Extracting Greater Efficiencies for Oil Companies

September 14, 2010. In the wake of the credit crunch and public fall out from the BP oil spill, petroleum companies have been adopting a more conservative approach to project financing. If they are not exiting or slowing down unconventional projects, such as oil reclamation from tar sands, they are halting downstream investments like the Honam refinery in Qatar. How else can oil companies derive greater efficiencies in order to maintain their competitive advantage?

Peter Davey, Vice President Consulting at M-Brain (formerly Global Intelligence Alliance) Singapore, shares his thoughts.

What are some of the most pressing challenges facing oil companies today?

“The challenges are numerous! They range from increased project complexity and risks, to intensified international involvement and the ensuing physical, cultural and environmental risks.

Onshore and offshore, oil and gas producers face increasingly complex challenges in the exploration and development of energy resources. Successful execution involves paying attention to many variables such as technical, financial, environmental, logistical and cultural factors.

Then there is the issue of rising costs and financing constraints as well as shorter product-to-market planning. Wild swings in supply and demand, volatile prices and shifting worldwide energy policies have made exploration and production planning more difficult than ever. The uncertainty of Thailand’s commitment to biodiesel and the US government’s flip-flop approach to offshore drilling are cases in point.

Global competition for depleting resources continues to drive the need to lower operating costs and increase discovery and recovery rates.

Of all the industry’s challenges, the constrained credit environment is especially demanding, given the industry’s capital-intensive nature. From Kuwait’s proposed US$15 billion Al Zour refinery project to Transneft’s Russia-China pipeline, oil and gas projects both up- and down-stream are being delayed or cancelled as firms prepare for a new economic cycle.

All in all, it’s a tough act of balancing quality and profit.

The collapse in refining margins and weaker retail profits, coupled with increasing scale and complexity means a review in refinery portfolios is inevitable.”

How has all this affected portfolios?

“Downstream projects in particular, have been affected by the credit crunch. Refinery expansion and upgrades have been put on hold or cancelled altogether in Qatar, Peru and the USA, while ConoccoPhillips and Shell have both delayed projects to consolidate their cash positions.

Many majors have had to deal with excess refining capacity while at the same time managing the risk of increased environmental legislation, making new investment in developed markets problematic. Given these constraints, it is hardly surprising the only major refinery capacity expansions are for Iran and Iraq, and ““ also not surprisingly ““ there is a lack of willingness in the private sector to become involved.

Planned new build has fallen by 15% over the next 5 years, with oil majors intensely monitoring prices in the hope of catching the bottom of the refinery construction market.”

Where else can oil companies derive greater efficiencies?

“Petroleum companies need to focus further on the things that they do best.

First, they can shift their asset portfolios to increase exploration and production activities in locations where exploration costs per barrel are realistic vis-à-vis oil prices. However, increased competition for limited new fields has meant that governments are becoming more adept in taking a larger share of the profits from the oil companies. In future, operational excellence, in terms of better recovery rates, decreased downtime and reducing the cost per barrel will become major drivers of profit. Some believe that the best operations can deliver a 30% increase in profitability while a glace at BP’s woes in the Gulf of Mexico reveals a clear picture of what companies can expect when operations fail.

Alternatively, oil companies can choose to look for upstream long-term investment opportunities to strengthen their resource positions. This may mean learning to squeeze more product out of existing marginal wells in addition to taking up opportunities off the coasts of the USA, India and Indonesia, where so many of the proven but as yet unexploited reserves have been identified.

They can also create business efficiencies by centralizing decision-making for areas where there is potential for cost savings, without diluting understanding of and a synergistic presence in local operations.

Of particular interest within the shift towards centralization is e-procurement. The current imbalance between supply and demand is putting pressure on both buyers and suppliers. With buyers struggling to source resources, and suppliers not able to predict accurately when and where demand will come from, transparency in the supply chain is a vital asset. E-procurement solutions can help as they level the playing field between large and small companies.

E-procurement benefits buyers in that they gain from productivity improvements, greater efficiency and cost savings from automating procurement activities and streamlining purchasing workflow, both internally and with vendors. By analyzing e-procurement transaction data, vendors can better match their products and services, and time their production schedules, to fit customer needs. This will ensure that producers benefit from faster supply and avoid bottlenecks, thus preventing downtime and adding to overall operational excellence.

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