Oil and Gas Looks to Standardization for Savings

Published Jan 25, 2016 8:47 PM by The Maritime Executive

A survey of oil and gas professionals released Monday shows that while the industry expects a tough year ahead, the downturn may produce some positives: a drive for efficiency may push firms to cut overhead and invest in standardization, leading to long-term growth, and for companies with strong balance sheets, this is an ideal time to pick up assets and talent as other firms look to shed operating expenses.

DNV GL’s annual survey of over 900 upstream, downstream, integrated firms, suppliers and regulators was conducted in October and November, when Brent crude was still trading in the range of $47. Even at that price – high, relative to trading in the $30 range as of late January – confidence was significantly down year over year, with only one third reporting a positive outlook for the industry. 70 percent of survey respondents said that they were preparing their company for a sustained period of low oil prices, and more than 40 percent predicted that oil prices would not increase in 2016. “We do not see a reason why they would return to previous levels in the short term,” said Christoph Frei, Secretary General of the World Energy Council.

The breakdown of confidence levels varied sharply between upstream and downstream firms – 20 percent for the former, 55 percent for the latter. The gap between crude and product prices meant strong profitability for refiners the first nine months of the year – for example the $2 billion quarterly refining profit for ExxonMobil in 3Q 2015 – although recent earnings have been lower.

The response to low oil prices varies by region, but as might be expected the most popular response was a reduction in capital expenditure. A small number are heading in the other direction – 17 percent plan to increase capex, a countercyclical approach to the price collapse. This was especially prominent in the Middle East and Asia, where a quarter of those surveyed said that they plan to increase capital expenditures in 2016.

A majority plan to decrease operating expenditures, especially upstream (65 percent).

Further headcount reductions appear to be a less popular strategy for cost control. The survey suggests an awareness that layoffs come at a high long-term cost: the respondents' choice for the most serious restructuring problem in the industry was “losing experienced people through headcount reduction.” And one firm's talent loss may be a competitor's hiring opportunity. “We have taken the downturn as an opportunity for growth on the headcount and competence front,” said Thore Kristiansen of Galp Energia. “We have found that there are a lot of interesting people available in the marketplace right now. We will continue to grow our staff in 2016.”

The majority of respondents looked to standardization as another way to reduce equipment and process expenses. “Almost by definition, standardization will lead to cost efficiencies, as it is intended to reduce complexity, one of the biggest causes of cost creep,” said Martha Viteri, head of subsea and well systems for DNV GL, North America. It will not be easy – she acknowledges the difficulty of reaching common agreement across the supply chain. “Standardization of equipment, even within one company, is a challenge . . . trying to standardize across the industry is easy in meetings, but not as easy when it comes to implementation.”

Koheila Molazemi, DNV’s service area leader for risk management, also had a warning note for the industry as firms look to cut overhead: she is concerned that cuts may have an impact on safety. “Any of these cost savings that these companies are considering would be dwarfed by the costs associated with a major accident [like Macondo]. I would encourage the industry to take a step back and ensure that the cuts that they are making at the moment are sustainable,” she said.