Cutting Costs and Cutting Jobs in Asia

Cost management is the top priority for 60 percent of senior oil and gas professionals in Malaysia, compared to 41 percent globally, according to a new research report published on Monday by DNV GL, the leading technical advisor to the oil and gas industry. One in three (34 percent) respondents in Malaysia is prioritizing headcount reductions to impose stricter cost controls (versus 31 percent globally).

According to A New Reality: the outlook for the oil and gas industry in 2016, a DNV GL report based on a survey of 921 senior professionals in the sector, increasing pressure on the supply chain will also be prioritized as a cost-management measure by 34 percent of respondents in Malaysia, compared to 27 percent globally.

The majority of Malaysian respondents felt that the industry is taking a short-term view on headcount and skills/career development. They believe the industry is repeating the mistakes made in prior downturns. Cutting back on manpower and thus competence and lack of discipline in cost control even in good times were stated as the key reasons for this view.

Raza Amin, country manager for Malaysia, DNV GL – Oil & Gas, says: “This is a cyclical sector and during a downturn we should use the momentum to drive out inefficiencies. To avoid repeating past mistakes, the industry now needs to really commit and deliver on a long-term plan.”

Singapore Already Successful

More senior oil and gas professionals in Singapore felt that their organization had been successful in achieving its cost-efficiency targets over the past year than the global average (87 percent versus 74 percent globally). Further, half of Singaporean respondents see cost management as a top priority versus 41 percent globally as the sector seeks to become more efficient.

Almost three quarters (74 percent) of Singaporean respondents agree that the industry will be successful in further reducing costs in 2016.

In Singapore, 37 percent of respondents state that the most prioritized measure to impose stricter cost controls is to reduce headcount, up from 14 percent in 2015, signalling further job losses. However, 29 percent of respondents will prioritize optimizing the efficiency of production from existing assets.

Even in the current price environment, 58 percent of respondents in Singapore state that their organization's response to the downturn in the area of innovation and R&D is focused on creating long-term value.

For more than half of the Singaporean respondents, the most important strategy for maintaining innovation in a cost-pressured environment is to increase collaboration with other players (compared to 45 percent globally). To a greater extent than their global counterparts, respondents in Singapore also want to collaborate through joint ventures and have greater involvement in joint industry projects.

Cost Management Not a Priority in Korea 

In contrast to Malaysia and Singapore, only 14 percent of senior oil and gas professionals in Korea expect cost management to be the top priority in 2016, 27 percentage points below the global average, according to the report. More than half believe their organization’s response to the downturn has primarily focussed on short-term value in the headcount (57 percent) and overall cost base (66 percent compared to 49 percent globally).

According to the report, only 29 percent of respondents in Korea say they are preparing their company for a sustained period of low oil prices, compared to 73 percent globally. In line with the lack of cost-cutting focus, not a single Korean respondent believes their organization has been highly successful in achieving cost-efficiency targets over the past year, compared to 18 percent globally.

Arthur Stoddart, regional manager for Korea, Greater China and Japan, DNV GL – Oil & Gas, says: “It is a concern that many Korean oil and gas professionals believe their company has taken a short-term approach during the downturn. The industry globally has a ‘lower for longer’ view on the oil price and the sector in Korea must not rely on the oil price bouncing back.”

However, 31 percent of Korean respondents cited that simpler processes and designs will be their top measure to impose stricter cost controls in 2016, compared to 20 percent globally.

Korean respondents also have a greater focus on R&D investment, with 31 percent planning to increase or ring-fence in-house R&D budgets from cuts, compared to 15 percent globally.

The report is available here.