Step change in thinking is needed to deliver long-term value in E&P

Five key sources of long-term value can deliver improvements in unit operating costs by a further 30% in E&P, according to a new paper from KPMG UK. Furthermore, new automation technologies are helping to reduce transactional back-office support costs by up to 30%, while a more agile supply chain could reduce third-party costs by more than 10%.

The paper looks at the underlying economics and challenges of the upstream E&P industry, and provides some insights and recommendations to tackle key issues relating to recent pressure on unit cost performance and global competition for capital. Five key sources of long-term value have been indentified to take advantage of the new economic reality, including zero-based asset costs, value-based prioritisation, using machines to make decisions, agile supply chains, and intelligent process automation.

In a bid to drive efficiencies from complex portfolios of smaller, more diverse assets, E&P companies are being advised to maintain a relentless focus on break-even costs.

KPMG believes that some of the leading industry players are already targeting unit cost improvements of approximately 30% from across these five key areas. However, it states that this is not another ‘business transformation’ and continuous improvement alone will not be enough to shift the needle. To deliver longer-lasting value, leading players will instead need to target a ‘step change’ improvement across the following five distinct areas:

• Engineering excellence is no longer an end in itself – standards and processes need to be stripped right back to what is affordable for individual assets, to take out up to 25% of operating costs.
• With reduced staff and budgets, a far deeper level of commercial thinking needs to inform the prioritisation of activities, only performing work that adds value and constantly assessing costs versus benefits.
• By starting with performance rather than ‘big data’, there is an opportunity to use new technology to improve performance outcomes in high-value day-to-day operational decisions.
• The industry needs to move beyond traditional ‘zero-sum game’ behaviours by thinking more like a manufacturing business – with far deeper integration and collaboration through the supply chain, to reduce third-party costs by more than 10%.
• New automation technologies are helping to reduce transactional back-office support costs by up to 30%, whilst simultaneously reducing error rates.

James Albert, Associate Director at KPMG UK, commented: ‘Our research shows that there is a potential opportunity to reduce upstream unit operating costs by a further 30%. However, taking advantage of new sources of long-term value is not a business transformation or a continuous improvement programme. We believe this is about a small number of step changes to exploit the opportunities, which includes being open to challenging conventional perceptions of “best-in-class” for E&P.’

‘To break the zero-sum cycle, operators must work more closely with suppliers to drive out inefficiencies, and our latest report demonstrates how this can be achieved through more agile, incentive-based relationships. In addition, leveraging machines for decision-making and other Industry 4.0 technologies will be critical to raise the performance of upstream oil and gas to the levels of productivity and efficiency seen in other marginal industries.’

‘Whilst extensive cost cutting and renegotiating supplier rates were obvious tactical responses to the downturn, it is not a sustainable longer-term strategy. Going forward, companies in the UK Continental Shelf need to build on recent market confidence and go further to deliver long-term value, so that the basin remains globally competitive. This requires adopting a far more commercial mindset to underpin all operational decisions, being more entrepreneurial in the approach to delivering improvements, and actively embracing new technologies.’

The paper concludes that a targeted execution of high-value opportunities is needed to complement continuous improvement efforts, along with a new entrepreneurial approach of ‘start small, fail fast, scale fast’.