Study: Oil Price Downturn Creates Need for 'Cost Culture' in Industry

Rig Zone ^ | February 17, 2015 | Karen Boman

[thackney]

Companies across all sectors of the oil, gas and chemicals industry will need to better plan and manage projects to ensure their survival during the recent downturn in oil prices, according to a recent study by global business advisory firms AlixPartners. Oil and gas companies not only need to improve their ability to plan and manage projects, but create a “cost culture” inside of their companies.

Only 30 percent of respondents in a study of 250 high-level industry executives across the world said their companies had explicit return-on-capital targets for projects before the oil price collapse. Perhaps most surprising is that 12 percent of respondents believe their companies are any better than competitors at project execution, AlixPartners noted.

AlixPartners also found that 19 percent of study participants from North American firms said their companies finish projects on budget, versus 29 percent of all respondents globally. Additionally, 34 percent of the executives surveyed said they agree or strongly agree that project management is executed at the company level across all projects, which suggests that many projects are not benefiting from economics of scale and institutional knowledge.

The found that only 30 percent of oil and gas drillers had a strong series of checks and balances to ensure projects were on time and on budget, compared with 39 percent of total survey respondents, while only 11 percent of respondents said they employ a stage-gated process to assess project viability at defined milestones when developing a new capital project.

The survey results were influenced by the time of the study, which took place in the summer and fall of last year, said Dennis Cassidy, head oil and gas consultant with AlixPartners, in an interview with Rigzone.

At that time, the “gold rush” mentality had set in, and cost was a secondary focus as the industry hastened to accomplish an abundance of projects while oil prices were still high, Cassidy explained.

The lesson to be learned from the recent downturn is that companies must maintain a balanced focus.

“While it’s great to grow and expand and take advantage of additional projects, companies also must keep an eye towards sustainable, profitable growth and maintaining some semblance of a cost culture,” Cassidy. “The thought has been that companies can’t be cost effective if they want to grow fast, but companies that do survive the downturn will be more resilient and able to grow while maintaining cost discipline.”

The fact that the industry has been on a 10-year uptick – with companies switching to oil from natural gas when gas prices dipped in 2008 – and that many working in industry today are newcomers to oil price downturns – also contributed to the rush towards project activity without thorough project planning and management.

Companies “got into a mentality that they didn’t have time for metrics or they would miss their window of opportunity,” Cassidy commented. “Things just got escalated beyond reality, and some companies got caught up in it. Those are the companies that will feel it the most during the price dip.”

Will companies learn from the experience? If the price downturn ends up being relatively short, it’s more likely that companies will revert back to operating the way they have previously, Cassidy noted.

In the past, companies would seek partnerships with companies to bring stability to a project in terms of additional cash and expertise. The survey found that 70 percent of oil and gas drilling companies said partnerships and syndicated relationships were the most important factor in determining whether to pursue a project. Companies continued to maintain this outward focus towards growth rather than focusing internally on cost management, even after the early warning signs of project cost overruns started to appear, Cassidy noted.

Digital technologies could offer the oil and gas industry tools for better sophistication in managing projects and supply chains. Time-based monitoring systems could allow companies to track time and utilization on a particular job, such as route planning for trucks.

However, the oil and gas industry historically has gone by worker experience, not technology, Cassidy noted.

“We trust our smart people to tell us if things are going wrong.”

Oilfield industry workers also have resisted time-based monitoring technologies, not wanting to be micromanaged. The characteristics of oilfield workers, which make them willing to search in difficult places in the far ends of the earth for oil and gas, “doesn’t lend itself for people who like being micromanaged from corporate headquarters.”

Pressure from Wall Street analysts and shareholders to keep stock prices up and dividends flowing also has spurred oil and gas companies to focus on production ahead of cost and project management, Cassidy said. The higher oil price environment reinforced this focus as the value of volume in this environment was greater than cost overruns.

“As painful as this recession is, it’s healthy,” Cassidy explained. “It will force companies to be more resilient and have a more balanced strategy.”

The survey also found that:

66 percent of exploration firms surveyed said it takes significant longer to see returns on capital from projects, compared with 38 percent of integrated oil and gas companies surveyed and 47 percent of drillers surveyed

55 percent of integrated oil and gas company executives surveyed said they “always” or “very often” deliver projects on time, compared with 74 percent of respondents

55 percent of integrated oil and gas company executives said their company culture is not focused on project management; half said they do complete reviews at key project milestones

[SoothingDave]

Perhaps most surprising is that 12 percent of respondents believe their companies are any better than competitors at project execution,

Cock-eyed optimists. Must be fresh out of school.

[thackney]

And this goes away when the price comes back up, and “fast as you can, any way you can” rules the day.