Sliding Oil Prices: Predicament or Prospect
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Sliding oil prices have led to cost-cutting across the oil and gas industry. Upstream companies are reducing operational costs through layoffs and postponing capital spending. However, the document recommends that companies revisit their "value tree" to identify non-essential processes and projects to optimize, prioritizing safety and regulatory compliance. Specific strategies discussed include optimizing maintenance costs, prioritizing quick IT wins, outsourcing non-critical business processes to the cloud, and using analytics to improve asset performance and reduce non-production time.
Sliding Oil Prices: Predicament or Prospect
- 1. Sliding Oil Prices: Predicament or Prospect? Given the steep plunge in crude oil prices and resulting cash crunch, now is the perfect time for oil and gas companies to revisit their value tree and synchronize business and IT strategies. Executive Summary The Decline of Crude Oil Prices Crude oil prices have slid over 50% in the last year (see Figure 1), leading to gloom and doom across the energy industry, particularly in the upstream segment. While, most stand-alone upstream operators and service providers focus on their operational costs to deal with plunging oil prices, integrated oil companies tend to look at the downstream value chain to offset the decline in profitability in the upstream segment. Upstream companies are scrambling to adapt to the fluid situation by applying conventional cost- cutting methods, such as layoffs and deferring capital spending to address the cash inflow Source: NASDAQ squeeze. While many see this as a “crisis,” we Figure 1 see an opportunity for oil and gas companies to invigorate their business by realigning their A Blueprint for Change priorities. In our view, a “return to the basics” approach is the best way to combat the crunch on cash This white paper lays out what the industry can inflows. We suggest that upstream companies do to not only survive the current conditions but revisit their “value tree” to identify areas in which also take advantage of future changes. tweaks can lead to performance improvements (see Figure 2, next page). cognizant PoV | june 2015 • Cognizant PoV
- 2. The Oil & Gas Value Tree The value tree analysis will help reinforce areas where costs can be more easily avoided; this can be computed by comparing target value with actual expenditures against each of the corporate KPIs, and then comparing corporate performance with the industry benchmarks relevant to each of these standards to ascertain which problem areas to focus on. For example, take the case of maintenance expense, which is a key component in upstream operating costs. In the current situation, upstream operators look to pass on a portion of the main- tenance costs to oil field services companies that are involved in drilling out the product. By closely scrutinizing the cost drivers related to maintenance activities, upstream players can apportion the cost to services companies. Addi- tionally, this approach provides actionable insight to formulate specific cost-centric strategies, in cases where costs are not in line with the estab- lished standards. From there, we suggest the following: • Re-prioritize the existing project portfolio. Existing projects were likely initiated at a time when oil prices were strong, allowing for the luxury of pursuing a spate of operational improvement initiatives. Amid truncated cash flows, it is not uncommon for companies to pause all ongoing initiatives in order to cut costs. While this parochial approach saves money, it can endanger and compromise operational safety. Hence, a more structural approach needs to be taken, meaning that projects should be evaluated using need- of-the-hour critical criteria without losing sight of strategic benefits at a holistic level. For oil and gas companies, safety in operations and regulatory compliance are two vital oper- ational cornerstones. Since the 2010 British Petroleum Gulf oil spill, oil companies have spent an inordinate amount of time and energy setting up systems and procedures to ensure zero-tolerance when it comes to ensuring operational safety against the backdrop of stricter regulatory requirements. Therefore, it is prudent to evaluate all project initiatives using safety and regulatory compliance as prime factors, while relegating cost-savings to a supplementary factor. • Pursue low-cost, quick-win initiatives on IT segments. Projects that can save signifi- cant resource costs but do not require a major effort to implement should be prioritized. For example, swiftly implementing a workflow for an approval process in an upstream environ- ment typically saves a substantial amount of time and cost because such approvals must flow through a plethora of production and operations groups, such as drilling, mainte- nance, etc. • Implement business process optimization to eliminate redundant activities, thereby saving money and resources. It is an ideal cognizant PoV 2 Figure 2
- 3. time for the business to examine its overall business processes and their relevance to running the business. Agile organizations con- tinually optimize their processes to minimize costs in line with the changing external environ- ment. For example, BP continuously reviews its business processes to ensure their relevance to market conditions. Hence, a cash flow crunch is possibly the best time to evaluate key business enablers such as procurement procedures. Stricter control points can then be enabled in the purchasing processes to lower costs. • Effectively manage operating costs by establishing a single source of the truth for information. In the operational environments of oil and gas companies, especially upstream operations, numerous service providers — such as seismic services, drilling services, site preparation services, completion and fracturing services, EPCs, pipeline and storage services, etc. — are key players in the value chain. Therefore, companies must put in place a robust data governance model, particularly for processes that affect operational cost per- formance, to contend with constricted cash inflows. Transform and Perform • Investigate IT and the cloud for mundane and less critical processes to eliminate unnecessary business process management (BPM) costs. According to a study by SAP,1 about 20% of a company’s business processes provide competitive advantage. The rest are standard or non-differentiating processes when compared with other industry players. It therefore makes sense for companies to closely monitor business-critical processes and outsource standard processes to third-parties. It is a better option to manage these processes through the cloud so that on-premises cost can be significantly reduced. • Categorize supply chain spending to formulate a category strategy for sourcing of critical materials. Oil companies — especially services companies, which bear the brunt of cost passed over from upstream companies — are moving to micro-level, category-specific strategies to enable better inventory controls. This will vastly help with cutting costs on materials handling, while tightly controlling inventory management (see Figure 4, next page). Source: Adapted from Business Process Management: SAP Road Map, 2008 Figure 3
- 4. • Leverage analytics to improve asset optimi- zation and avert cost. Upstream operations are capital- and asset-intensive. The challenge cognizant PoV 4 Categorize to Save Analytics on Casing Monitoring that upstream operators face is to minimize the non-productiontime(NPT)intheiroperationsto maximize production. According to the Athens Group,2 drilling contractors incur $100 million to $150millionperannumonaccountofNPTcosts. The highest percentage of failures that led to NPT were reported on sub-surface equipment. Asset analytics provide visibility into the performance of critical assets employed in operations. Such analytics not only help with real-time monitoring of current performance, but they also provide foresights into future performance, including possible downtime, through pattern analysis. This helps companies take preventive maintenance measures for these critical assets so that NPT is minimized (see Figure 5). Figure 4 Figure 5
- 5. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger busi- nesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfac- tion, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 217,700 employees as of March 31, 2015, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ 07666 USA Phone: +1 201 801 0233 Fax: +1 201 801 0243 Toll Free: +1 888 937 3277 Email: [email protected] European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) 20 7297 7600 Fax: +44 (0) 20 7121 0102 Email: [email protected] India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, 600 096 India Phone: +91 (0) 44 4209 6000 Fax: +91 (0) 44 4209 6060 Email: [email protected] © Copyright 2015, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners. Codex 1319 Footnotes 1 Business Process Management: The SAP Roadmap, SAP Press, Oct. 28, 2008, http://www.amazon.com/ Business-Process-Management-SAP-Roadmap/dp/1592292313. 2 Athens Group is a pioneer in offering systems-based rig inspection services. In its first annual benchmarking report, “The State of NPT on High Specification Offshore Rigs,” published in 2010, it provides a detailed analysis on the causes of drilling control systems’ non-productive time and their impact on the financial performance of the drilling. The report is widely referenced by the upstream industry when analyzing drilling operations efficiency. 3 Benefits referenced from BP’s Well Advisor Program; information available at www.BP.com. For more insights, visit our energy and utilities page or e-mail us at [email protected].