An oil well. © 123RF
An oil well. © 123RF

Cost cutting 'top priority' for oil and gas sector

16 February 2016

Cost reduction, including in the supply chain, will be a top priority for oil and gas companies this year, according to research.

In a survey of senior executives across the global oil and gas industry by DNV GL, 88% of respondents said that cost reduction would be a top, or high priority for them in 2016, up from 85% last year. For publicly listed companies the figure was higher at 93%.

The supply chain would be expected to account for 10-15% of the total 20-30% average costs reductions that operators are looking for on projects.

The report, A New Reality: the outlook for the oil and gas industry in 2016, outlined market sentiment against a backdrop where ongoing high supply in 2015 has suppressed oil prices and this year started with the lowest oil prices in 12 years, increased tension in the Middle East and uncertainty over the Chinese economy.

The study found that applying pressure on the supply chain would be the third most popular cost-cutting strategy this year, according to respondents.

A third of all companies surveyed cited stricter decisions on capital expenditure as the main cost cutting priority this year, followed reducing the labour force, cited by 31%, up from 25% last year.

Although the total number of respondents that plan to put pressure on their supply chains is down to 27%, from 31% last year, almost a third (32%) of oil and gas operators said they would be doing this.

These pressures are also being passed down the chain, according to the study. A quarter of service companies and 29% of other businesses in the sector also said they would be putting pressure on their supply chains, the study found.

Almost three quarters of companies in the sector said that they had had some success in reaching their cost cutting targets last year, while a third felt that cost cutting would be successful this year.

The study also concluded that these cost pressures would force greater collaboration to maintain innovation in the industry.

Collaborating with other industry players was the most common strategy for maintaining innovation, cited by 45% of respondents. Some 30% said they would have greater involvement with joint industry projects, while almost a quarter (22%) said they would create a specific joint venture.

A number are looking to partner outside the industry to find new skills, with 16% saying they were planning more partnerships with innovative start up companies.

However, 18% said they did not have a strategy in place to maintain innovation.

Standardisation as a means to saving costs will be a major theme this year, according to the report. Almost half of upstream companies (44%) said they would increase standardisation this year.

Respondents to the survey acknowledged that standardisation in practice could be a challenge. However a fifth of those questioned said that simpler processes and design would be a focus this year, with 10% adopting industry standards to do this.

The study said there were “vast” opportunities for standardisation across the value chain from data collection to design and drilling to IT.

The report concluded that in the "lower-for-longer" oil price environment, companies across the value chain must work carefully to balance shorter term cost-cutting with a longer term strategy.

“The industry needs to maintain a medium term outlook, whilst not taking its eyes off the short-term position”, said DNV GL vice president Graham Bennett.

“The industry is correct in focusing on cost saving at the moment, but it also needs to think about how to be sustainable and resilient beyond the two-year horizon. We need to be in a situation where we are replacing reserves, and looking at future industry challenges so that we don’t keep going through these boom and bust cycles.”

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