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The oil price decline

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Oilfield Technology,

The industrial experience, from Milos Bartosek, oil and gas specialist in PwC Economics and policy team

With the oil price falling at a precipitous rate, oil and gas operators are pulling the traditional levers of cost mitigation. In some cases they are downsizing headcount, announcing reduced capital expenditure for 2015, and implementing wage freezes. Looking ahead it would not be surprising to see operators dispose of non-core assets and negotiate more aggressively with third party suppliers for reduced pricing. Given it is unclear where the oil price floor will be during this period of volatility, some participants can be forgiven for pulling these levers fervently.

However, it is important the sector’s responses are measured to ensure the sustainability of the industry. Moreover, the industry would do well to be mindful of two themes going forward – talent retention and operational excellence.

Talent retention is essential for the long-term survival of the industry. The talent gap that currently plagues the industry in the shape of the ‘big crew change’ was in large part triggered by the mass layoffs of the 1980s when oil prices declined dramatically. That decision back then has resulted in the major challenge of sourcing and retaining seasoned geologists and engineers, who are in perennial short supply.

As for operations excellence this is somewhat of a core competency that needs to be revisited. The ability to manage an asset base (which in some cases is very mature such as in the North Sea) efficiently while complying with stringent Health and Safety requirements is essential. In light of the large capital projects the sector typically undertakes, there are many best practices to be imported from other sectors. Companies in the aerospace and automotive sectors, for example, have survived periods of significant challenge in the last 20 years by changing their whole business model and learning to collaborate with supply chain partners in new ways.

Finally, quite often talent retention and operations excellence are very much interconnected. Operators in maturing basins often struggle to retain experienced staff to manage ageing assets in decline. Their staff are instead lured to work in more prolific and emerging basins. In short the oil and gas sector needs to consider carefully how decisions taken today may come back to haunt them at a later date.

The business impact from Alastair Geddes, Head of Oil & Gas Consulting in PwC Scotland

In the oil and gas industry, complexity arises from the nature of a ‘whole system’ – interconnected elements from people and processes to assets and supply chain that need to be balanced. Whole systems, however, don’t respond well to tactical change – and that’s where the challenge lies. Almost by definition, you change one thing in the system and you’ll find unintended consequences that may create a bigger problem down the line.

Unfortunately, there is no ‘silver bullet’ solution. Companies need to implement a range of measures to create a sustainable, lower cost, operation, not just the tactical quick-fix answers.

Take supply chain as an example. The level of practice we see in the oil & gas industry is decades behind that of other comparable heavy industries. This is perhaps understandable as cost has not been such an important factor when compared with speed and quality – but it cannot be sustained in a late-life, low cost operation.

So, it’s seductively simple to take the biggest single contract, eyeball your supplier and demand a significant cut in price. Just share the pain. However, that approach could be limited. What happens when you want that “strategic” supplier to collaborate with your high-priority project? Maybe they’ll go for a better offer elsewhere. Or, have you unwittingly ignored the far greater cost component that your own engineering organisation is driving into the contract through late changes to specification; bespoke requirements when standard will do or not taking advantage of cheaper prices for longer-lead-time orders?

That’s why PwC advise companies to make sure they treat the root causes of cost, not the symptoms.

Edited from press release by Joe Green

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