Oil and gas firms must learn lessons from other UK industries and fundamentally change the way they operate if they are to successfully compete for international investment and maximize recovery across the UK continental shelf (UKCS) over the next 25 years, according to a new cross-sector efficiency report from PwC and the Oil and Gas Industry Council.
The recent drop in oil price from US$110/bbl to a low of $45/bbl, before rallying at $60/bbl, has brutally exposed a substantial escalation in cost base across UK oil and gas operations.
While some firms are taking action to implement sustainable, long term changes, the concern is that there are still many situations where short-term tactical measures to cut discretionary spend or apply familiar solutions from previous down turns are the norm. The reality is that making long term, structural change takes time and is not easy.
But there is a route map that could help hasten this much-needed industrial transformation across the UKCS. The report authors from PwC have set out seven fundamental steps that could turn the tide and secure a brighter future for the industry – and crucially these approaches have been tried and tested by many other leading organizations including multinational brands such as Rolls-Royce (aerospace), Bombardier and Jaguar Land Rover.
“There is no one silver bullet that can solve the range of issues currently facing the oil and gas industry - instead there are seven that we believe can transform, modernize and re-energize operations across the UKCS,” said Gordon Colborn, consulting leader, PwC in Scotland. “These seven fundamental steps are pragmatic lessons that have been transformational in other major industries and are highly relevant to those firms working in the North Sea.
In the 1980s to 2000s, four heavy engineering based industry sectors - aerospace, automotive, chemical, and rail - dealt with a similar range of challenges, such as: significant safety requirements; extended periods of considerable cost pressure; economic downturns impacting trade; and increasing international competition for investment.
Their responses were transformational and this report’s seven fundamental steps capture the key tactics used to cut their cost base and manage performance:
Leadership
The single fundamental that has had the greatest impact on making transformational change (in pursuit of operations excellence) is leadership with a strong compelling vision and a passionate execution of that vision in a trust based environment.
Operations as a strategic asset
High-performing organizations treat operations as a strategic asset of the business and not a ‘cost of doing business’. They clearly articulate how operations helps to deliver competitive advantage and build the necessary capabilities to ensure this happens.
Process and IT architecture
Delivering operations excellence requires a strong ‘process’ focus underpinned by the appropriate IT architecture. High-performing organizations view operations as an integrated end-to-end process and have moved to minimize the level of ‘over the wall’ practices that have often characterized functional ‘silos’. Information systems provide visibility across the end-to-end process and support and enable better decision-making. The concept and role of process ‘owners’ is emerging, transcending traditional functional boundaries.
Knowing and building your core
Leading organizations have a very clear understanding of what constitutes ‘core’ and ‘non-core’ activities. They focus on building class-leading capability in their ‘core’ activities and realize that external organizations are better placed to manage and deliver ‘non-core’ activities.
They also recognize and manage their supply base as a spectrum; on one end, organizations build relationships that are highly collaborative; on the other end, relationships are largely transactional and most often decided on price.
Organization and people
We have no evidence to suggest that there is a single, effective organization design model for high-performing operations. However, several factors appear to be common amongst the companies interviewed:
Performance management
Leading companies focus on a small number of key metrics and use these to drive transformational change. They deploy a systematic performance management process – both internally and supplier/customer oriented, focusing on a set of pivotal metrics. People clearly understand the key metrics for which they are accountable (individually and in teams) and these are used to incentivize the correct behaviors and drive performance.
Innovation and change
Leading organizations are inherently innovative – not necessarily in the product offering, but in the quest for continuously finding ways to improve.
They are very aware of the competition, both direct and indirect, and constantly look for ways to be better than their competitors.
They benchmark their performance and their practices, not just against direct competitors, but against the best they can find.
While the seven fundamentals will go a long way to helping firms secure sustained efficiencies of up to 30-40%, the guideline target set by the regulator, the report authors do not believe they are sufficient on their own. Two other factors are crucial to maximizing improvement potential and delivering the step change needed across the North Sea:
“It is essential industry acts quickly and determinedly to address its cost and efficiencies challenges,” said Stephen Marcos Jones, business development director, Oil and Gas UK. “If this sector is to thrive for decades ahead, cooperation and relationship optimization will be key.”