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With the recent fall-off in oil prices, companies in virtually all sectors of the oil, gas and chemicals (OGC) industry worldwide are going to have to plan and manage their projects for greater capital productivity, something they weren’t doing particularly well before the price-drop, and along the way create a “cost culture” inside their companies. That’s according to a new study, which includes a survey of 250 high-level industry executives around the world, released today by\u00a0AlixPartners, the global business-advisory firm.<\/p>\n
The executive survey finds that just 30% respondents say their companies had explicit return-on-capital targets for projects prior to the crash in oil prices and, perhaps most surprising, that just 12% believe their companies are any better than their competitors at project execution. Meanwhile, the survey finds that only 19% of respondents from North American firms say their companies finish projects on budget, compared with 29% of all respondents globally.<\/p>\n
The study also delves into the reasons behind suboptimal project management to date.\u00a0 According to the executive poll, just 34% of respondents said they “agree” or “strongly agree” that project management is executed at the “company level” across all projects, suggesting that many projects are not benefitting from economies of scale, institutional knowledge, etc. \u00a0Only 39% of respondents\u2014and just 30% of oil and gas drillers\u2014said they have a strong series of checks and balances to ensure projects stay on track.\u00a0 And only 11% of all respondents said they employ a stage-gated process to assess project viability at defined milestones when developing a new capital program.<\/p>\n
Overall, when asked to name up to three ways in which they are most challenged in keeping projects on budget, the top reason chosen (by 39% of all respondents) was “company culture isn’t focused on project management.”<\/p>\n
“Strong energy prices in recent years have allowed companies to delay putting an emphasis on project management, as they focused instead on the urgent need of achieving greater throughput.\u00a0 But that was then and this is now,” said\u00a0Dennis Cassidy, managing director at AlixPartners and co-head of the firm’s global\u00a0Oil, Gas and Chemicals Practice.\u00a0 “In the current environment of falling prices, plus increasing geologic and technical challenges, a new focus on building a ‘cost culture’ into each and every project is mandatory.”<\/p>\n
The survey results also suggest that as projects grow more complex, many companies have attempted to boost returns, not by tightly controlling costs internally, but by looking outward, toward such things as developing partnerships.\u00a0 For instance, when asked to list the most important criteria used in selecting new capital projects, 60% in the survey cited “partner\/syndicate relationships,” a tie for first place with the project’s projected net present value.\u00a0 And, among the firms in the survey with the highest (self-reported) corporate ROCE (return on capital employed), 64% cited partner\/syndicate relationships as most important, compared with 51% of those representing the companies with the lowest self-reported ROCE who said that, suggesting that partnerships may indeed have been a successful strategy for boosting returns\u2014in the past.<\/p>\n
AlixPartners research accompanying the executive survey notes that, despite an average 10% per annum increase in industry capital spending globally since 2010, compounded ROCE averages for all major sectors of the industry (integrated oil and gas, chemicals, upstream, downstream, midstream, and equipment and services were in reality negative for the period 2008-2013\u2014 i.e., even before the recent drops in energy prices.<\/p>\n
Sector Highlights<\/strong><\/p>\n Below are some of other key survey results by sector:<\/p>\n Meanwhile, while 58% of total respondents said they are “focused” or “highly focused” on creating a “cost culture” within the companies \u2013 and an even higher number, 69%, from refining and marketing firms and from exploration\/production companies said that — the study finds that many companies are not taking the right actions to match their words.<\/p>\n Regional Highlights<\/strong><\/p>\n Here are survey highlights by region:<\/p>\n The executive survey also found that prior to the crash in prices “improving throughput” was indeed the single-most important focus for improving capital productivity, globally, with 63% of total respondents saying they were “quite” or “highly” focused on increasing throughput if existing operations.\u00a0 It finds as well that only 30% of those surveyed formally identify and quantify project risks in advance of undertaking new projects, and that, in an era where new digital technologies help define the drilling environment, just 39% have a formal knowledge- management process in place.<\/p>\n The AlixPartners study does, though, offer hope to companies looking to crack the code on efficient project management in today’s brave new world of lower energy prices\u2014and a lot of it starts with proactive leadership.\u00a0 For instance, the executive survey finds that the companies which are best ROCE performers according to those surveyed are also more likely to be creating tighter criteria for project approval (36%, vs. 29% of all respondents), and that top leaders in those high-ROCE companies review all projects on a semi-annual or annual basis (53%, vs. 43% of total respondents).<\/p>\n Furthermore, the survey results suggest that OGC-industry leaders themselves view the creation of an overall cost culture inside their companies as a powerful generator of returns in the year ahead.\u00a0 According to the survey, 46% of respondents believe doing so will yield at least 5% savings for their firm over the next 12 months, a greater improvement than they believe could come from improved purchasing\/resource acquisition (41%), higher subcontractor productivity (39%),\u00a0 SG &A improvement (27%) or technical-cost reduction (19%).<\/p>\n “The good news is that creating a true, soup-to-nuts cost culture can not only yield significant returns, if implemented properly it can be the approach that offers a lower degree of social impact, which of course can be of use once markets change yet again,” said Cassidy.\u00a0 “If history is any guide, companies that simply go into shut-down mode given today’s tough market will rue the day when the market turns yet again.”<\/p>\n\n
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