The recent collapse of oil prices from a peak of $147 has once again made operational excellence a central imperative for upstream oil and gas companies. Previous industry cycles have shown that companies should use a price drop as an opportunity to drive through fundamental improvements in the way their operations function. Three factors influence a company’s ability to do so: a comprehensive approach to improvement across all functions; a continuing focus on building capability; and a permanent shift in leadership attention. Done right, world-class operational execution can add up to 30 percent of value to the production asset base.
The fall of oil prices has exposed an inflated cost base in many oil and gas companies, forcing them to reduce operating costs, rationalize investment budgets, and boost operational efficiency. Many of these programs focus on short-term expenditure reductions by cutting nonessential costs such as travel, minimizing inventories, postponing maintenance, deferring projects, and renegotiating service contracts. Though such measures are useful in a cash-constrained environment, structural opportunities for sustained operational effectiveness can be missed. Worse, as some exploration and production companies learned to their detriment in the last oil price cycle, deep cuts in maintenance and production budgets can damage asset integrity, reduce reliability and thus production, and lead to the loss of the most capable operations staff.
Upstream companies should remain focused on operational excellence for structural as well as cyclical reasons. Many hydrocarbon provinces have moved into the mature stages of their life cycle. Likewise, production facilities reaching the end of their economic if not their technical life spans require modifications and increased maintenance. The widespread application of infill drilling, water-flooding, and enhanced oil recovery schemes has increased activity levels and associated operating costs.
At the same time, there are fewer opportunities to create value from greenfield exploration and development projects. Access to the most promising provinces, such as the Middle East and South America, is restricted. Competition for the remaining opportunities is intense, and the commercial terms and conditions have become more onerous, putting ever more pressure on capital and operational efficiency. Access is often granted only to those companies that can maximize recovery of the marginal barrel in a cost-efficient manner. Companies that could once flourish because they were better at exploration or project development now find that they must achieve excellence across the value chain.