An operating model should outline how pro­cesses, people and systems interact to support the business in the most optimum way possible to maximize efficiency. But this isn’t always the case—in fact, it’s rarely the case. Instead, operating models are designed in a vacuum that results in a lack of standardization, policy and enforcement across the business. Unclear deci­sions, governance or performance management can create inefficient operations.

In more recent months, as a result of con­tinuing low commodity prices, more com­panies have undertaken partnerships or joint ventures to share project costs and risks. That’s changing the operating model dynamic. Companies need a different operating capa­bility to support smaller stakes in projects – especially when you consider the impact of cost and headcount reductions on the busi­ness. Embracing new technologies is one way companies can fill gaps in skills sets to oper­ate in this new environment.

Mismanaged supplier and contractor relationships

Contractors and suppliers have the poten­tial to contribute positively to business performance. Companies that don’t apply adequate prequalification and contract exe­cution of these relationships, however, are setting themselves up for failure. An interest­ing assumption that a project is unique also tends to take place in an organization, when companies should really be looking for syner­gies or best practices within existing projects that can offer cost savings. Already off on the wrong foot, external vendors also get left to their own devices with poor oversight from management.

It’s important, at the beginning of any supplier or contractor relationship, to structure an agree­ment so that objectives and oversight mecha­nisms are clear, appropriate and managed.

Poor asset reliability and integrity

Total asset reliability and integrity, in an ideal state, means the ability to detect asset failures for elimination, track and investi­gate failures for improvement and focus on the life cycle of assets from design to decommissioning. Throughout the life cycle, there are countless areas where inefficiencies can emerge.

On the maintenance side, companies that favor scheduled maintenance over predictive maintenance, for instance, cannot anticipate failures or issues and respond quickly. Many companies also undertake over-abundant maintenance activities. This usually happens when data is overlooked or insufficient ana­lytics are in place to interpret data to create a more effective asset management program.

Inefficient cost management

Cost improvements are always on the boardroom agenda—regardless of oil price or profit margin. Of course, with margins squeezed as much as they are now, cost reduc­tion efforts receive more attention. But, these considerations too often focus on surface costs, like personnel, when they should be looking far beyond at the hidden costs of inef­ficiency and rework. Tools and technologies that measure efficiency or productivity can identify areas for saving that maintain output.

Overall, with so much potential to improve operational performance, it’s not difficult to see why savings of more than $30 billion are within reach over the next few years. Analy­sis suggests closing the gap between the total efficiency opportunity and delivered improve­ments begins in the stage when managers are setting strategy.

A handful of vital components can make for OPEX program success:

--Operations/business management systems: These systems establish a centralized op­erating framework that ensures all core activities are done consistently and in the most effective way, to sustain the OPEX transformation and achieve measureable results.

--Digital/technological advancements: Big data and analytics, robotic process automa­tion, digital oilfield, Industrial Internet of Things and cloud computing are a handful of new digital tools with the potential to enhance efficiency like never before. Com­panies must focus on how to embed these technologies most effectively to achieve their OPEX ambitions.

--Organizational development: Leadership is crucial to the success of any large (or small) scale business program. Companies must take care so that they have the right people at the top of the organization and throughout to maintain OPEX.

--Performance management: New technol­ogies allow companies to track, measure and report on performance in real time. Companies that establish their own met­rics and dashboards can capitalize on the power of big data analytics.

--Continuous improvement: This is perhaps the most important component to success. OPEX programs shouldn’t be a one-off. Companies must make a constant effort to improve process efficiencies, reduce redundancies and improve the way work is completed.

The global oil and gas sector has a history littered with clear expand-and-contract rou­tines during boom and bust cycles. The days of a knee-jerk reaction to volatility are over, because, gone may be the days of high highs and low lows. The industry is undergoing a real structural shift and needs new business innovation models to succeed in the new environment. Using digital should be seen as a part of a holistic answer to today’s challenges. Companies should start deploying digital in areas where technology can affect the cost curve in the short term and deliver imme­diate results.

Thriving in the current oil price environment depends on embracing operational excellence at every level of the organization—especially when it comes to aging assets and mature fields. Every dollar counts in a low oil price world.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

Andreea Ene is an EY Europe, Middle East, India and Africa area oil and gas advisory leader, based in the Stavanger, Norway, office.

Comments