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 optimisation. These all combine to determine the economic viability of a well or a drilling programme under a given set of market conditions.
It is crucial to have a well-defined strategy on the journey towards achieving meaningful operational excellence. Here, analysts at Oliver Wyman make five key observations.
1. The oil price downturn increased profitability pressure
Since 2014, the oil and gas industry has found itself in a new market environment, with oil prices dropping by more than 60%. In an industry accustomed to prices in the US $80-$120 per barrel range, the new price cycle of $40-$60 per barrel led to a significant decrease in profitability, impacting shareholder value.
Companies with the lowest break-even prices will be the winners in the long run. For national oil companies (NOCs), the oil price drop adds to the pressure on profits, given the important role oil plays in supporting the local economy and government budgets. Indeed, some oil exporting countries have seen oil revenues drop by more than 50%.
2. Operations excellence and cost optimisation are critical
NOCs are increasingly implementing ambitious cost optimisation programmes, with the objective of reducing their cost base by at least 20%. In Europe, Statoil has already achieved a 20% OPEX reduction through right-sizing, and reorganisation. In Russia, Gazprom has reduced the cost of gas production by more than 30%, taking advantage of its share of Ruble-based contracts. Â In the GCC, the Abu Dhabi National Oil Company (ADNOC) has set an ambitious cost optimisation target of 20%, having already started to deploy initiatives such as right-sizing, and taking advantage of the supply base market opportunities to renegotiate contracts.
3. Sustainable cost optimisation has five characteristics
Analysing this and previous downturn cycles, Oliver Wyman has identified five levers that are common in oil and gas companies that thrive at achieving sustainable cost optimisation. The firm developed a pragmatic cost optimisation approach based on these levers. The deployment of this approach should be adjusted to each company’s situation, objectives, capabilities, and culture.
a. Set ambitious targets and obtain top management buy-in Perform a high-level cost due diligence, across assets and peers, to set a cost optimisation target, and then promote it throughout the organisation.
b. Plan which areas to optimise using pragmatic methodologies Follow a structured and systematic approach to identify key areas for improvement and potential quick wins. One pragmatic method is to develop a profitability tree, mapping the key cost drivers and identifying the areas to focus on. It’s important not to cut costs equally across the board.
c. Develop pragmatic cost optimisation initiatives
These must be impactful and implementable, such as initiatives that:
• focus on eliminating redundancies, reducing demand, and finding alternative supply options.
• focus on renegotiating supply contracts, consolidating volumes across sites, standardising specifications, and deploying total cost of ownership (TCO) for key spending categories.
• focus on localisation, low-cost country sourcing, or outsourcing. These types of initiatives are being deployed across the board.
4. Ensure delivery using robust performance management
Cost optimisation initiatives and targets should be monitored to ensure the savings are captured and not spent elsewhere. As an enabler, it is also important to create the right level of cost transparency in the organisation. For example, the CEO of one GCC NOC systematically asks his team what their profit per barrel is, and some companies display their daily margin per barrel prominently for all staff to see.
5. Implement a company-wide cost-performance culture
To ensure cost optimisation targets are met, it’s important to involve all levels of the organisation, particularly operational teams that have key insights on where and how to optimise costs. Create a suggestions box and a web-based savings tool that are accessible to all employees so that they can help to identify potential cost optimisation initiatives, or organise workshops with operational asset teams to create a case for change and get buy-in across the organisation, which is  critical in implementing and delivering any cost optimisation programme. Of all five levers, this is perhaps the most important.
Case study
In response to rising costs and declining oil prices, Petronas launched an industry-wide programme, CORAL 2.0 (Cost Reduction Alliance), involving 25 operators. Under CORAL 2.0, there are 11 identified initiatives to activate three value levers – proactive demand management, spend consolidation, and driving innovation. CORAL 2.0 aims to inculcate a cost-conscious culture across the industry, to promote international performance benchmarking, and to increase collaboration in exploration and production. This programme has a targeted potential annual cost saving of $0.9bn to $1.7bn by 2019, has already enabled Petronas to reduce CAPEX by 28%, and OPEX  by 9% from 2015 to 2016.
Co-authors: Bernhard Hartmann, Saji Sam and Volker Weber
