Delivering long-term value in E&P: A new economic reality

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James Albert, Associate Director, KPMG
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E&P has become a margin business, with relentless pressure on unit operating costs (UOC) and global competition for capital. Whilst the industry response to the downturn has been impressive, past initiatives, such as reductions in headcount and supplier rates, are unlikely to go far enough and risk being non-sustainable.

To survive in this new economic reality, companies will have to go further and an opportunity exists to potentially reduce unit operating costs (UOC) by another 30 percent. Here are five sources of long-term value that every Leadership Team should be tackling in earnest:

1. Zero-based asset costs

Pursuit of engineering excellence has driven complexity into processes, activities, and equipment. Centralisation and standardisation have further contributed to this accumulation of cost. Meanwhile, as portfolios have shifted through acquisitions and divestments, differences in asset break-even unit costs have become more visible and these costs are no longer sustainable.

There is an opportunity to reduce waste by differentiating processes and standards, tailoring them to the economic needs of individual assets or asset classes. By adopting an approach that starts with a ‘zero base’ and adds back only activities that truly drive value for an individual asset, Operators can reduce costs.

2. Value-based prioritisation

Since the downturn, organisations are having to do ‘more with less’, with some having reduced headcount by up to 30-50%. Gold-plated engineering solutions and low-impact maintenance interventions are no longer feasible in the new economic reality.

Downstream operators have long-established prioritisation processes that use the common corporate risk matrix to assess work-scopes based on relative Benefit-Cost Ratios (BCRs). By quantifying benefit using ‘value of risk mitigated’, rather than ‘value at risk’, Operators can drive a far greater commercial focus into prioritisation decisions across the organisation.

3. Machines make decisions

High profile developments in technology suggest a massive value opportunity from optimising outcomes in high-stakes day-to-day operational decisions, for example, equipment reliability or production optimisation.

This technology represents the opportunity move from reactive monitoring to predictive decision-making and put these decisions in the hands of those with access to the right data – not necessarily those closest to the asset or those with the greatest experience.

Yet ‘Big Data’ approaches that invest millions of dollars in data lakes risk wasting money consolidating datasets that in many cases are incomplete or poor quality, with limited understanding of how to drive value from the data.

4. Agile supply chains

Traditional behaviours across the supply chain have focused on playing a ‘zero-sum game’, with Operators and Service Companies gaining at the other’s expense at different points in the oil price cycle.

There is little scope for further rate reductions, and a new optimism in the industry sees capacity tightening and rates rising again – risking losing hard-won gains. Further value therefore must come from working together to drive out inefficiencies. This necessitates much greater agility and collaboration, in short: thinking like a manufacturing business, where the manufacturer and Tier 1 and Tier 2 suppliers work together seamlessly to adjust practices to maximise value for all parties.

5. Intelligent process automation

Support function costs are often relatively small yet can be challenging to reduce. Simple process automation technology, using ‘bots’, has delivered significant productivity improvements in other sectors such as Financial Services and Pharma. It represents a largely untapped opportunity for E&P to reduce the costs of repetitive, transactional processes by up to 30%, whilst reducing processing errors.

‘Start small, fail fast, scale fast’

The scale of these opportunities suggests that something in the order of a further 30% reduction in UOC is possible; this will require four things:

  • Driving a far more commercial mind-set into day-to-day decision-making across the organisation.
  • Looking outside E&P for best practice, and opening minds to different ways of working from other sectors.
  • A very different approach to releasing the value potential from new technologies.
  • A more entrepreneurial delivery approach, best characterised as ‘start small, fail fast, scale fast’.

KPMG’s report ‘Delivering long-term value in E&P’ is available online and contains a range of examples where E&P players are delivering these opportunities in practice.

Share your insights and join the conversation: Do you agree with KPMG on these 5 ways to innovate E&P? Leave your comment below.

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Image courtesy of KPMG