Global Oil & Gas Industry Needs to Adopt a Cost Culture

24.03.2015 -

(CHEManager International 3-4/2015)     Abundance of capital investment     With the recent fall-off in oil prices, companies in virtually all sectors of the oil, gas and chemicals (OGC) industry worldwide are going to have to plan and manage their projects for greater capital productivity and along the way create a "cost culture" inside their companies. Prior to the crash in prices "improving throughput" was the single-most important focus for improving capital productivity. That's according to a study conducted by AlixPartners and Oxford Research, which includes a survey of 250 high-level industry executives. Since the late-2000s, higher energy prices and the unconventional-energy boom attracted an abundance of capital investment into the industry globally.

ROCE trends     Compounded ROCE (return on capital employed) averages for all major sectors of the industry were negative for the period 2008-2013 - i.e., even before the recent drops in energy prices. Meanwhile, average returns across all sectors deteriorated, with the E&P sector having some of the most significant declines, from 17% ROCE in 2010 to 6-7% currently (fig. 2). However, within sectors there is a wide dispersion of performance, suggesting that some companies have implemented superior operating models and are able to generate above-average returns, while others struggle. Despite the overall downward trend in capital returns over the past few years there is still an abundance of capital available for companies to invest.

Sustainable returns     According to the study, virtually all executives are frustrated that actual returns are lower than their expectations and that it is taking longer to generate target returns. In North America only 19% of the projects are likely to be delivered on budget, while - depending on the region where projects are managed - 47-61% take longer than expected to generate expected ROI. Only 39% of total respondents said they had a strong series of checks and balances to ensure projects stay on track, and only 11% reported using a stage-gated process to assess project viability. The study concludes that the industry is at an inflection point: to generate sustainable returns, companies need to find a balance of production growth and cost control.

Room for improvement     Overall, when asked to name major challenges to keep projects on budget, the top reason chosen (by 42% of all respondents) was "lack of specialized technology for project execution." 41% of total respondents said they are challenged by "limited synergy with planning and operations" for getting projects completed on time. 30% of all res­pondents stated that "company culture istn't focused on project management." These results show that there is room for improvement in project management, particularly in terms of project execution. The study concludes that in the current environment of falling prices, plus increasing geologic and technical challenges, the creation of an overall cost culture seems to be mandatory.