Despite the already difficult North Sea market and painfully high cost levels, a new research report published today by DNV GL reveals that more short-term cost cuts are expected in 2016.
Sixty-five percent of UK respondents think mistakes made in previous downturns are being repeated, with more than twice as many UK respondents (30%) concerned about layoffs and loss of experience than the global average (14%).
According to A New Reality: the outlook for the oil and gas industry in 2016, a DNV GL report based on a survey of 921 senior professionals in the sector, investments in CAPEX, OPEX and research and development are expected to be cut even further in the UK in 2016, deeper than at a global level.
A decreasing headcount this year is also expected by 58% of UK respondents compared to 51% globally. However, increased spending on improving the efficiency of assets in operation is expected by 39% of those surveyed.
Eighty-one percent of UK respondents say they were highly or somewhat successful at achieving cost-efficiency targets in 2015, compared to 74% globally. Nevertheless, 12% expressed concern about cost control and lack of efficiency. More than half (56%) stated their organization has taken a short-term approach to headcount.
Hari Vamadevan, regional manager, UK and West Africa, DNV GL – Oil & Gas, says: “The downturn is being felt by the global industry, but nowhere more acutely than on the UK Continental Shelf (UKCS). The previous long period of escalating prices has made the drop particularly painful in a region with ageing assets, high costs of production, high taxation and relatively high capital expenditure for new fields.
“As an industry, we have taken quick, cost-cutting action, which has been particularly apparent through a raft of major job cuts over the past 12 months, and further short-term measures are expected, despite concerns over the skills drain. To have sustainable growth in the ‘new reality’, the oil and gas sector will have to accelerate meaningful and healthy cost-management changes – that means reducing complexity, boosting innovation, enhancing collaboration and extending standardization.”
The research shows that the downturn is leading to more joint industry projects and this year 22% of UK sector professionals expect their company to collaborate with other firms to deliver cost savings. Increased collaboration is expected by 46% of respondents to be the most prioritized strategy for maintaining innovation.
Subsea (39%) and EOR (28%) are envisaged to be the highest impact new/emerging technologies, followed by unconventional oil extraction (25%). However, 42% of respondents expect spending on research and development and innovation to be cut even further in 2016; 6% more than at a global level.
Elisabeth Tørstad, CEO of DNV GL – Oil & Gas, says: “While the industry is understandably preoccupied with generating shorter-term value, we must also keep an eye on where longer-term value and permanent efficiency gains can be achieved. Nearly one in five companies globally does not have a strategy in place to maintain innovation and research and development investment is expected to fall during the year ahead.
“Innovation isn’t just about finding the breakthrough technologies – although that’s important too - it’s also about making things simpler and more efficient and ultimately helping the industry to safely cut costs. At DNV GL, we are continuing to invest 5% of our revenue in research and development as we see this as a key enabler for sustainable long-term competitiveness,” continues Tørstad.
DNV GL's report also surveyed oil and gas professionals in each region.
Brazil
Of senior oil and gas professionals in Brazil, 24% say they have been highly successful in meeting cost-efficiency targets, compared to 18% globally. Cost management will still be the top corporate priority in 2016 for 47% of Brazilian respondents, compared to 41% globally, as the sector seeks to become more efficient.
According toDNV GL global survey, around a third of those questioned (31%) will prioritize job cuts to manage costs. Further, ahigher share of Brazilian respondents believe the sector has taken a short-term approach to headcount (55% in Brazil versus 51% globally).
Brazil also has a higher focus on standardization, with 80% of respondents expecting operators to push for standardization, compared to 61% globally. A total of 64% say their organization will seek to achieve greater standardization of tools and processes during 2016, compared to 59% globally.
Alex Imperial, area manager, South America, DNV GL – Oil & Gas, says: “Brazil’s oil and gas industry has had a very turbulent year and has responded with short-term measures to control costs, such as increasing pressure on the supply chain and making tougher decisions on CAPEX. More job cuts can be expected in the year ahead to control costs.”
"However, it's encouraging to see that these short-term measures are being balanced with a longer-term view of cost management: optimizing production efficiency and greater standardization of tools and processes are being cited as important ways to drive cost-efficiency. I’m particularly pleased to see that the region is forging ahead with collaborative industry projects and strengthening links with academia to maintain innovation in the long-term,” Imperial says.
A total of 44% of Brazilian respondents plan to increase collaboration with other industry players and 40% plan greater involvement in joint industry projects. About 27% of Brazilian respondents plan to increase partnering with academic institutions in order to maintain innovation, compared to 16% globally.
Continental Europe
Despite ongoing concerns over job losses, a new more meaningful stage of cost management is expected, prioritizing efficiency, cutting complexity and driving innovation.
Cost management is the top priority for 41% of Continental European respondents in 2016. The highest-prioritized measure to impose stricter cost controls is to optimize the efficiency of production from existing assets (31% in Continental Europe, compared to 25% of respondents globally). Reducing exposure to riskier/costlier projects is favored by 29% in Continental Europe (compared to 25% globally) and 27% will initiate simpler processes and designs (versus 20% globally).
Continental Europe has less of a focus on reducing headcount to manage costs in 2016 compared to the global average (22% versus 31% globally) and pressure on the supply chain is also easing, down from 31% in 2015 to 27%.
Liv Hovem, regional manager, Continental Europe, North and East Africa for DNV GL – Oil & Gas, says: “While the oil and gas sector in Europe still needs to be prepared for more short-term cost-cutting measures and job losses, there is cause for optimism. Companies are driving initiatives to reengineer projects to create more efficiency and generate longer-term value.”
"The industry needs to accelerate these more meaningful cost-management measures that will enable it to adjust to the new reality and put it on a sustainable growth path for the long term. That means cutting complexity, increasing collaboration and driving standardization,” Hovem says.
Standardization measures in Continental Europe will have a high focus on processes, process design and operational procedures in 2016.
The most common strategy for maintaining innovation with shrinking budgets is to increase collaboration with other industry players (47%). Nearly one in three (28%) plans greater involvement in joint industry projects in the year ahead.
Norway
According to DNV GL, the Norwegian oil & gas sector needs to commit to long-term thinking for meaningful cost cutting.
Although around one in five (19%) plan to increase or ring-fence R&D spending, 22% say they lack a strategy to help maintain innovation.
Norwegian respondents see collaboration as a key enabler to maintain innovation in a cost-pressured environment - 44% will increase collaboration with other industry players and 28% will increase the involvement in joint industry projects.
Cost management is the top priority for nearly half (49%) of Norwegian respondents in 2016 –an increase of 22 percentage points compared to last year, and 8 percentage points above the global score. Further, 76% of the Norwegian respondents believe the industry will be successful in reducing costs in 2016, compared to 65% globally.
Standardization and collaboration on innovation are viewed as measures for cutting cost. 75% of Norwegian respondents expect that operators will increasingly push to standardize their delivery, versus 61% globally.
“The sector will have to focus stronger on meaningful and long term cost management measures to adjust to the new reality. That means cutting complexity, increased collaboration and greater standardization, which will put the industry on a sustainable growth path for the long-term,” Kjell Einar Eriksson, Regional Manager for Norway of DNV GL – Oil & Gas says.
UAE
UAE oil & gas sector needs to commit to long-term thinking for meaningful cost-cutting, DNV GL says.
Despite strong cost-efficiency achievements, UAE respondents still favor more short-term responses to the downturn.
UAE respondents also believe the sector has taken a short-term approach to innovation and R&D (36%) and to skills and career development (45%), compared to 32% and 43% respectively among global respondents.
Cost management has fallen slightly as a top/high corporate priority, but there is expected to be growing pressure on the supply chain (31% of respondents in 2016 compared to 20% in 2015). Reducing the headcount will be less important in 2016as a cost-management measure, down from 30% last year to 24% in 2016.
The UAE is receptive to standardization and 66% of respondents believe that organizations will achieve greater standardization of tools and processes, while 60% think that operators will increasingly push to standardize their delivery globally.
While only 17% of UAE respondents plan to increase R&D spending, this is still more than the global average of 15%. The most favored strategy in order to maintain innovation within a cost-pressured environment is to increase collaboration with other industry players (43%).
Enhanced oil recovery (31%), unconventional gas extraction technologies (29%) and unconventional oil extraction technologies (28%) are perceived as the new/emerging technologies that will have the greatest industry impact in 2016.
Elisabeth Tørstad, CEO of DNV GL - Oil & Gas, says: "Joint innovation and smart standardization are critical to strip back complexity and, in turn, lower costs and enable rapid and efficient technology implementation. It is interesting to see that UEA respondents see operational production efficiency as the highest priority for R&D spend.
UK
Despite the already difficult North Sea market and painfully high cost levels, a new research report published today by DNVGLreveals that more short-term cost cuts are expected in 2016. Of total of 65% of UK respondents think mistakes made in previous downturns are being repeated, with more than twice as many UK respondents (30%) concerned about layoffs and loss of experience than the global average (14%).
Investments in CAPEX, OPEX and R&D are expected to be cut even further in the UK in 2016, deeper than at a global level. A decreasing headcount this year is also expected by 58% of UK respondents compared to 51% globally. However, increased spending on improving the efficiency of assets in operation is expected by 39% of those surveyed.
Eighty-one percent of UK respondents say they were highly or somewhat successful at achieving cost-efficiency targets in 2015, compared to 74% globally. Nevertheless, 12% expressed concern about cost control and lack of efficiency. More than half (56%) stated their organization has taken a short-term approach to headcount.
Hari Vamadevan, regional manager, UK and West Africa, DNV GL – Oil & Gas, says: “The downturn is being felt by the global industry, but nowhere more acutely than on the UK Continental Shelf (UKCS). The previous long period of escalating prices has made the drop particularly painful in a region with ageing assets, high costs of production, high taxation and relatively high capital expenditure for new fields.”
“As an industry, we have taken quick, cost-cutting action, which has been particularly apparent through a raft of major job cuts over the past 12 months, and further short-term measures are expected, despite concerns over the skills drain. To have sustainable growth in the ‘new reality’, the oil and gas sector will have to accelerate meaningful and healthy cost-management changes – that means reducing complexity, boosting innovation, enhancing collaboration and extending standardization,”Vamadevan says.
The research shows that the downturn is leading to more joint industry projects and this year 22% of UK sector professionals expect their company to collaborate with other firms to deliver cost savings. Increased collaboration is expected by 46% of respondents to be the most prioritized strategy for maintaining innovation.
Subsea (39%) and EOR (28%) are envisaged to be the highest impact new/emerging technologies, followed by unconventional oil extraction (25%). However, 42% of respondents expect spending on R&D and innovation to be cut even further in 2016; 6 percentage points more than at a global level.
US
Pressures on margins continue to drive difficult decisions throughout the US oil and gas market, DNV GL says.
One-third of US respondents are concerned that they do not have a strategy in place to maintain innovation in a declined market.
New research reveals that skills shortages are seen as a barrier to growth and an increasing concern throughout the US. More than half of the respondents believe organizations are taking a short-term approach to skills and career development. It also showsthat an increased portion of US respondents see cost management as the top priority in 2016 (38% compared to 25% in 2015).
Peter Bjerager, executive vice president, director of division Americas in
DNV GL Oil & Gas, says: “The majority believe that oil prices will remain lower-for-longer, which ultimately leads to continued pressure on cost management. Within this region, and throughout DNV GL, we continue to focus on new ways to drive research and innovation. We partner with every segment of the value chain and look for new ways to improve through standardization. It's encouraging to see that leaders in oil and gas companies are also seeking new ways to standardize operations as a preferred way of driving efficiency.”
This year’s report shows that six out of 10 (61%) respondents agree that operators will increasingly push to standardize their approach globally - an increase of 9 percentage points since 2014.
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