GCC Players Must Make Bold, Fundamental Changes| MENAFN.COM

Saturday, 28 January 2023 09:31 GMT

GCC Players Must Make Bold, Fundamental Changes

(MENAFN- Arab Times) A new report by The Boston Consulting Group (BCG), a global management consulting firm and the world's leading advisor on business strategy, delves into the challenges faced by Exploration & Production (E&P) companies here in the GCC region. The fact is, these are trying times for E&P companies globally. Following more than a decade of strong financial returns, the industry has experienced several difficult years caused by a confluence of forces. Protracted inattention to costs, depleting easy-to-exploit resources, increasing government regulation and fiscal demands, and shortages of critical skills and talent have dealt a fundamental blow to E&P players € both in terms of revenue and profit.

In addition, the recent drop in oil prices has made an already challenging situation significantly more difficult.

"In 2014, most E&P companies across the GCC responded to this harsher environment by shifting their focus away from growth in favor of value," said Rend Stephan, Partner & Managing Director at BCG Middle East and Head of the Energy Practice. "But the corresponding portfolio adjustments these businesses have made will, we believe, not prove sufficient."

In line with this, BCG's new study, titled Killing the Complexity Monster in E&P, identifies the key organization-wide changes that E&P players(as well as the oilfield services and equipment companies that support them) must make to succeed in today's new reality.

"It is likely that this environment represents a new reality rather than a cyclical downturn," explained Stephan. "To prosper sustainably in this setting, these companies will need to transform themselves by making bold, integrated, organization-wide moves; redefine the way they interact with service providers; and do a better job of managing the overall value chain. Isolated or incremental measures will not suffice."

Through its extensive work with both E&P companies and suppliers to the industry, BCG has outlined eight critical actions for E&P businesses in the current environment. These actions cut across the organization and, for many players, are significantly underexploited.

Indeed, by implementing the measures together, BCG has helped companies achieve sustainable reductions in unit operating costs within six to 24 months.

Here are the eight critical actions that oil and gas companies must take imminently:

* Technical Standardization and De-averaging. E&P players should analyze the range of technologies they employ and look for opportunities to move from best-in-class to good-enough solutions. In particular, companies should seek opportunities to de-average technology standards among higher-risk and low risk projects in which short-term costs can be more important than long-term, maintenance-free integrity.

* Organizational Right-Sizing. E&P companies should adjust staff to an appropriate size and, simultaneously, use the opportunity to raise the level of talent. The size reduction will lower personnel costs and simplify internal overhead, including overhead for office space and IT.

* Improved Workforce Efficiency. E&P companies have many opportunities to improve the efficiency of their workforce, both offshore and onshore. They can, for instance, simplify the process for obtaining work permits and thus improve their crews' time-on-tools numbers. Companies can also review work schedules of rotational staff for optimization opportunities to reduce head count and to generate related savings in aviation and logistics costs of up to 25 percent. Companies can also reduce manpower at certain facilities or leave individual facilities unmanned for further savings.

* Supply-Chain Partnering and Renegotiation. Service company margins have fallen by 10 percent or more since the end of the first decade of this century; for E&P companies, the scope for trimming service company margins further through traditional renegotiation has shrunk proportionately. In the current market, E&P companies can still achieve reductions of 5 to 10 percent in such areas as contract labor and well services by applying an intelligent combination of rate renegotiation, changes to service levels, better allocation of risk between operator and contractor, and, where possible, tighter partnerships with suppliers and a shared focus on removing costs from the full value chain.

* Maintenance Optimization. E&P companies can also lower costs by optimizing maintenance schedules for mature assets. The norms established for new facilities € with regard to maintenance philosophy, shutdown frequency, and redundancy-are unlikely to be appropriate as these assets enter their later years. Changing these policies can be technically and culturally challenging, but doing so can mean the difference between an economic asset and a loss-making one.

* Optimization of Aviation, Trucking, and Marine Logistics. Too many contracts guarantee providers a huge proportion of revenues before any work has been done. Many contracts also lock in high standing charges that provide contractors little incentive to make efficient use of their assets. Numerous operators that BCG has worked with, however, have been able to mitigate or eliminate such costs by, for example, eliminating helicopters and supply vessels. The companies managed to further reduce costs by increasing the utilization of the helicopters and supply vessels that remain in their fleets through improved network management and by reducing the flexibility of service available to operational locations.

* Greater Cooperation with Other Industry Players. Companies' willingness to engage in such cooperation is dependent as much upon culture as contracts, of course. But today's industry conditions should spur increasing numbers of businesses to reach out to try to seize such opportunities where they exist.

* Streamlining Overhead, Real Estate, and Support Service Costs. Rethinking organizational support services can generate significant savings. By optimizing its training and certification procedures, one company dramatically reduced the fees it incurred for training-course cancellations, translating into a six-figure savings for the company. The rationalization of software licenses for desktop technical and information packages can yield material savings and send a powerful message to the organization regarding the level of cost scrutiny that is emerging.

Most E&P companies in the GCC have already taken some of these steps in a bid to kill this "monster" of complexity and reduce costs.

"A number of oil and gas companies across the region have applied at least one of these eight critical actions, albeit not consistently," stated Shelly Trench, a Principal at BCG Middle East and a petroleum engineer. "These levers have, unfortunately, not been employed in a coordinated manner. There is a strong need for some form of central steering € so guidelines can be set around processes, systems and tools-that can deliver consistent results across assets. Also, a comprehensive system should be set in motion to make sure that desired outcomes are both quantified and tracked."

She added, "Lastly, based on our experience, this takes time. We have observed that these eight critical actions yield significant results after a period of six months. More focused and longer initiatives -that last at least 12 months -are required to effectively embed the culture and behavior needed to support continuous improvement."

Trench concluded, "For the eight levers to have the desired effect, they must be skillfully deployed. Only then can they deliver sizable improvements to companies' efficiency and financial performance as well as ensure their long-term survival."

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