Value-Added Engineering: A Solution to a Down Market

Oil prices are on downward trend due to a host of reasons such as oversupply and
fluctuating demand. This forces oil producers to make tough decisions to cope with
revenue reductions. Interestingly, this creates more opportunities for
Oil prices fell by 60% from June 2014 to January and ranged from more than USD
100/bbl. to less than USD 45/bbl. in recent months, according to the US Energy
Information Administration. For consumers, this news has largely been welcome,
delivering savings at the pump nationwide and helping the US economy continue its
march back from the brink of the 2008 recession. Retail prices for automotive
gasoline have dropped significantly. Consumers, not surprisingly, are happy with
this development, which is making a difference in the monthly household budgets of
millions of Americans. New Challenges But the good mood does not extend to
domestic oil and gas firms for whom the challenges of doing business in this
environment are clear. Lower prices mean lower revenues and lower profits, which
are stressing business models, forcing cutbacks to operations and investment
budgets, and raising new questions for midstream and upstream firms. Among other
risks in this changing market, operators now face a reality of lost profits, delayed
exploration and development efforts, and changes to their long-term site and
growth plans. In the short term, oil and gas firms need to find ways to cut costs and
optimize their existing production efforts and debottleneck their systems to
maximize available revenues from what they are already producing to maintain
profitability until the market returns, all with an eye on future needs. Prices are
falling now, but are expected to rise again in the future. Operators need to know
that they can make adjustments to expenditures now without sacrificing future
opportunities down the road. It is a delicate balance. It might be tempting to trim
the operating costs at a given site, especially if the cost to keep the facility running
exceeds the amount of revenue it is generating, but that can be a rash decision. The
real question should be: How do I maximize my production against the needed cuts
in capital and operating expenditures to maintain profitability in this market? Where
is the sweet spot between costs and revenue? To what degree should I cut costs
now to hit the sweet spot? Consider, for example, an operator that decides to lay
down a rig on one of its well pads to scale back its operating costs. Rather than
building out facilities to support the one remaining wellhead (in this example), the
company might want to build out capacity so that it would be able to add onto the
site in the future when it is again able to invest in new rigs and assets. Cutting
operating expenses and capital expenditures now might require a decrease in
exploration and drilling activities, but the operator should still think about the future
need for surface facilities to avoid having to make up ground when a return to
growth occurs. In the long term, the risks associated with lower oil and gas prices
could be even more significant. If prices linger at todays low levels for an extended
period, operators could be faced with some difficult decisions about their existing
and future assets. Todays oil and gas sites may eventually become uneconomic,
meaning that the cost to operate them could exceed the amount of revenue they
generate. Operators may even be tempted to abandon their longer-term plans in
favor of quick savings and cost cuts. When will domestic operations stop making
economic sense? When will oil and gas firms be forced to pull the plug rather than
lose money on their investments? What will reduced domestic production, as a
result of the low prices, mean for global energy prices or the US growing role in this

market? So far, no one has all the answers. What this could mean for the long-term
health of the US energy market remains to be seen. Short-Term Fixes How are
operators addressing these challenges? So far, they have been using a mix of midterm planning and short-term cutbacks. Firms are generally finding savings by
cutting staff, consolidating resources, delaying exploration and drilling, and even
holding off on the completion of existing wells without making fundamental changes
to their business models. These efforts are helping to keep them solvent and their
investments in place in hopes of a quick turnaround in oil prices. GUEST EDITORIAL
FROM THE PFC TECHNICAL DIRECTOR Examples of the efforts are as follows: Cost
savings. As revenues have been falling, many operators have begun to cut costs,
both in terms of operating expenses and development expenditures, to remain
profitable in this environment. Many producers are delaying exploration efforts and
trimming their capital expenditures. Diversification. Some operators are
introducing new products to their offering mixes such as the extraction of helium
from natural gas in parts of Colorado, while others are adding processes such as
fractionation to their facilities to access products such as butane, propane, and
hexane. Tis puts them at a strategic advantage by allowing them to go to market
with new revenue streams in which there is more demand and stronger pricing.
These steps have helped many firms adapt to the changing pricing climate for oil
and gas products, but they may be insufficient to weather the industry against a
protracted and widespread market downturn. In the face of potential long-term
revenue reductions and profit losses, the industry needs a carefully planned, well
thought-out approach to solving these challenges. Toward an Engineered Solution
Fortunately, value-added engineering can be part of the solution. How? By helping
energy operators cut costs and raise revenues in innovative ways. By leveraging
proven approaches in midstream engineering to help with pricing challenges,
operators can retrofit existing facilities, better plan new installations, and ensure
economic operation of sites in both current and future market conditions. Carefully
planned facilities engineering can do the following for operators: Cost reductions
through process optimization. Existing oil and gas collection and delivery systems
may be improved by focusing on efficiency improvements, addressing product
quality needs, and eliminating redundancies. The overall goal of process
optimization is to reduce the cost of production at existing sites and reduce longterm maintenance needs. Where can these improvements be made? What
redundancies can be addressed? What maintenance can be eliminated or
streamlined? Can any existing process be done differently to remove waste from the
system? Revenue generation through debottlenecking. By bringing more products
to the market, operators may increase their potential revenues from existing sites
by both increasing production and adding new products to the mix. Often, this
revenue stream is being constrained by improper or less than optimal site designs.
Where is production currently being held back? Done right, engineered
debottlenecking of oil and gas sites may allow operators to make more money with
their existing resources at minimal cost, thus offering the best of both worlds.
Strategic site planning. Would shifting to prefabricate or modular facilities help the
operator with overall system efficiency and cost? Can their installations be better
planned and organized to take advantage of shared labor, resources, and
economies of scale? Engineers can develop plans for retrofit applications and new
builds, thus minimizing the cost of construction and ongoing maintenance and
upgrade costs.