Since oil and gas became commodities, and with the equity market impact of the Enron/other corporate scandals, the financial world is scrutinizing oil companies more closely. E&P companies are being driven more by Wall Street performance indicators - return on capital employed (ROCE), cash flow and years of remaining reserves - versus historical oil industry metrics (production volumes, number of high profile projects and long-term growth). Oil company managements have become more risk intolerant, choosing to sit on cash even with high oil and gas prices, and buy back shares. Companies are forced to deliver results within a shorter time, negatively influencing their ability to undertake "high risk/high reward" ventures. Simultaneously, field maturity worldwide, and especially in North America and the North Sea, is advanced, with field productivity on an ever-steeper decline.

From the 1980s, multi-nationals in the United States looked to redevelop old US assets as a low-risk lower-investment-cost way to increase cash flow, reserve life and ROCE. Infill drilling, for example, adopted an "assembly line" approach to keep development costs below US $5/boe. This approach was successful for Pan American Energy in Cerro Dragon in Argentina, Renaissance Energy in Canada, Oxy Permian in the Permian Basin and ConocoPhillips in South Texas.

In the early to mid 1990s, after the wave of field redevelopment via increased well density and tertiary recovery initiatives, focus shifted toward cutting operating expenses. In the late 1990s, to continue squeezing existing assets for more cash and reserve life, companies reduced operating expenses and production downtime by improving the application of existing technology and enhancing work processes.
Managements came to understand that the application of best practices to field operations reduces field downtime, increases field cash flow and reduces cost, and is a more effective, long-lived approach than merely lowering costs without best practices. This paradigm shift was from a "reactive operation" (e.g. immediate cost reduction targets) to a "proactive operation" focusing on root causes of operating problems to install solutions that naturally increase field cash flow. This paradigm shift is what is currently driving the industry's pursuit of operating excellence.

Today, most oil companies are committed to improving their operating and production efficiency. Most majors and many larger independents have developed, or are in the midst of developing, their own "operating excellence models." Their success will depend on how committed they are to this new approach of "thinking outside the box."

Ziff Energy Group, a global energy consulting firm, has been assisting the industry worldwide to reduce costs and improve operating efficiency. Business structure and production operating strategies vary from company to company and region to region, but the challenges are the same. A proven actionable and effective instrument in the improvement effort is benchmarking.

Operating costs and processes are benchmarked, establishing performance "gaps" upon which performance targets and milestones may be set. Benchmarking provides an unbiased comparison of performance and is a strong foundation for building upstream excellence based on the "four pillars" of (1) capital efficiency, (2) operating expenses and practices, (3) production maximization and (4) people efficiency.

The main objective is to implement change by translating analysis into action. We have found the most effective improvement process includes internal and external comparisons of performance metrics as well as performance monitoring tools. Successful implementation depends on formation of an internal benchmarking/excellence team and full commitment of management. Benchmarking supports an organizational mindset having a "continuous cycle" of measurement and improvement. The premise is:

• Whatever gets measured gets managed.
• Whatever gets focus and effort gets improved.
• Whatever gets benchmarked gets focus.

Operations efficiency efforts are different for each phase within the life-cycle of oil and gas fields.
Management of excellence in each period is different - often those who excel in one stage are not best performers in others.

• In the first phase of field discovery and early development, the incentive is to develop the resource (capital) efficiently and quickly, to start the recovery of capital invested.
• In the next phase, the field is young and still in development, and the incentive is to grow production rapidly to achieve the peak rate.

• During mid-life, the field has reached its maximum development and production has peaked at a plateau, and the incentive is to maximize production every day.

• Last is the mature period when the field goes into decline. The objective is to optimize production and minimize costs until the field reaches its economic limit and is abandoned.

Although corporate competition still is, and always will be, a strong driver within the industry, especially among some leader companies, collaborative approaches are utilized more now than a decade ago. This trend to collaboration is evident in Gulf of Mexico deepwater transportation costs, measured in the consulting company's periodic multiclient benchmarking studies.

These studies confirm that companies that share boat and helicopter services within their own company (i.e. between drilling and production) and with other companies have significantly lower transportation costs than those that do not share. Industry leaders have seized the opportunity and reaped benefits in cost savings from efficient logistical operations.

A major issue for E&P companies today is the aging of staff and lack of replacement personnel from traditional sources. In Canada, the challenge has become particularly acute in the services sector, especially drilling. At the current peak, a number of rigs are working on a part-shift basis (e.g. 1-2 shifts rather than 3) due to lack of staff. In the United States, safety statistics from mid-2004 reveal increased rig incidents as less experienced crews enter service.

Some of the steps companies are using to overcome staff shortfall include increased automation of fields and equipment to utilize existing staff more effectively; reduced staff surveillance of older, low-producing wells; use of part-time contract employees; use of leased compression with guaranteed performance; and sharing of facilities, inventories and staff.

An excellent example of an industry collaborative project built upon benchmarking is a project with three operating companies in Colombia, including the national oil company, Ecopetrol. The three companies operate 23 mature fields close to each other in the Neiva region of Colombia. Based upon the consultant's benchmarking and best practices analysis and recommendations, the trio is undertaking a number of initiatives targeted to improve performance.

The objective of the project is to identify and capture opportunities to elevate operating efficiency and reduce costs. Improvements arise first from changes to individual company operating practices and secondly from newly identified operating synergies among the three companies. Based on the results of the project thus far, annual cost improvement of several million dollars is expected.

Figure 1 shows the project work process and deliverables. The project began with a cost benchmarking analysis, comparing the 23 fields to each other and to comparable fields in the consulting company's international field cost database (with 3,150 fields, the world's largest). This analysis identified three cost areas with the greatest improvement opportunities: well servicing/subsurface repair and maintenance; surface repairs and maintenance; and energy management. The analysis also indicated high potential from integrating the companies' operations in areas such as drilling and workovers, warehousing and materials, and contract services.

Based on the cost benchmarking results, the companies commissioned a significant second-phase project with the consultant to capture identified improvement opportunities. This phase consisted of field visits and detailed analysis of existing practices, identification of applicable industry best practices, and field implementation of recommended changes. This work was conducted by the companies' technical teams working in collaboration with the consultant's technical specialists in each high-priority area. Workshops with the companies were used to debate ideas and issues and prioritize and finalize implementation plans.

The consultant also helped establish ongoing performance improvement processes within each company. The companies included this aspect to ensure improvement would become embedded long-term within their cultures. Training helped each company's internal benchmarking team effectively continue and manage performance improvement efforts. This training included transfer of benchmarking knowledge and technology. In addition, the consultant worked with each company to develop performance metrics and a dashboard-based performance monitoring tool to monitor and assess in real time ongoing business performance.

This comprehensive improvement project has already begun to yield benefits for the three companies and has laid the groundwork for further work and collaboration to further improve results from the Neiva fields and extend their economic life.

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