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Is there life after $30 oil?
July 31, 2020 | Robert Bergman
The Boston Consulting Group (BCG) sets $37 a barrel as the best possible oil price by the end of 2020. Most industry watchers are making similar predictions, leaving many producers wondering how they can survive in this market. Cost-control is job one with most oil and gas executives, either freezing spending or requiring justification based on near-term cost reduction. Why? Because unless they can stem short-term cost-bleeding, there may not be a long term.
But is this enough? BCG’s analysis made in 2017, when oil had returned to the $50 range after dropping as low as $27 a barrel in 2016, raises some doubts.
“… lean does not necessarily mean strong. Most companies have not fundamentally changed the way they work. They cling to outdated, overly complex processes and counterproductive behaviors. And a good number appear to be losing their cost-cutting zeal; expenses are starting to creep back in. Many maintain hope for a material recovery in oil prices in the near term, an iffy bet given continuing consumption efficiency gains and the decreased costs of supply,” write BCG oil and gas industry experts Henning Streubel and Abhi Ravishankar in their 2017 report, “From Cutting Costs to Building Resilience in Upstream Oil and Gas.”
Today’s prices are closer to the 2016 levels and the industry appears to be implementing the same cost-cutting measures that BCG identified in 2017:
- Reducing discretionary operational expenses and forcing suppliers to lower their costs.
- Reducing headcount, especially in support functions, to match new (lower) activity levels.
- Freezing salaries and hiring.
- Delaying, shelving, or dialing back major investments and capital projects.
All such “textbook” cost-cutting measures, they say, did yield substantial savings, as evidenced by BP, which reduced cash costs by roughly a third between 2014 and 2016, primarily through divestitures, lower capital expenditures, and reductions in headcount and supply chain costs. But BCG saw indications in the general market that such changes were not sustainable. Costs returned; behavior didn’t change, and complex processes were not improved.
“All told, while upstream companies have done what they have needed to do to survive, most are fundamentally unchanged. This leaves them ill-suited to thrive in the uncertain oil price environment that stands to prevail over the next several years and possibly beyond. What they need to do now is reorient themselves from near-term cost-cutting to the ability to produce longer-term, sustainable results,” they write.
According to BCG, extensive traditional cost-cutting in the short term won’t help them adapt to a future in which oil pricing below $40 is the norm, not the exception. Long term cost-control depends on what they call a comprehensive performance management program consisting of the following components:
- Portfolio optimization—aligning goals, assets, and expectations for the market.
- Operational improvement—simplifying and optimizing processes.
- Organizational effectiveness and efficiency improvement—becoming a more flexible, adaptive, agile organization.
- Behavioral and cultural change—making the changes stick.
Certainly, automation and digital transformation have a role in all of these steps, but industrial automation fits most directly in their “operational improvement.”
“Upstream companies have traditionally possessed technological prowess, but many have been slow to adopt digital technologies. We estimate that advanced technologies, such as big data analytics, deep connectivity, augmented reality, advanced robotics, and artificial intelligence, can unlock up to five times more value if they are used to redesign and optimize processes,” they write.
And if you are able invest in automation or cyber security, be sure that you investment is easily scalable to take you into the future. For more on scalable automation, see Driving Costs out of Upstream Oil & Gas Operations with Open Secure Automation.
For more on scalabilty of OT cyber security see Limited Scalability of Bolt-on OT Network Cyber Security Threatens ROI