Operating cost: has the oil industry really moved the needle?

The dramatic fall in oil prices – from over US$100 a barrel in mid-2014 to less than US$30 a barrel in early 2016 – has left the oil industry scrambling to contain the damage. Upstream operators are deferring investment decisions, cutting activity and headcount and putting pressure on suppliers.  Governments faced with falling oil revenues are reviewing fiscal terms. Service companies have responded to thin order books by reducing capacity. In the case of the Majors, cash for dividends now means increased borrowing.

So has the industry finally reversed the long trend of opex inflation? Well, yes and no. At an aggregate level, a 9% annual reduction in opex per barrel costs is admirable and in line with the trend we noted in our December 2015 Perspective. However, this is skewed by the roughly 30% reduction in Russia, which is largely due to the fall in the rouble, as well as a sizeable domestic supply chain. Stripping out Russia shows a global reduction of just 4% with large variations between regions and operators. Looking at the top 14 producing regions around the world reveals a significant disparity: from about 20% in the North Sea to a 7% increase in Europe (Figure 1). Most surprisingly, six regions, accounting for 41% of total global hydrocarbon production, saw cost inflation both in 2014 and 2015 (excluding the Middle East, the remaining five regions account for 14% of global production).

Chart1

Large variations are also present across operator groups (Figure 2). Between 2014 and 2015, NOCs only managed a 1% decrease in opex per unit costs, and this was after average costs increased in 2014. In comparison, the Majors reduced opex by over 5% in 2015 and the IOCs (excluding the Majors) managed even better, with a total reduction of 8.5%. This indicates that NOCs started their cost reduction drives later than most and perhaps did not push as hard.

Chart2

Given that the low price environment is likely to be here for some time yet, the question is whether the industry can use this moment as an opportunity to move to a truly sustainable cost structure. At Wood Mackenzie, we believe that since the oil price is unlikely to come to the rescue, the industry needs to do more to address the structural cost problems resulting from a decade of sustained  cost inflation.

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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.

4 Comments
  1. Steve 8 months ago

    Can you kindly explain the methodology for calculating OPEX/BOE? I’m assuming this metric is showing OPEX versus New Production. How do you account for the production over the life cycle of the well? Ie we Spent 10,000,000 dollars drilling and completing a well that produces 3,000 BOE/day what would be the OPEX/BOE number for that well? What other inputs do you need to calculate that?

    Thank you!

    • Andy Tidey 7 months ago

      Hi Steve. Thanks for your interest. Our opex per boe calculation takes our estimates of fixed and variable opex for the field for the year, over our production estimates for the field in the same period. Our aim is to show the amount of operating effort required for production of a barrel on an equivalent year-by-year basis.

      We are looking to create a view of developments in operating efficiency, therefore initial well development work is not taken into account as these are assumed to be sunk capex costs and not related to up-and-running operations. Similarly, corporate overheads are not included in our methodology. We only look at the costs associated with physical production.

  2. Yus 5 months ago

    Hi,
    I’m really interested in this subject and currently doing some analysis on reducing the operating cost for Malaysia. One of the thing that interest me is so called Unit Technical Coat (UTC) which consist of Finding, development and production cost which could be crucial for long term sustainability. Hope to learn from you more base on your performance improvement experience for upstream operation. tq

    • Andy Tidey 5 months ago

      UTC is indeed a very important factor especially when comparing potential projects and during the FID process as well as in the early phases of development. Also, as part of the overall economics of the asset and understanding long term commercial outcomes of the portfolio. However, in the day-to-day running of a producing asset – the key driver for management decisions will be the continued operating expenses of the assets (Opex) and therefore unit operating costs (also known as cost/barrel or short term marginal costs). This becomes imperative during price down cycles for it’s impact on company’s profitability and in some cases viability. We work with operators and governments around the world to help bring down unit operating costs by identifying opportunities with a clear and precise link to the commercial benefit to the asset or company. We combine our expertise of improving performance with Wood Mackenzie’s world class data and expertise in the industry to drive sustainable improvements in the business. If you would like to discuss how we do this and if this could be useful for your company, please get in touch.

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