Costs – early warning signals

In September, we published a blog flagging real sustainability risks to cost reductions in the oil & gas sector. This week’s results announcements from the big oilfield services (OFS) companies show that the market may be turning very quickly.

The release of Q3 results from the major OFS groups suggests that this tipping-point may be happening sooner than we, and most survey respondents, expected. With oil prices steadying, Paal Kibsgaard, CEO of Schlumberger, suggested that it will soon be time to start “pricing recovery discussions with a large part of our global customer base”. Halliburton and Baker Hughes also said that they see the market steadying and anticipate price increases in 2017.

How big a risk is this to the economics of the sector?

Our research shows that the operators are facing a big challenge to hold on to recent cost reductions. Responses to our Global Upstream Cost Survey indicated that less than half of cost reductions achieved over the last two years are truly sustainable. Added to this view, about 16% of respondents anticipated price increases in the next 12 months.

Digging into the cost reduction approaches taken over the last twelve months and the expectations for the next twelve months, highlights the challenge. The charts below show that 69% of respondents believed that tactical actions, such as price negotiations and activity deferrals, were very or extremely important to achieving cost reductions over the past 12 months.

Two years into the low price environment, we expected to see the focus shifting to more structural approaches such as standardisation and partnering. These are the approaches that many of the operators are talking about, but our survey respondents highlighted a continued reliance on tactical measures.

These are precisely the kinds of approaches which suppliers are now looking to reverse.

It will be interesting to see whether the threat of increasing rates will be the push required for the industry to take work out of the system and really drive efficiency, or whether we are seeing the turning point of the price cycle.

To read more about our Global Upstream Cost Survey, download our newly published Perspective “Cost management in upstream oil and gas: Has Upstream kicked its cost problem?”

 

Andy has led over 55 performance improvements engagements in upstream, downstream, petrochemicals and retail. He was previously Regional VP of BP’s Commercial Performance Improvement (CPI) function and a former KPMG partner and graduate of Imperial College, London.

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