As we watch the oil price go down, with no indication of how low it will go or how long this trend will be sustained, it’s increasingly clear that the impact of this – alongside a double whammy of falling production levels plus cost inflation – is being keenly felt by operators across the UK Continental Shelf (UKCS).
In recent weeks, we’ve seen Christmas parties cancelled, free meals curtailed and shareholder revolt on CEO pay as well as plans to cut onshore and offshore contractors pay in 2015.
There is also the prospect that up to $150bn of global projects could be labelled as uneconomic next year, resulting in them being mothballed or cancelled altogether.
While some of these savings may be marginal, what they do send is a strong signal of intent to employees and contractors. It’s crunch time.
For those firms who survived the oil price dip in the 90s, it’s safe to say that the landscape now is quite different and the tactics and strategies that got them through then may not be appropriate now.
Against this challenging backdrop, we believe that up to £10bn of cost reduction savings could be made simply by implementing more effective and cohesive project decisions, reducing over runs, streamlining the supply chain and improving collaboration.
By cutting costs of CAPEX and OPEX projects by 40% and reducing the average price of oil extraction from £17 per barrel to £14, operators could go a long way to making programmes more affordable, safeguarding jobs and extending the lifespan of projects and fields.
At an asset or installation level, doing things differently is not just about reducing costs, but also about doing things more efficiently and intelligently, having a focus on those activities that add value, and creating the space and capacity to execute more activity for the same or less cost. Understanding the end-to-end processes and the total cost of ownership is therefore critical.
So what’s the rub? Well, for one, based on our experience of other heavy industries, the oil and gas industry is decades behind other comparable heavy industries when it comes to cost reduction.
And the pressure of low oil prices is likely to lead to a flurry of acquisitions and consolidation across the oil and gas market as operators strive to drive costs down and derive synergies – something that was prevalent in the 90s.
It is vital that operators understand there is no silver bullet. The power to influence their future profitability and growth is entirely in their control and positive change can come from the heart of their organisation.
It’s also important to recognise that this is a global issue. Over the last four or five decades, many innovations have sprung from the North Sea and we believe that if operators grasp the nettle, they could again lead the way in transforming the oil and gas industry, ensuring it is fit for the future.
Brian Campbell is head of forensics at PwC in Scotland
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