70% OF SURVEYED ENERGY COMPANIES ARE EXPECTING TO SEE REDUCED OPERATIONAL COSTS AND HIGHER PRODUCTIVITY THROUGH OPERATIONAL EXCELLENCE. ARE YOU ONE OF THEM?
This is an issue that has been near and dear to me for certainly the last year or so. It was heartening to see that some research done by PennEnergy in their white paper "Maximizing Operational Excellence" focusses on many of the same things I have been seeing. Allow me to share a quick snippet.
"Over the past 20 months or so, the industry has addressed falling oil prices in the traditional manner. Reductions In Force (RIF), freezing discretionary spending, shuttering projects, etc. have been wide spread. the number of bankruptcies and asset sales continue and one can expect mergers and acquisitions to accelerate once asset value is stabilized.
Has management done all it can to survive in this market? Perhaps not. If the market has undergone a systemic change, cost savings efforts are not enough.
In 2015, the consulting firm McKinsey put forth a methodology they claimed could reduce offshore drilling costs by 50%. Two major findings that are under the control of management include;
- Up to 80% of costs are project time issues, e.g., optimizing equipment, material and facilities, and delivery times.
- 50 and 75% are engineering productivity constraints, such as frequent and last minute project change orders, and "weak-performance cultures and broken learning curves."
These are significant cost savings that are measurable, which means they can be managed. Moreover, other components of the energy value chain suffer from the same issues including cost overruns.
If drilling costs can be reduced by 50%, operators, drilling companies and energy service providers among other participants in the value chain may be profitable in the current crude oil trading range....
An earlier McKinsey paper stated that, "world class operational execution can add up to 30% of value to the production asset base." If these values then can be extracted from the financial Balance Sheet and Net Income Statement, the value to shareholders are huge. Additionally, they are visible at all levels of the organization and actionable....
Increased productivity and lower direct operational costs will unlock this value and can do so quickly." PennEnergy White Paper - Maximizing Operational Excellence, 2016
There Is Another Way
To sum up this finding; In addition to the traditional approaches to dealing with falling prices, operational excellence can be used to garner significant additional savings. This can be at the drilling level and indeed through all the levels related to it. If you can save 50% in drilling then savings should also be realized for example, in completions, other service components and indeed throughout the entire organization.
The reality is that the downturn also represents a significant change in the industry as the "boomer" demographic exits the workforce and the remaining smaller demographic groups are left to cope with a smaller work force. Operational Excellence is THE tool to equip companies to not only survive but to be competitive in this new market reality. If you are not already rolling out Operational Excellence my question to you is "what are you waiting for?" Performance Leadership - Think About It!