Being on the winning side of the equation

Tuesday, 15 December 2015

Operational strategies for success in a tough Oil & Gas market – Key learnings from Malaysia

The Oil & Gas industry has long been a pillar of the nation's economy, contributing an average of 13.5% to Malaysia's GDP over the past five years. However, the recent drop in oil prices, along with a combination of other factors, contributed to a slowdown in the nation’s economic growth. From a high of 6.5% in the second quarter of 2014, Malaysia’s GDP annual growth rate shrunk to 4.7% in the third quarter of 2015.

Figure 1: GDP Annual Growth Rate and Average Brent Crude Oil Prices (2014-2015) 

Figure 1
Source: Trading Economics Statistics (2015), U.S. Energy Information Administration 

 

Malaysia’s crude oil production has been fluctuating for some time, and long term oil production outlook does not look promising in view of forecasted oil prices of US$50 – 60/bbl over the next five years.  These prices are not likely to adequately support projects with high breakeven costs such as deep water, enhanced oil recovery (EOR) and marginal fields. 

Figure 2: Malaysia's Crude Oil Production (2014-2015) 

Figure 2

Source: U.S. Energy Information Administration 

 

In the current environment, it is important for Oil & Gas companies to focus on prioritising productivity and efficiency, without compromising on safety and reliability. Now is a good time for Oil & Gas companies to reassess their operational strategies and focus on cost optimisation efforts that are sustainable.

A PwC analysis on the margins of publicly listed Oil & Gas companies around the world shows that some companies—including Malaysian ones—have displayed resilience by successfully managing and optimising cost, thereby maintaining or increasing their share of industry profits, while others have suffered cumulative margin erosions of more than 20%.

Figure 3: Cumulative gross margin % of publicly listed Oil & Gas companies indexed to Q2 2014

Figure 3
Source: Quarterly financial reports of publicly listed O&G companies 

 

In our experience, it is a combination of three strategies that have been most impactful to Oil & Gas companies in their efforts to manage costs.

  • Maximise information sharing across the organisation
  • Procure strategically by the numbers
  • Resist the temptation to retreat into departmental silos

Strategy #1: Maximise information sharing across the organisation

Sharing and use of information across the organisation can help ensure cost savings in the Oil & Gas industry. For instance, field operations managers are highly empowered to make things happen, which often involves the procurement of equipment and materials and ensuring their timely delivery.  Since many organisations fail to coordinate and share information regarding their customer needs, and assets they have; purchases made to support local operations in the field are often duplicative or executed less efficiently. From our experience, the problem isn’t usually misbehaviour on the part of field operations personnel but rather the tendency of different departments to function in silos. For example, a field manager without visibility to equipment or tools that may be available elsewhere within their company’s network will understandably over-order from suppliers to ensure that their customer is adequately supplied. Our experience with an Oil & Gas major has shown that it is possible to reduce inventories by more than 20% and avoid CAPEX by 50% of previous annual levels, resulting in more than 5% of overall P&L cost reductions. 

Strategy #2: Procure strategically by the numbers 

The capital intensive nature of the Oil & Gas business means that single procurement decisions and tender awards are often very meaningful.  Yet, many companies do not do enough to monitor the actual spending that occurs on a daily basis, and end up paying more than needed. 

Procurement spend is one of the biggest areas of cost savings a company can leverage on, and managing it effectively can lead to significant impact on bottom line and shareholder value. Companies successful in this area have two tendencies - First, they acknowledge that their initial attempts are unlikely to be perfect and that it may not be feasible to collect data for all of their spending.  Second, they elevate the idea of spend assessment beyond the grunt-work analytical domain that it often occupies— with top-level executives aware of and participating in the initiatives to better control and manage spend.

Figure 4

Strategy #3: Resist the temptation to retreat into departmental silos 

Given the historical strength of functionally-organised departments within companies in the Oil & Gas business, it is easy for management to define accountability along these lines; probably more so when there is an increasing pressure on profitability. 

This silo approach often puts pressure on the department heads which in turn gets passed on to the staff of each functional unit.  Tough business conditions make doing the job more difficult for everyone and staff members become wary about getting blamed for the next event that occurs outside the plan, resulting in sub-optimal output. 

The organisations that pursue improvement most effectively do so by recognising the reality of what it takes to actually achieve operational performance gains—that no one person or department can do it alone.  For example, truly effective efforts at reducing the cost of procured items or improving delivery lead times require both effective supplier management as well as consultation with customer-facing teams to understand areas where trade-offs may be possible. 

 

Exercising these three simple strategies can help provide an effective and sustainable way to combat margin pressures and enhance profitability. However, true impact can only be driven by proper implementation and on-ground execution, for which constant senior management support and team motivation is essential. It is therefore necessary to also ensure that any efforts currently underway within your company are given due visibility and recognition, as they are very valuable in maintaining resilience during these tough business conditions. 

Read more about these operational strategies in our report, "Being on the winning side of the equation", recommended as a good starting point for companies to rethink what value means to them and their customers amidst the low oil price environment. 

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