Analysis

10 September 2014 www.petroleum-economist.com

E
NERGY firms margins are again coming under
increasing pressure. Historically, companies have had
to juggle the effects of significant fluctuations in the
availability of raw materials and equipment, in the costs of
salaries and services, and in the price of oil.
As a result, most companies manage their costs in
cycles that mirror the peaks and troughs experienced
by the industry, relying both on initiatives designed to
cut costs and others designed to improve operational
efficiency.
During high-profit cycles, cost control tends to be poor;
industry downturns, meanwhile, are generally charac-
terised by cost-firefighting maintenance cancellations,
shut-downs and staff lay-offs, such as those experienced
in the 1990s.
The lessons learned from these cycles, coupled with a
number of critical factors such as the involvement of top
management, cost ownership, bottom-up cost examination,
internal benchmarking, multi-annual cost-saving plans and
robust cost-control mechanisms have improved com-
panies abilities to manage their margins and generate
additional value. With shareholder scrutiny of financial per-
formance (cash flow, margins, return on capital employed)
intensifying, cost-reduction and operation excellence have
become key to managements tool kit.
But relying solely on these traditional cost-reducing
approaches without a more profound transformation of
the way companies carry out their businesses will be
insufficient to effectively tackle the challenges ahead.
Despite high crude prices, margins are diminishing, and
structural pressures are driving costs upwards and this
will force energy companies to consider initiatives that
go beyond performance management if they wish to
maintain profits in the long run.
So how does a company move from cost-firefighting to
effective cost-management?
A disruptive approach is needed to tackle the cost-
reduction challenge the industry currently faces. To sup-
plement and support the traditional methods, there are
three main initiatives companies can deploy - creating a
lean organisational model; working collaboratively; and
squeezing value from the digital oilfield and all will be
vital in generating sustainable cost reductions.
The way organisations are set up is crucial to the cost
equation they can be too big, too slow, or simply ill-fitted
to adapt to changes in their various operating environ-
ments. To sustainably maintain profitability, companies
must challenge established structures and create lean
organisational models. They need greater organisational
flexibility and more dynamic decision-making to ensure
costs mirror industry fluctuations; specific internal struc-
tures to ensure core competencies are optimally allocated
for each operating context deep offshore, mature fields,
unconventional, etc.; and to pool talent in shared loca-
tions to maximise productivity.
Ef fectively variablising costs is a fundamental
Look after your pennies
As upstream margins grow tighter, energy firms are taking a much closer look at their spending.
Rather than fighting a rearguard action against spiralling costs, taking on a new suite of cost
management tools may very well be the right approach, say Jerome Sevin and Pierre-Antoine
Fliche from Schlumberger Business Consulting (SBC)*
Counting the
cost: Energy
firms must
keep a tighter
rein on costs
Analysis
11 September 2014 www.petroleum-economist.com
element of company management in the oil and gas
industry. To adapt the organisation to industry cycles, it
is necessary to identify a companys core competencies.
Resources essential to operations should be shielded
from cost reductions during difficult economic periods,
while use of less-critical resources could vary in accord-
ance with fluctuations in the business cycle.
To undertake such an appraisal, the company must
perform a detailed analysis of its resource and wage
policy, and answer some of the following questions: what
is the optimal number of employee versus contractor
positions? Which core competencies are essential for
running the company? Is there policy allowing wage flex-
ibility, especially for sub-contractors? Are oil companies
willing to change their image and culture? How able and
determined is middle management to implement difficult
decisions to variabilise costs?
Typi cal l y, petro- techni cal professi onal s (PTPs)
and drillers account for the bulk of an operators core
competencies. The length of time it takes for PTPs to
train (also referred to as their time to autonomy) and
the shortage of suitably qualified PTPs in the employ-
ment market make these positions a precious resource.
These roles are also key to an operators development.
Positions with specific expertise could also be shielded
from any planned job cuts. With offshore resources
playing an increasingly important role in exploration,
subsea-related expertise is likely to figure among core
competencies as well.
For positions that are strictly related to operations,
such as operational and support staff, flexibility and
mobility in the staffing are by far the most intelligent
response to a regional downturn. It is true, however,
that activity-dependent positions are the first exposed
to cycles.
Recently, a North Sea operator decided to outsource
various operations in an effort to improve operational flex-
ibility, telling local media: Doing these [support function]
jobs ourselves is very expensive.
One of an oil companys main difficulties is moving a
portion of its fixed costs to a variable-cost set-up; this
requires a thorough knowledge of core competencies
and a degree of flexibility in non-core resources. Hasty
cost-cutting in the early 1990s triggered fears that a
talent shortage would emerge especially in drilling
as early as 1996, according to reports in industry
journals. Flexibility in human resources requires a fast
and efficient decision-making process: fast, because
the organisation must react and adapt resources to the
level of activity being undertaken; and efficient, since
management decisions are sometimes not fully relayed
because of a lack of commitment from the top or from
middle management, and the difficulty of enforcing
decisions in the assets.
Time for transformation
The second element required for effective restructuring
is linked to the diversity of exploration and production
(E&P) activity and relative uniformity of the organisa-
tional structure itself. Predominantly pyramidal, oil
companies have transformed their structures to be
less centralised and hierarchical, through organisa-
tional arrangements and project-based management
principles, such as task forces, capital projects teams,
or cross-functional organisations. But as the resource
base becomes more diverse, with the emergence of
unconventional plays, ultra-deep offshore fields, and the
increasing contribution of mature fields, a standardised
structure may no longer be a winning formula. Specific
business units, each with their own set of core compe-
tencies, might better cater to the needs of mature fields
or unconventional plays.
Mature fields provide a good example of how further
value may be generated through a dedicated business
unit. According to data provided by Rystad Energy, mature
fields account for roughly 65% of world oil production,
making them a sizeable prize for operators. But in order
to produce these barrels, attention must be focused on
asset integrity, inspection procedures, maintenance back-
logs, contradictions between original design and actual
operations, enhanced oil recovery, as well as investment
decisions because of the fragile nature of their eco-
nomics. Operating these assets efficiently requires core
competencies (corrosion inspectors, petroleum econo-
mists, maintenance specialists, for example) and govern-
ance procedures (pre-emptive decision making) that differ
from those required in conventional oilfields where pro-
duction has reached a plateau. A dedicated mature-fields
business unit with these characteristics would improve
Figure 1: Current decline in operating margins and returns of
oil and gas companies
Majors
NOCs
Independents
30
25
20
15
10
5
0
45
40
35
30
25
20
15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012
%
%
Companies operating margin as
a percentage of gross revenue
1
Companies average return
on capital employed
Source: Evaluate Energy; Schlumberger Business Consulting
1
Average values from a group of 5 majors, 12 NOCs and 22 Independents
*SBC is the
management
consulting
arm of
Schlumberger
Analysis
12 September 2014 www.petroleum-economist.com
production performance, generating costs reductions that
would outweigh higher overheads, resulting in net savings
over a non-specialised, centralised structure.
Operators could create distinct entities to manage each
of the main phases of a fields life ramp-up and devel-
opment, plateau, and end-of-field life. Instead of seeing
margins decrease steadily over a fields life, stewardship
of fields would be transferred over from one specialised
entity to the next as production drops. Without compro-
mising on quality, health, safety and environment (QHSE)
standards, leaner processes, staff and overhead costs
would enable operators to achieve better margins and
extend the economic life of a field, generating additional
profits before it is eventually relinquished to specialist
independents. Shallow Gulf of Mexico (GoM) fields pro-
vide a good example of how this system is already in
place, with independent companies taking the role of
business units. Shallow GoM fields were developed by
large, international oil companies (IOCs), operating from
high cost bases, in the 1970s and 1980s before being
transferred to large independents, which have interme-
diate cost bases, and eventually to small independents
with low cost bases.
Some operators are already setting up separate busi-
ness units for US onshore projects, mostly in the unconven-
tionals sector, in an attempt to compete more effectively
with independents. Their key objectives are to enable
faster innovation and decision-making, and better cost
management. This suggests the end of a one-size-fits-all
organisational structure. Why wouldnt specific types of
operations benefit from reinforced core competencies
and fit-for-purpose governance? The intensifying focus on
deep water and onshore unconventionals two leading
segments in the years to come strengthens the case for
specialisation. The success of deep-water ventures lies in
technological development, risk management, long-term
asset management, and mega-project execution skills.
Unconventional projects are best developed with a factory
approach, emphasising operations, quick adoption of
reservoir learnings and supply chain excellence.
Talent pool
As well as identifying core competencies and optimising
their allocation within each business unit, operators could
benefit from optimising the utilisation of their talent pool.
In a tight human-resources environment SBC research
indicates the shortage of PTPs could reach 16% in 2016
access to core competencies is a strategic challenge and
a cost factor for operators. Setting up offsite locations to
assist field operations remotely is one solution: central-
ised pools enable operators to reduce overall headcount,
as remote operators can manage several assets at a time.
They also obviate the inconvenience of sending staff off-
shore, potentially increasing the operators attractiveness
to talented employees.
Some companies have already made use of remote
hubs and commando teams in exploration drilling. But
broader implementation, notably in other E&P activities,
could create new cost-saving opportunities. Setting up
remote hubs requires more than just infrastructure invest-
ments, however. Governance needs to be adapted to
integrate remote decision support centres in the manage-
ment system and define their role, new positions created
and people trained to use new tools and processes. Local-
content regulations must also be taken into account, as
this may be a constraining factor in some areas.
To work efficiently, a company needs hard principles
and soft skills. Hard principles cover organisations,
processes and governance. Soft skills relate to human
nature, such as leadership, communication and cul-
ture. Among these soft skills, collaboration is frequently
overlooked. Collaboration often seems a terra incognita,
a working style that pushes individuals outside their
comfort zone, creates dependencies between different
entities and requires a shift in mindset towards shared
responsibility.
Despite the stated ambitions of some companies and
the potential it has to encourage greater cost manage-
ment, collaboration may be considered a frontier play for
the industry. Many oil and gas companies under-utilise
collaborative approaches at all levels of their organisa-
tions, whether between co-workers or functions, with
suppliers or with other industry players.
Untapped cost-saving measures linked to collaboration
include integrated activity planning (IAP) and life-cycle
cost management (LCC).
IAP, when effectively applied, enables a company to
optimise its operating costs sustainably by regrouping
tenders, limiting airborne supply, centralising purchases
and restraining spot orders. Integrated planning can be
achieved only with the full co-operation of all the func-
tions within a company, which is very rarely the case.
LCC which involves estimating the overall costs of
project alternatives and selecting the design that guaran-
tees the lowest overall cost of ownership at iso-quality and
iso-functional capability also requires a strong degree of
collaboration at each step of the process, often calling for
a much higher degree of integration than what would be
needed for a standard investment profitability calculation.
Building an LCC analysis starts with exhaustive data
collection for each key element of the project. In the
simplified case of a single platform development, these
include: anticipated production capacity from the reser-
voir and well engineering teams; failure and repair data
from the maintenance teams; logistics data, such as
availability of spares and lead times for item procure-
ment from the supply-chain teams; operating constraints
linked to technical characteristics of the project from the
asset team and economic data from the strategy team.
Building the model then requires the collection of statis-
tical distributions assumed for some of these elements.
Maintenance distributions play a particularly significant
role in LCC analysis. Finally, cooperation from all teams
Figure 2: Cost-saving opportunities from remote operations
e.g. drilling
Improved technical performance: experts are available 24/7 in the remote ofce to improve
performance e.g. drilling optimisation, reservoir navigation, etc.
Conventional drilling operations Remote drilling operations
Source: Schlumberger Business Consulting
Analysis
13 September 2014 www.petroleum-economist.com
is required to establish the lowest available alternative
at current market costs. This final step is essential in
guaranteeing optimum resource allocation. Involvement
of all disciplines in the early stages of the project is key to
enabling sustainable LCC reductions.
Both IAP and LCC usually require a fundamental cul-
tural change for effective implementation. Change of this
nature is now essential.
Relationships with suppliers are also a central part of
the cost-reduction puzzle. Most operators still have logis-
tics, transport, purchasing and contracts departments,
reflecting how remote they remain from the supply-chain
management concept, which emerged around a decade
ago. Many companies still have an approach to supplier
relations, based mostly on tendering, competition and
squeezing prices.
Success stories from other industries suggest that
greater maturity in supplier management goes hand-
i n-hand wi th greater cooperati on. The automoti ve
industry understood some time ago that its profitability
was directly linked to the sustainability of its suppliers
and engaged in more mature, partner-like relationships
with them. Cars are now usually co-developed using
collaborative digital workspaces. Manufacturers retain
responsibility for concept development, and body and
engine design, while contractors take responsibility for
designing and producing the remaining parts. They start
collaborating, in the early design phase, on plateaus
online virtual models of cars ensuring design compat-
ibility and alignment to the original concept. Oil and gas
companies could consider implementing some of these
best practices, including co-engineering, to take best
advantage of collective knowledge; supplier development,
to improve supplier performance; and co-innovation, to
support the emergence of new technologies.
Facing the challenge
Capital projects offer an example of how the energy
industry could collaborate. As bigger and more complex
projects come on stream, project delivery is becoming
increasingly important for the industry, with people,
organisation and supply chain issues amongst the top
challenges faced by companies. More partnerships with
engineering, procurement and construction (EPC) com-
panies and the earlier integration of EPC teams within
project teams could generate multiple benefits. Long-
term relationships with EPC companies would enable
the implementation of plateaus, under which EPCs could
absorb an increased share of the work, allowing energy to
allocate human resources to areas where their expertise
generates the most value. The earlier integration of EPC
teams would help secure long-lead time items earlier,
generating lower costs and better schedule management
in a tight supply environment. Some pilot initiatives have
been launched to explore the possibilities offered by such
collaboration. Broader deployment would contribute to
better performance.
Improved collaboration between energy companies
themselves could also yield significant returns. Two areas
illustrate these opportunities particularly well: industry
standardisation and education.
Standardisation offers numerous advantages ranging
from lower purchasing and stock costs, to better technical
understanding, facilitated maintenance or smoother asset
transfer. Subsea modules are a field of application in
which there is potential for the industry to add value.
As the number of complex offshore field developments
rises, ease of integration of multiple subsea elements
will become increasingly important to the industry.
Collaboration and agreement between operators on
standards would help unlock such potential and generate
significant cost savings and companies know it.
Most companies recognise the benefits of greater
standardisation: it enables the supply chain to deliver
more promptly, achieving the dual benefits of lower prices
and better equipment. But, SBC research shows that only
11% of upstream companies that were surveyed have a
systematic approach to design standardisation, in which
the adoption of standard solutions by project teams was
effectively tracked
1
.
Beyond norms and standards, greater collaboration
on the design of projects with shared similarities in a
given region could also contribute to the sustainability
of the profits the industry makes. The Norwegian Oil &
Gas Association suggests there is a potential for further
cost reduction in equipment, project processes and docu-
mentation for subsea developments. The elimination of
unnecessary work, the improvement of quality standards
and the facilitated integration of various subsea elements
all contribute to reducing project delivery times and costs.
Education is another area where energy companies
operate in isolation from one another. The big crew
change is placing the human-resources market under
stress, SBC has found, with acute workforce shortages
evident in core competencies, such as subsea and
drilling. This is leading to increases in direct costs, as a
result of salary inflation, and in indirect costs, as staff
shortages and the loss of trained staff to competitors
heighten operating risk. Collaboration between industry
players would help to spread the risks and coordinate
efforts between industry players to lower these costs.
Setting up and/or financing a dedicated supply chain of
talent for the industry is an example of the form collabora-
tion could take. Operators could step up their efforts in
teaming up to support universities, create schools and
develop learning centres.
Ultimately, developing partnerships outside the industry
fosters innovation. As fields become more complex to
develop, technology is playing an increasingly important
role, whether to unlock unconventional resources or to
access ultra-deep offshore reservoirs. Such partnerships
hold significant value potential but usually require crea-
tive collaborative arrangements. For example, some IOCs
have worked with aerospace companies to prove that
oil seeps and oil-impacted soils could be detected by
airborne hyper-spectral sensors.
Technical changes have also had an impact on the cost
Figure 3: Benets and approach to greater standardisation in
work-package design
Shorter lead times
Better operability
and reliable over time
More competition
and better prices
Greater satisfaction with
products and services
Low Somewhat High
No C&P focus
on standardisation
C&P engages
project teams on
standardisation
(eg: on workshops)
Standardisation has clear
objectives and is tracked
Average of respondents % of respondents
Importance of benefts from
greater standardisation
Contract and Procurement (C&P)
focus on standardisation
of tendered packages
50%
39%
11%
Source: Schlumberger Business Consulting Capital Projects Survey 2013
1
SBC 2013
Capital Projects
Survey
Analysis
14 September 2014 www.petroleum-economist.com
equation over the past decade. The dramatic increase in
hardware, software and telecommunication capabilities
has fueled the emergence of what is frequently called
the digital oilfield.
Although usually considered evolutions rather than
revolutions, possibilities such as real-time production opti-
misation; remote operations; and big-data analytics offer
additional cost-saving opportunities when accompanied
by an evolution in a companys genetics.
The proliferation of measurements and monitoring
systems is yielding more field data than ever before.
Data can be used to optimise field operations in general
or well-by-well performance, provided companies have
made the necessary investments. However, while invest-
ments have been made in instrumentation and technical
systems, training employees and adapting processes to
incorporate real-time information seems to have fallen
behind. Indeed, SPE found that real-time field optimisa-
tion requires specific automated processes and workflows
for surveillance and diagnostic purposes because cost
efficiencies are not directly derived from an operators
ability to monitor but from its ability to analyse data
2
.
Surveillance workflows need to be model-based and
help determine the thresholds above or below which
alarms are triggered, while diagnostic workflows try to
trace back the root cause of the issue to help determine
necessary actions.
Pooling talent
It therefore seems that there is significant leeway to
reduce costs by making better use of live data. Some
focal points include adapting management structures to
ensure decision-making matches data-processing capa-
bilities, checking surveillance and diagnostic workflows
are in place to trigger optimisation actions, and training
field personnel to use information technologies.
As the amount of field data have increased, the infra-
structure required to deliver them has developed and this
has enabled companies to conduct a broader range of
operations remotely.
The pooling of talent described earlier highlighted
how a remote organisation could generate costs savings
through optimal resource allocation. Additionally, this
type of organisation generates cost savings through
improved technical performance. By telecommunicating
information offsite to a dedicated data centre, calcu-
lation capacity is unconstrained by space or energy
consumption. Increased computer power enables better
and quicker decision-making, possibly reducing costs
through design optimisation and improved efficiency.
Some operators have reported a significant increase in
feet-per-day drilled on wells that benefited from remote
support.
Greater use of telecommunications could also gen-
erate cost savings by the optimal utilisation of field
engineers, particularly for onshore mature fields. For
example, maintenance teams at present generally go
from wellhead to wellhead conducting in situ checks
on ageing equipment. But given the large number of
wellheads, this is inefficient. Remote data transmission
now allows operators to allocate engineering time only to
wells in need and instantly to evaluate the actions that
are necessary.
Wider development of remote-led operations would
contribute to the industrys effort to control costs, but
is sometimes constrained by a lack of infrastructure.
Greater partnering between operators or stronger col-
laboration with host countries could alleviate the burden
of infrastructure development in certain locations.
Energistics is an example of industry-wide partnering
to set data- exchange standards such as Wel l si te
I nformati on Transfer Standard Markup Language
(WITSML) for drilling or Production Markup Language
(PRODML) for production.
The combination of greater information-gathering and
data-export capacity are enabling the industry to harness
big-data solutions. The volume of data generated by
operators, the data velocity (now stream rather than
batch), and the variety of the data (mostly structured data
generated by sensors) demonstrate that the industry is
ready to step up the implementation of big data solutions.
Moreover, value creation opportunities and cost-saving
ones give added impetus for its development, because
big-data analytics can help fine-tune maintenance,
enhance drilling performance, clean up seismic data,
optimise production, improve understanding of unconven-
tional fields, and predict equipment failure.
Maintenance of producing assets and particularly
predictive maintenance provides a good example of
the specific benefit of big data versus more common
data analytics. On the one hand, the fixed and long-term
characteristics of these assets enable the installation of
numerous measuring devices, eventually generating a
sufficient stream of data for big-data solutions. On the
other hand, establishing failure prediction requires the
analysis of huge datasets.
For example, an early indication of failure could come
from a subtle change in revolutions per minute on a
pump. Recognising the typical pattern of variance that
signals a failure is about to occur could be done using
common statistics, but significant noise is likely to trigger
ill-timed maintenance activity changing the pump too
frequently or too late. Cleaning the noise implies tracking
and correlating patterns for a multitude of other param-
eters formation behaviour, for example, the stability of
electrical supply and baseline for the analogue-to-digital
converter just to name a few.
An IDC survey found that the industry was not fully
familiar with big data, and operators have been recently
keen to acquire talent in this field. Other key improve-
ments relate to how data are transported from remote
places to headquarters or a hub base; how operators
and service companies collaborate to store and share
data received during operations; and setting up dedi-
cated workflows and processes to transform data into a
decision-making tool.
Big data would help the industry unlock value from
high-volume raw information and contribute to cost
reductions. This could be a collaborative effort, involving
the sharing of IT capacity in certain regions, the crea-
tion of data-sharing partnerships with oilfield services
companies and alliances with IT providers to develop
data-processing tools that cater for the specific needs of
oil and gas companies.
With costs rising and oil prices apparently stabilising,
neither the business-as-usual approach nor the traditional
cost-cutting model remain viable options for the energy
industry. The present situation calls for a disruptive
change that will have an impact on the inner functioning
of oil and gas companies, and, as such, the change must
come from within them. Whether inspired by existing
solutions, or supported by pilot experiments, the organisa-
tion, collaboration and technology changes necessary
would transform the DNA of most oil companies. Yet,
if companies embrace these ideas and make the step-
changes needed to support their implementation, they
can move successfully from cost firefighting to effective
cost management.

Jerome Sevin,
principal,
Schlumberger
Business
Consulting
Pierre-Antoine
Fliche, analyst,
Schlumberger
Business
Consulting
2
RB Thompson,
V. Shanmugam,
S. Sinha, N.
Collins, S.
Bodwadkar, M
Pearcy, S. Herl;
Optimizing the
Production
System using
real-time
measurements:
a piece of
the Digital
Oilfield puzzle ;
SPE110525