A critical component of operational excellence in the oil and gas industry is effective cost containment practices. The current oil and gas landscape has driven the entire industry to reevaluate its operations. While important and timely, sustainability is achieved by adopting long-term strategies to manage costs.
Aligning cost containment strategies and measures with key bottom-line metrics will help stabilize businesses in the current cost-conscious environment and stay competitive in the long run.
Oil and gas operational excellence is composed of several critical factors that must be managed in an integrated way to sustain a high level of operating performance. The main factors are safety, reliability, well productivity, operational efficiency, and cost optimization. All combine to determine the economic viability of a well or a drilling program under a given set of market conditions.
When market conditions change, such as in the case of the 2014/15 downshift in crude oil prices, the challenge for operators and service companies is to realign their cost structures, while making the minimum negative impact on the other components of operational excellence. Success in achieving this is usually the main factor if new resource development can continue or if it should be deferred. The challenge for the upstream sector is to take a more strategic view of cost structures so the necessity for tactical and reactive cost reduction measures as oil prices drop is minimized.
Oil and gas companies should actively and continually build in structurally sustainable cost management practices in order to lock in the competitive advantage of being the low-cost operator or the low-cost service provider, while maintaining high achievement levels along the other parameters of operational excellence. Smart well design, real-time reservoir management and data analytics, lean operations, a supply chain strategy aligning companies along the chain, and flexibility in contractual commitments all contribute to a cost management culture that supports sustained operational excellence.
The recent oil price downturn has put oilfield service (OFS) companies on the frontline of activity cutbacks, service price renegotiations, and vanishing commitments to future services. Systems and structures, suppliers, contracting models, and staffing levels are all key elements in resolving the challenges faced by the sector. OFS providers risk bearing the brunt of reactive cost-cutting measures driven by operators, reducing activity in a low-price environment. Strategically, this should push OFS companies to manage their service offerings and relationship portfolios in a more focused way, allowing them to concentrate on higher margins, differentiated services, risk-and-reward sharing contractual arrangements, and long-term partnerships with both operators and equipment suppliers. Additionally, they should ensure back office and administrative functions are efficient, cost-effective, and state-of-the-art.
