Driving operational performance in oil and gas

Driving operational performance in oil and gas

T ab le of contentsE x e cu t i v e s u m m ary

T he p ri z e o f o p e rat i o n al e x ce l l e n ce

I n d u s t ry o b j e ct i v e s

T o p b u s i n e s s i s s u e s

Low oil prices are highlighting the effects of operational inefficiencies

W hy n o w ?

T he an at o m y o f o p e rat i o n al e x ce l l e n ce

K e y o p e rat i o n al e x ce l l e n ce co m p o n e n t s

Causes of inefficient operating performance

O p e rat i o n al e x ce l l e n ce re s u l t s i n b e t t e r o u t co m e s

Current state in industry: usage and benefits

I s i t t i m e f o r a s hi f t i n f o cu s ?

H o w E Y can he l p — achi e v i n g o p e rat i o n al e x ce l l e n ce

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T he o i l an d g as i n d u s t ry i s cu rre n t l y f aci n g a cri s i s t hat t hre at e n s e v e n t he m o s t s t ab l e o f o rg an i z at i o n s . I n cre as e d s u p p l y an d d e cre as i n g d e m an d g ro w t h d e rai l e d an e x t e n d e d p e ri o d o f hi g h p ri ce s an d t he i n d u s t ry i s n o w f aci n g w hat ap p e ars t o b e an e x t e n d e d p e ri o d o f l o w o i l p ri ce . T o f u rt he r co m p l i cat e m at t e rs , t he n e w price reality comes on the heels of diminished returns despite high prices. Over the past five years, upstream operators have seen a steady decline in efficiency (the barrel of oil equivalent per day, per capital dollar) and asset reliability while experiencing increases in finding and lifting costs.

A s t he e ra o f “ e as y o i l ” p as s e s , o p e rat o rs are f ace d w i t h i n cre as i n g l y e x p e n s i v e g l o b al e x p l o rat i o n an d development in harsher, remote and complex basins. These factors have been eroding profits, though price stability (of more than US$100 per barrel) prior to December 2014 masked the full effect of these increases.

T he o i l an d g as i n d u s t ry has e x p e ri e n ce d n u m e ro u s b o o m an d b u s t cy cl e s , rare l y re act i n g i n a s t e ad f as t w ay t o e i t he r hi g hs o r l o w s . I n p e ri o d s o f p ro s p e ri t y , o rg an i z at i o n s s p e n d b i g m o n e y f o r n e w as s e t s , hi re m an y employees (often at an inflated rate) and push for growth, often at the expense of current asset performance. During downturns, organizations make drastic cuts to survive, eradicating projects, slashing headcount and d e f e rri n g i m p o rt an t i n v e s t m e n t s i n o rd e r t o m i n i m i z e co s t s , ag ai n o f t e n at t he l o n g - t e rm e x p e n s e o f as s e t p e rf o rm an ce .

T hi s e x p an d - an d - co n t ract m o d e l cre at e s g re at i n s t ab i l i t y i n t he i n d u s t ry , w i t hi n i n d i v i d u al o rg an i z at i o n s an d at o n - s i t e o p e rat i o n s . O n l y w he n o p e rat o rs d e ci d e t o b u i l d l o n g - t e rm s t ab i l i t y an d s u s t ai n ab i l i t y i n t o their operational strategies will they be equipped to weather the downturns and capitalize on upswings in a measured and profitable way. This stability is best achieved through operational excellence programs focused o n co n t i n u e d , m e as u re d i m p ro v e m e n t t hat s y s t e m at i cal l y ad d re s s e s re cu rre n t b u s i n e s s i s s u e s .

Operational excellence is not a new concept, but current conditions create a unique opportunity for the i n d u s t ry t o re al i z e i t s f u l l p ro m i s e . E x t e rn al e co n o m i c f act o rs are p u t t i n g p re s s u re o n t he i n d u s t ry t o b e m o re efficient and cost effective without giving any ground on HSEQ. And, advances in digital technologies offer new tools and techniques to capture and leverage information to streamline operations while increasing p ro d u ct i o n . F i n al l y , an d w hat m ay b e t he m o s t i m p o rt an t f act o r i n cre at i n g s u s t ai n e d chan g e , i s t he ri s e o f younger workers committed to serving a broader purpose through work beyond simple economics and their i m p act o n o rg an i z at i o n al cu l t u re . I t i s t hat p u rp o s e t hat w i l l d ri v e t ru e t ran s f o rm at i o n an d b ri n g s t ab i l i t y an d carry sustained benefits of operational excellence through both boom and bust.

E x e cu t i v e s u m m ary

O p e r a t i o n a l e x c e l l e n c e i s an e l e m e n t o f o rg an i z at i o n al l e ad e rs hi p t hat s t re s s e s ho w a v ari e t y o f p ri n ci p l e s , s y s t e m s an d t o o l s can b e ap p l i e d t o w ard t he sustainable improvement of key performance metrics.

1Driving operational performance in oil and gas |

T he p ri z e o f o p e rat i o n al e x ce l l e n ce

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T hro u g h o p e rat i o n al e x ce l l e n ce , t he i n d u s t ry can t ap i n t o significant savings. For example, the cost of extracting oil an d g as co n t i n u e s t o i n cre as e , an d a re v i e w o f o p e rat i n g co s t s p e r b arre l o f o i l o v e r t he p as t s e v e n y e ars s ho w s a s t e ad y e s cal at i o n f o r m aj o rs , n at i o n al o i l co m p an i e s (NOCs) and independents alike. While exact performance d at a v ari e s b y s u b s e ct o r, an d w i t hi n s u b s e ct o rs , co m p an i e s are al l f aci n g an i n cre as e i n e x t ract i o n co s t s .

T he rat e o f e s cal at i o n v ari e s b y co m p an y an d y e ar, s o average numbers are used to reflect a general trend. The compound annual opex/bbl cost escalation rate (CACER), similar to a compound annual growth rate (CAGR), can be d e t e rm i n e d f o r e ach o rg an i z at i o n an d g ro u p o f o rg an i z at i o n s , majors, NOCs and independents.

Top-performing companies have achieved a CACER of only 2.25%. Running a model for the majors within the i n d u s t ry — as s u m i n g 9 3. 5m b b l / d ay , a s t art i n g co s t b as i s of US$6.80/bbl and cost escalation at 2.85% and 2.25% —reveals that US$30b is available to be saved over five years between best-in-class and average performance. Given that t he m aj o ri t y o f co m p an i e s hav e a co s t b as i s hi g he r than US$6.80/bbl, and that NOCs and independents have much higher cost escalation, the US$30b figure can actually be considered quite conservative, displaying the hu g e o p p o rt u n i t y t hat e x i s t s acro s s t he i n d u s t ry .

C A C E R

M a j o r s 2. 85%

N O C s 5. 01%

I n d e p e n d e n t s 5. 54%

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I n d u s t ry o b j e ct i v e s

G r o w a n d m e e t e c o n o m i c e x p e c t a t i o n s

Whether a NOC is focused on a broader national agenda or an IOC focused on shareholder return, increasing value for stakeholders is paramount for all organizations. Value increases with fiscal p ru d e n ce , i n t e l l i g e n t i n v e s t i n g an d o p e rat i n g co n s i s t e n t l y at o r ab o v e e x p e ct at i o n s . Man ag i n g co s t s w i t ho u t s acri f i ci n g e f f i ci e n cy i s cru ci al f o r achi e v i n g t hi s o b j e ct i v e .

D e l i v e r c o n t i n u o u s i m p r o v e m e n t i n h e a l t h , s a f e t y , e n v i r o n m e n t a l a n d q u a l i t y ( H S E Q ) p e r f o r m a n c e

Oil and gas exploration, transportation and production contain inherit risks: smaller consequences, like slips and trips, and those with high severity and high impact, such as fatalities or serious environmental incidents. These risks, and specific recent incidents, have resulted in increased demands and expectations from stakeholders (internal and external) for faster, safer, more reliable, m o re re s i l i e n t an d e n v i ro n m e n t al l y s o u n d p ro d u ct i o n . E f f e ct i v e l y m an ag i n g as s e t s an d o p e rat i o n s i s p aram o u n t t o s u s t ai n i n g a s o ci al l i ce n s e t o o p e rat e .

D r i v e g r o w t h i n d a i l y p r o d u c t i o n a n d p r o v e n r e s e r v e s

Nearly all oil and gas organizations are focused on growing revenue, but their strategies and priorities may differ significantly. Some organizations achieve growth through increasing daily p ro d u ct i o n rat e s , f ro m e i t he r o p t i m i z i n g e x i s t i n g as s e t s an d w e l l s o r e x p an d i n g e x p l o rat i o n i n t o n e w fields, while NOCs prioritization lies in curbing expenses for the sake of using funds for more urgent needs than operating costs. Regardless of the organization’s priority, the ability to grow is linked d i re ct l y t o av ai l ab l e cas h an d p ro v e n o p e rat i o n al p e rf o rm an ce i n d e l i v e ri n g re s u l t s .

Oil and gas companies’ objectives form the basis for operations and activities, and they are highly i n f l u e n ce d b y o p e rat i o n al p e rf o rm an ce .

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T o p b u s i n e s s i s s u e s

I n ad d i t i o n t o t he f u n d am e n t al s hi f t i n e x p l o rat i o n , t he g l o b al i z at i o n o f t he i n d u s t ry i s l e ad i n g t o re s o u rce co n s t rai n t s , w i t h ce rt ai n re g i o n s f aci n g a m aj o r t u rn o v e r o f p e rs o n n e l an d e x p e ri e n ce . Mai n t ai n i n g a s o ci al l i ce n s e t o o p e rat e , w hi l e achi e v i n g co n s i s t e n t re t u rn s o n i n v e s t m e n t s , has n e v e r b e e n m o re co m p l i cat e d o r d i f f i cu l t . W hi l e rap i d l y chan g i n g t e chn o l o g y d o e s ho l d o u t t he p ro m i s e o f t ran s f o rm i n g t he i n d u s t ry , i n cre as i n g e f f i ci e n cy an d i m p ro v i n g re s u l t s , s u cce s s f u l l y i n t e g rat i n g t he s e n e w t e chn o l o g i e s i n t o d ay - t o - d ay o p e rat i o n s an d re al i z i n g t hat p ro m i s e re m ai n s e l u s i v e .

D r o p p i n g o i l p r i c eT he re ce n t an d s u s t ai n e d d ro p i n o i l p ri ce has hi g hl i g ht e d t he s u b s t an t i al i m p act o f t he s e t re n d s .

Mo s t E & P co m p an i e s hav e b e e n f o rce d t o re d u ce t he i r cap i t al spend outlook in favor of reducing costs and increasing operating e f f i ci e n ci e s .

Declining E & P operating efficiency

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D e c l i n i n g e f f i c i e n c i e sP ro j e ct p l an n i n g an d e x e cu t i o n are b e co m i n g m o re chal l e n g i n g d u e t o t he t e chn i cal n at u re o f t he p ro j e ct s as w e l l as f i n an ci al i m p l i cat i o n s .

1 1 % B O E p e r d ay

produced per US$m i n cap i t al has d e cre as e d b y

Y O Y o v e r 2008- 12.

A g i n g a s s e t sT he e x i s t i n g i n f ras t ru ct u re an d as s e t s w i t hi n t he o i l an d g as i n d u s t ry are co n t i n u i n g t o ag e , re s u l t i n g i n i n cre as e d risk of equipment f ai l u re s .

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b e y o n d t he i r m i d p o i n t o f t he as s e t l i f e cy cl e .


The sustained reduction in oil and gas prices, coupled with a forecast of modest recovery, requires the industry to apply increased f o cu s an d ri g o r t o o p e rat i o n s p e rf o rm an ce . W hi l e n e w e x p l o rat i o n an d g ro w t h w i l l al w ay s b e a co rn e rs t o n e o f u p s t re am o p e rat i o n s , achi e v i n g a b al an ce b e t w e e n n e w as s e t d e v e l o p m e n t an d e x i s t i n g as s e t o p t i m i z at i o n i s b e co m i n g i n cre as i n g l y i m p o rt an t . F ai l u re t o improve operational performance and economics could have lasting effects on a company’s long-term growth and viability.

I n t he cu rre n t l o w - p ri ce e n v i ro n m e n t , p e rf o rm an ce g ap s hav e b e co m e e v e n m o re p ro m i n e n t d u e t o a he i g ht e n e d aw are n e s s among investors, stakeholders and employees. The present low oil price is disruptive by nature and calls for more than just rapid re d u ct i o n o f co s t t hro u g h d o w n s i z i n g o r b u d g e t cu t s acro s s t he o rg an i z at i o n . T he d i re ct i m p act s o f t he cu rre n t l o w - p ri ce s ce n ari o are p re s e n t e d i n t he t ab l e b e l o w , i n d i cat i n g t he re as o n s f o r e x p e d i t i n g o p e rat i o n al e x ce l l e n ce .

Low oil prices highlight the effects of inefficiencies

I m p a c t o f l o w o i l p r i c e a n d h o w E Y o p e r a t i o n a l e x c e l l e n c e c a n h e l p

S i t u a t i o n • C as h co n s t rai n t — e x i s t i n g O & M b u d g e t s w e re cre at e d d u ri n g p re v i o u s o i l p ri ce f o re cas t s , an d i n re s p o n s e , co m p an i e s are s l as hi n g t he m .

• Declining asset uptime — blanket budget cuts are creating risks of equipment failure and production output.

• Insufficient performance measurement and governance — when company performance begins to lag industry leaders, o rg an i z at i o n s t e n d t o o p e rat e i n s i l o s w i t h l i t t l e g o v e rn an ce .

• Expectation to “achieve more with less” — organizations are required to maintain margin by reducing costs and meet stakeholder expectations,

• Cost efficiency — the rise in the cost of fuel has increased the focus on fuel loss. The loss of fuel occurs throughout the s u p p l y chai n .

• Operational excellence viewed from employees’ perspective — when organizations focus on cost efficiency, employees may n o t s hare t he s am e p ri o ri t y .

I m p a c t • O rg an i z at i o n s are f o rce d i n t o ran d o m cu t s an d s l o w e d g ro w t h t hat i m p act s l o n g - t e rm co rp o rat e o b j e ct i v e s .

• ►Instability in achieving production targets becomes an issue, risking production revenue.

• Without continuous improvement, organizations can’t capitalize on ideas and leverage leading practices.

• Organizations are required to identify savings from existing contracts

• F u e l l o s s i s p ro m i n e n t acro s s t he i n d u s t ry , has d e v as t at i n g e f f e ct s o n b u s i n e s s e s an d n e e d s a t ho ro u g h i n v e s t i g at i o n t o t hw art f u rt he r l o s s e s .

• When organizations focus on cost efficiency, employees may view this as a decrease in capital investment and may become l e s s e n g ag e d .

• Mi s ap p ro p ri at i o n o f co m p an y i n t e l l e ct u al p ro p e rt y m ay o ccu r f o r p e rs o n al g ai n , an d acci d e n t al l o s s can o ccu r t hro u g h negligence. Data breach incidents can be high profile and expensive and may result in reduced value of the organization’s IP.

H o w w e c a n h e l p

• Free up operating cash through intelligent supplier and contractor management and by building cost efficiencies.

• I m p ro v e re l i ab i l i t y an d p e rf o rm an ce t hro u g h as s e t re l i ab i l i t y an d i n t e g ri t y m an ag e m e n t .

• Gain consistency across operating groups and a governance framework all by having a defined operating model and ap p l y i n g t he i n t e g rat e d b u s i n e s s p l an n i n g ap p ro ach.

• I m p ro v e p ro j e ct p e rf o rm an ce b y i m p l e m e n t i n g b e s t p ract i ce s an d cre at i n g s t an d ard i z at i o n acro s s p ro j e ct s

• Generate savings through identification of duplicate payments, overpayments and erroneous payments

• Capturing data and leveraging continuous improvement to compress repetitive processes and maximize efficiency

• I d e n t i f y are as f o r i m p ro v e m e n t an d p ro v i d e p ract i cal i n p u t t o f u t u re co n t ract n e g o t i at i o n s b y g ai n i n g a d e t ai l e d u n d e rs t an d i n g o f co n t ract g o v e rn an ce p ro ce s s e s

• Determine whether the key driver of fuel loss is due to inadequately skilled staff, damaged equipment or collusion.

• Quantify potential loss and provide recommendations for improvements through forensic analysis of technical, operation and financial data pertaining to the production and allocation of fuel.

• I d e n t i f y i n d i cat o rs o f p o t e n t i al l y s u s p i ci o u s act i v i t y , i n cl u d i n g u n au t ho ri z e d s y s t e m an d d at a acce s s o r d at a harv e s t i n g .

• Embed and assist with the implementation of information governance program that aligns with the organization’s risk m an ag e m e n t s t rat e g y .

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W hy n o w ?

O p e rat i n g co s t s hav e co n s i s t e n t l y e s cal at e d o v e r t he p as t 10 y e ars an d are p ro j e ct e d t o co n t i n u e d o i n g s o f o r t he n e x t 10 y e ars , independent of oil price fluctuations. The recent price drop is not the driving force behind the need for operational excellence, but it d o e s cre at e a d e m an d f o r s w i f t act i o n . H o w e v e r, t he i n d u s t ry i s i n n e e d o f a m e as u re d ap p ro ach i n co n t ras t t o t he ap p ro ache s o f t he p as t , w hi ch hav e re s u l t e d i n t he b o o m an d b u s t cy cl e s .

T hi s e x p an d - an d - co n t ract m o d e l cau s e s co n s i d e rab l e i n s t ab i l i t y i n t he i n d u s t ry an d i s m i t i g at e d o n l y o n ce o p e rat o rs i n co rp o rat e perpetual stability and sustainability into their operations strategies. Doing so allows them to capitalize on upswings in a measured and profitable way. This type of operational endurance is best achieved through operational excellence programs focused on continued, m e as u re d i m p ro v e m e n t t hat co n s i s t e n t l y ad d re s s e s re cu rre n t b u s i n e s s i s s u e s .

With ever-growing pressure being leveraged upon the oil and gas industry as a result of significant asset and environmental incidents, declining performance, escalating costs and the more recent drop in prices, companies must take actions that are not only swift, but appropriate and sustainable to improve HSEQ, operations and business performance. The current economic climate has provided the necessary focus on operational excellence and new technologies have been provided to make it happen.


T he an at o m y o f o p e rat i o n al e x ce l l e n ce

The notion of operational excellence (OE) is not new. Leading industries like manufacturing and p harm ace u t i cal s hav e e m b race d i t , an d i t i s e v e n m o re p re v al e n t i n d o w n s t re am p e t ro che m i cal s an d refining. Many oil and gas organizations have also implemented, to some degree, operational excellence programs targeted at improving HSEQ performance and driving cost and efficiency improvements, or as part of a larger transformational program for strategic adjustments. Subsequently, many companies have seen improvements in HSEQ performance, cost position, reliability and overall production. However, the benefits have been inconsistent across the industry, somewhat overshadowed by a lack of structure, direction, p ro ce s s o r e x e cu t i o n .

W he re o p e rat i o n al e x ce l l e n ce has b e e n hi g hl y s u cce s s f u l , i n s i d e an d o u t s i d e t he o i l an d g as i n d u s t ry , co m p an i e s reaping the benefits share many key characteristics and attributes. Below is an outline of the cultural attributes o f O E an d t he co m p o n e n t s t hat hav e b e e n p u t i n p l ace t o d ri v e co n t i n u e d an d s u s t ai n ab l e re s u l t s .

K e y cu l t u ral at t ri b u t e s

S t r o n g l e a d e r s h i p : F ro m t he b o ard o f d i re ct o rs t hro u g h t he o p e rat i o n s i n t e g ri t y management system (OIMS) all the way to tool pushers, each leader is aligned on the co m p an y v i s i o n an d g u i d e s t he i r o rg an i z at i o n o n i t , d ri v i n g p e rf o rm an ce e x p e ct at i o n s an d d e v e l o p i n g t he cap ab i l i t y o f t he i r e m p l o y e e s an d co n t ract o rs .

E n g a g e d p e r s o n n e l : A l l e m p l o y e e s u n d e rs t an d t he i r ro l e an d ho w t he i r j o b an d p e rs o n al choices impact the performance of the organization. They don’t just support the OE p ro g ram b u t o w n i t an d s t ri v e re l e n t l e s s l y f o r co n t i n u e d i m p ro v e m e n t .

C l e a r f o c u s : O p e rat i o n al e x ce l l e n ce an d p e rf o rm an ce i m p ro v e m e n t are a cl e ar f o cu s for the organization, and each employee is empowered and supported to make difficult cho i ce s t hat s u p p o rt t he O E p ro g ram ab o v e al l e l s e . O rg an i z at i o n al chan g e s t o t he o p e rat i n g m o d e l are i m p e rat i v e f o r s u cce s s .

L e v e r a g e d t e c h n o l o g y : T he o rg an i z at i o n u s e s o n l y t he n e ce s s ary t e chn o l o g y t hat is implemented to allow real-time effective knowledge transfer, communication and p e rf o rm an ce re v i e w , as w e l l as t he ab i l i t y t o t ran s f o rm co n t i n u o u s s t re am s o f d at a i n t o i n f o rm at i o n an d u l t i m at e l y d e ci s i o n s t hat p o s i t i v e l y i m p act re s u l t s .

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K e y o p e rat i o n al e x ce l l e n ce co m p o n e n t s K e y o p e rat i o n al e x ce l l e n ce co m p o n e n t s

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A sset reliability and

integrity



F o r co m p l e t e an d s u s t ai n ab l e p e rf o rm an ce e x ce l l e n ce , o rg an i z at i o n s m u s t e s t ab l i s h t he ap p ro p ri at e O E cu l t u re , implement the key OE components, and strive for robust execution and continuous program enhancement.

H e a l t h , s a f e t y , e n v i r o n m e n t a n d q u a l i t y : T he f o u n d at i o n o f o p e rat i o n al e x ce l l e n ce , i n which the operational risks are understood and ranked and everyone engages in a re l e n t l e s s p u rs u i t t o e l i m i n at e i n j u ri e s an d i n ci d e n t s f o r e m p l o y e e s , co n t ract o rs an d t he e n v i ro n m e n t , i n cl u d i n g a z e ro - d e f e ct approach to product quality.

I n t e g r a t e d p l a n n i n g : L o n g - t e rm b u s i n e s s s t rat e g i e s are e f f e ct i v e l y t ran s l at e d i n t o s ho rt - t e rm an d m e d i u m - t e rm o p e rat i n g p l an s and supported by appropriate frameworks an d s p o n s o rs hi p .

O p e r a t i n g m o d e l : T hi s o u t l i n e s ho w p ro ce s s e s , p e o p l e an d s y s t e m s i n t e ract t o s u p p o rt t he b u s i n e s s an d ho w t he y are arran g e d an d prioritized to achieve optimum efficiency.

A s s e t r e l i a b i l i t y a n d i n t e g r i t y : A t o t al re l i ab i l i t y o rg an i z at i o n i s e s t ab l i s he d that identifies potential asset failures for elimination, tracks and investigates failures f o r i m p ro v e m e n t , an d f o cu s e s o n t he l i f e cy cl e o f as s e t s f ro m d e s i g n t o d e co m m i s s i o n i n g .

Cost efficiency: C o s t i m p ro v e m e n t s are s t rat e g i cal l y ad d re s s e d , re g ard l e s s o f o i l prices or profit margin, looking far beyond s u rf ace co s t s , s u ch as p e rs o n n e l , an d i n t o t he hidden costs of inefficiency and rework. Tools an d t e chn o l o g i e s are i n p l ace t hat f o cu s o n i n cre as e d o i l p ro d u ct i o n o u t p u t .

S u p p l i e r a n d c o n t r a c t o r s : C o n t ract o rs an d s u p p l i e rs are i n t e g rat e d i n t o t he o v e ral l o p e rat i o n s p ro g ram an d co n t ri b u t e p o s i t i v e l y t o b u s i n e s s p e rf o rm an ce . A g re e m e n t s are s t ru ct u re d s o t hat o b j e ct i v e s an d o v e rs i g ht m e chan i s m s are cl e ar an d ap p ro p ri at e .


Vital components for success

• O p e r a t i o n s / b u s i n e s s m a n a g e m e n t s y s t e m ( O M S ) : Guidelines and necessary processes to establish how an o rg an i z at i o n o p e rat e s are arran g e d i n a ce n t ral i z e d framework and adherence is strictly enforced, ensuring al l co re act i v i t i e s are d o n e co n s i s t e n t l y an d i n t he m o s t e f f e ct i v e w ay t o s u s t ai n t he t ran s f o rm at i o n an d achi e v e m e as u rab l e re s u l t s .

• T e c h n o l o g i c a l A d v a n c e m e n t s : W i t h n e w t e chn o l o g i cal ad v an ce m e n t s , w e hav e t he p o t e n t i al t o i m p ro v e b u s i n e s s f u n ct i o n s acro s s t he i n d u s t ry . B i g d at a an d analytics, digital oilfield, industrial Internet of things and s e cu re cl o u d co m p u t i n g — t he re are a v ari e t y o f d ri v e rs emerging today. But, oil and gas companies must make the leap from the digital oilfield of the past and adopt p ract i ce s t o p o s i t i o n t he m s e l v e s f o r t he f u t u re . T hi s i n cl u d e s ad d re s s i n g t he e n t i re v al u e chai n , f o cu s i n g o n i n n o v at i o n an d au t o m at i o n . T e chn o l o g y has cau g ht u p with the industry’s needs — but the industry still lags b e hi n d i n l e v e rag i n g t he s e ad v an ce m e n t s .

• O r g a n i z a t i o n a l d e v e l o p m e n t : An established pool of skill s e t s i s i n p l ace , w i t h s u cce s s i o n an d d e v e l o p m e n t p l an s i n p l ace f o r e ach p o s i t i o n , an d a co n t ract i n g s t rat e g y i s i n p l ace to establish the organization as a preferred place to work and creates a competitive advantage in the marketplace.

• P e r f o r m a n c e m a n a g e m e n t : T he o p e rat i n g o rg an i z at i o n e s t ab l i s he s an d o w n s m e t ri cs an d d as hb o ard s , an d v i s u al p e rf o rm an ce m an ag e m e n t i s u t i l i z e d t o d ri v e d ay - t o - d ay p e rf o rm an ce o p t i m i z at i o n .

• C o n t i n u o u s i m p r o v e m e n t : A co n s t an t e f f o rt i s m ad e t o improve process efficiencies, reduce “waste” and improve the way work is completed.

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Causes of inefficient operating performance

W hi l e m an y o rg an i z at i o n s are s u cce e d i n g i n s o m e cri t i cal o p e rat i o n al are as o f f o cu s , f e w , i f an y , are e f f e ct i v e l y m an ag i n g them all. Industry analysis suggests operational performance gaps begin at the strategic level and carry through to a specific process breakdown within assets. In addition, operations functions often lack continuous improvement efforts targeting these inefficiencies and failure modes.

Below, we outline the most common key factors behind operational inefficiencies.

Strategic factors

M i s m a n a g e d s u p p l i e r a n d c o n t r a c t o r r e l a t i o n s h i p s P o o r a s s e t r e l i a b i l i t y a n d i n t e g r i t y Inefficient cost management

• Prequalification and contract e x e cu t i o n n o t ro b u s t

• L i m i t e d v i s i b i l i t y t o co n t ract o r and supplier risks

• Poor field management and p e rf o rm an ce an al y s i s

• Assumption of project uniqueness

• Discounting predictive m ai n t e n an ce f o r s che d u l e d m ai n t e n an ce

• P o o r s hu t d o w n an d t u rn aro u n d m an ag e m e n t

• I n e f f e ct i v e o p e rat i o n al re ad i n e s s p l an n i n g

• O v e r- ab u n d an t m ai n t e n an ce act i v i t i e s

• Insufficient data analytics

• Unaware of cost drivers across v al u e chai n an d i n t e rd e p e n d e n cy

• Lack of production management o p t i m i z at i o n

• Inadequate business component m o d e l i n g

1 2 3T act i cal f act o rs

N o n - i n t e g r a t e d b u s i n e s s a n d a c t i v i t y p l a n n i n g

L a c k i n g a n e f f e c t i v e o p e r a t i n g m o d e l

• Lack of leadership sponsorship an d m at u ri t y

• I n e f f e ct i v e s t rat e g y an d framework

• Difficulties translating strategy i n t o o p e rat i o n s

• Siloed design architecture

• Unclear decision governance

• Insufficient performance m an ag e m e n t

• lack of standardization, policy an d e n f o rce m e n t

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1 1Driving operational performance in oil and gas |

O p e rat i o n al e x ce l l e n ce re s u l t s i n b e t t e r o u t co m e s

S t r a t e g i c d e c i s i o n - m a k i n g

A NOC sought to improve the way its top management was making key s t rat e g i c d e ci s i o n s . A n o rg an i z at i o n with multiple subsidiaries, the NOC f ace d a chal l e n g e t o as s e s s t he i m p act o f m aj o r s t rat e g i c d e ci s i o n s , M& A act i v i t y an d o t he r l arg e investment projects it was making on key financial metrics of its entities an d at t he co n s o l i d at e d l e v e l . T he NOC had to answer the question: “ C an re - e v al u at i n g o u r d e ci s i o n - making strategy help us develop t he m o s t o p t i m al co m b i n at i o n o f i n v e s t m e n t d e ci s i o n s ? ”

• ►Our team identified revenue and co s t d ri v e rs re l e v an t t o e ach p art o f t he b u s i n e s s .

• ►We created a flexible, transparent and robust decision-making model t hat e n ab l e s b e t t e r b u s i n e s s p e rf o rm an ce , cal cu l at e s K P I s , an d identifies and quantifies the key risks for better risk management an d m i t i g at i o n .

• ►We designed a documented p ro ce s s , he l d t rai n i n g s f o r al l stakeholders and ensured our m o d e l w o u l d b e s u b j e ct t o continuous development to make i t s u s t ai n ab l e i n a chan g e - d ri v e n e n v i ro n m e n t .

Our strategic decision-making model empowered the NOC to make better i n f o rm e d s t rat e g i c d e ci s i o n s . T he t o p decision-makers now work with more t ran s p are n t i n f o rm at i o n , e n ab l i n g t he m t o m o re cl e arl y an al y z e t he i m p act o f t he i r s t rat e g i c d e ci s i o n s o n both the consolidated group’s and its individual subsidiaries’ financial p e rf o rm an ce . O u r m o d e l has b o o s t e d the NOC’s analytical capability an d co n s i s t e n cy i n p e rf o rm an ce m an ag e m e n t acro s s s u b s i d i ari e s .

B e t t e r q u e s t i o n B e t t e r a n s w e r B e t t e r o u t c o m e

T a c t i c a l d e c i s i o n - m a k i n g

A n o rg an i z at i o n w as s t ru g g l i n g t o keep its assets intact while continuing t o b e a l e ad i n g s e rv i ce p ro v i d e r an d juggling significant internal spend. T he o rg an i z at i o n had t o an s w e r the question: “Will performance improvement help identify significant co s t s av i n g s ? ”

• W e an al y z e d an d e v al u at e d the maintenance team’s work p ro ce d u re s an d t he cri t i cal p e rf o rm an ce e l e m e n t s t he y s t ru g g l e d w i t h d ai l y .

• ►We redesigned the maintenance team’s processes, streamlining their work routines to more effectively link to one another and scale up t he i m p act o f s i n g l e m ai n t e n an ce e f f o rt s .

• ►We introduced a leading-practice s t af f p e rf o rm an ce as s e s s m e n t to make successes measurable, e n s u re co n t i n u o u s i m p ro v e m e n t an d s p re ad t o p p e rf o rm an ce i n t he l o n g ru n .

Our client’s annual costs for internal m ai n t e n an ce s e rv i ce s d e cre as e d b y ro u g hl y 15% o f t o t al i n t e rn al m ai n t e n an ce co s t s . I n ad d i t i o n t o the financial impact opportunities, our client benefited from higher p e rf o rm an ce o f i t s m ai n t e n an ce t e am s , w hi ch are n o w b e t t e r o rg an i z e d an d m o re m o t i v at e d .

B e t t e r q u e s t i o n B e t t e r a n s w e r B e t t e r o u t c o m e

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of I O C s currently have an OE program or have run one in the past

8 6 %

5 0 %of the N O C s in ou r sample have never implemented an O E program

The oil majors have long-established OE programs that are embedded across the organization.OE programs have long remained an asset to the organizations by providing a quantitive decrease in drilling and completion costs, volu me of petroleu m spills and, increasing refinery energy efficiency, uptime and earnings. However, even the most successful OE programs have room for improvement. Now is the time to harness the momentum by leveraging new tools and technologies and capitalize on the multitude of opportunities for success OE has to offer.

Our findings are as follows:

Current state of industry: usage and benefits

EY researched 30 oil and gas companies, including oil majors, NOCs and independent players, to identify if the sample companies had an operational excellence program. For companies that did have an operational excellence program, we looked at the reasons for i n t ro d u ci n g t he p ro g ram , t he m ai n are as o f f o cu s an d t he s t ru ct u re o f t he p ro g ram .

currently have an OE program or have previously ru n an O E program

of these companies applied O E across the organization

5 3 %

7 7 %


F ou r main ou tcomes of companies u sing O E programs

Improved HSE metrics

4 3 %C o m p an i e s re p o rt e d d e cl i n e s i n b o t h t he t o t al re co rd ab l e i n j u ry / i n ci d e n t rat e an d d ay s -away-from-work incidents for e m p l o y e e s an d co n t ract o rs . T w o co m p an i e s achi e v e d t he i r b e s t -e v e r re s u l t s o n s p i l l an d p e rs o n al s af e t y m e as u re s .

C ost savings

4 3 %C o s t s av i n g s i n cl u d e d achi e v i n g re d u ct i o n s i n t o t al o p e rat i n g co s t s as w e l l as i n are as s u ch as w e l l d ri l l i n g co s t s . T he m aj o ri t y re p o rt e d t hat t he y d e l i v e re d o n co s t re d u ct i o n t arg e t s ahe ad o f s che d u l e .

$I mproved asset u ptime/

availability

2 9 %O i l an d g as co m p an i e s w i t h O E p ro g ram s re p o rt e d i m p ro v e d as s e t u p t i m e o r av ai l ab i l i t y . T w o co m p an i e s had t arg e t e d top-quartile performance in as s e t av ai l ab i l i t y .

I ncreased oil/ gas produ ction

2 9 %T he i n cre as e d as s e t u p t i m e m ay be linked to the increased oil and g as p ro d u ct i o n achi e v e d i n 29 % o f O E p ro g ram s .

We identified three main reasons why companies first introduced an operational excellence program:

E x p an s i v e as s e t re l i ab i l i t y

8 0 % 8 0 %

E x p an s i v e p ro d u ct i o n efficiency

Man ag e m e n t of HSE risk

O p e rat i n g co s t re d u ct i o n

F o cu s o n cu l t u re

E m p l o y e e re t e n t i o n

Six most common operational excellence focus areas

1 To improve HSE performance, typically following an HSE incident. Companies that had not experienced an HSE incident introdu ced an operational excellence program in response to high-profile HSE incidents in the industry.

2 To improve financial and operating performance, with a focu s on redu cing costs and closing the performance gap relative to peers.

3 As part of a wider corporate transformation program or a shift in strategic direction.

7 3 % 6 0 % 2 0 % 1 3 %

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T he o i l an d g as i n d u s t ry , p art i cu l arl y t he u p s t re am s e ct o r, has b e e n s l o w t o ad ap t t o chan g i n g e x p e ct at i o n s an d therefore has failed to reap the benefits available through a systematic focus on operations.

I n t he p as t 10 y e ars , e x p l o rat i o n has s hi f t e d i n t o m o re co m p l e x an d re m o t e b as i n s , n e w l y d e v e l o p e d t e chn o l o g i e s hav e b e e n i n t ro d u ce d an d re g u l at i o n s hav e b e e n rap i d l y e v o l v i n g i n an e x p an d i n g g l o b al e n v i ro n m e n t . Mai n t ai n i n g a s o ci al l i ce n s e t o o p e rat e , w hi l e achi e v i n g co n s i s t e n t re t u rn s o n i n v e s t m e n t s , has n e v e r b e e n m o re co m p l i cat e d or difficult. The next 10 years show even more tightening in these areas and an impending loss of experience and talent through retirement. These fundamental shifts in the industry indicate that the time is indeed now to make f u n d am e n t al , s u s t ai n ab l e i m p ro v e m e n t s t o o p e rat i o n s t hro u g h i n t e g rat e d o p e rat i o n al e x ce l l e n ce p ro g ram s .

The programs identified in our industry examination show that there is willingness and desire to improve operating performance, specifically reliability, efficiency, cost and HSE. However, the same examination highlighted that few existing operational excellence programs adequately address all four of those factors and, despite these efforts, o p e rat i n g p e rf o rm an ce i n t he i n d u s t ry has b e e n s t e ad i l y d e cl i n i n g , e v e n b e f o re t he s harp d ro p i n o i l p ri ce . I n addition, stakeholders are demanding more consistent returns and improved HSE performance across assets.

I s i t t i m e f o r a s hi f t i n f o cu s ?

C ommu nities, non-governmental organizations and mu nicipalities are applying pressure for exploration companies to ensu re risk mitigation and minimization practices are in place.

Shareholders are investing in exploration companies that can consistently deliver results and minimize profit fluctuations in the heavily cyclical oil and gas industry.

A new generation of employees expects organizational stability and gravitates toward organizations that can offer stable employment with opportunities for advancement.

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EY’s Oil & Gas professionals can work with clients to develop, design and implement operational excellence programs. Our Operational Excellence team is composed of advisors with experience in engineering, plant operations, maintenance reliability, HSE, supply chain, s t rat e g y an d o rg an i z at i o n al chan g e w i t hi n o i l an d g as .

Through our closely linked Transactions Advisory, Tax, Fraud Investigation and Dispute Services, and Advisory service teams, co u p l e d w i t h o u r g l o b al t e am o f m o re t han 10, 000 industry professionals, EY is equipped to provide independent support and advice t o o u r cl i e n t s t o e n ab l e t he i r g ro w t h i n a chan g i n g l an d s cap e .

H o w E Y can he l p — achi e v i n g o p e rat i o n al e x ce l l e n ce

1. Integrated business and activity planning Key challenges

A t t he f o re f ro n t o f o p e rat i o n al p e rf o rm an ce i s t he n e e d t o t ran s l at e l o n g - t e rm b u s i n e s s s t rat e g i e s i n t o s ho rt - t e rm an d m e d i u m - t e rm o p e rat i n g p l an s .

• ►Sponsorship and maturity: Success in any endeavor starts with executive sponsorship an d a cu l t u re t hat s u p p o rt s an d u n d e rs t an d s t he o b j e ct i v e s .

• ►Strategy and framework: To prevent value leakage from siloed thinking that often o ccu rs f ro m i n cre as i n g o p e rat i o n al co m p l e x i t y , o i l an d g as co m p an i e s m u s t e s t ab l i s h clearly defined and well-understood connection and integration points among the s t rat e g i c p l an n i n g l e v e l s .

• ►Translating strategy to operations: The enterprise strategy needs to be effectively translated into quantitative and actionable business unit and functional goals and t arg e t s t o f aci l i t at e p l an n i n g , b u d g e t i n g an d s t e w ard s hi p p ro ce s s e s .

2. Target operating model Key challenges

A t arg e t o p e rat i n g m o d e l d e s cri b e s n o t o n l y ho w p ro ce s s e s , p e o p l e an d s y s t e m s i n t e ract t o s u p p o rt t he b u s i n e s s b u t al s o ho w t he y co u l d b e arran g e d an d prioritized to achieve optimum efficiency.

• ►► Siloed design architecture: Functions and geographies need to be fully integrated to p ro m o t e co n s i s t e n cy i n cu l t u re , p ro ce s s e s , co n t ro l s an d t e chn o l o g i e s .

• ► Unclear decision governance: Decision-making and delegation of authority underpin t he o p e rat i n g m o d e l an d s ho u l d i n cl u d e p o l i ci e s , p ract i ce s , co m m i t t e e s an d ru l e s .

• ► Insufficient performance management: Many organizations are lacking a balanced set of quantitative and qualitative performance metrics necessary to support the strategy an d v i s i o n . I f m e t ri cs are p re s e n t , t he y o f t e n t e n d t o b e i n co n s i s t e n t l y m e as u re d , m an ag e d an d e v al u at e d .


3. Supplier and contractor management Key challenges

L e ad i n g o p e rat o rs u n d e rs t an d t he y m u s t l e v e rag e t he i r s u p p l i e rs an d co n t ract o rs t o achi e v e t he d e s i re d l e v e l o f o p e rat i o n al p e rf o rm an ce .

• ► Prequalification and contracting: While supply chains and supplier networks have become increasingly complex, prequalification requirements and contracts have f ai l e d t o cap t u re t he s e co m p l e x i t i e s .

• ► Supplier and contractor risk: With increasing impact on business and operating performance, risks associated with these portfolios must be adequately understood, quantified and mitigated.

• ► Field management and analysis: When organizations work with suppliers and co n t ract o rs w ho s e p e rf o rm an ce i s n o t re l i ab l e an d w ho s e s e rv i ce av ai l ab i l i t y i s unpredictable, value can erode by as high as 10%-15% due to ongoing inadequate m an ag e m e n t an d f ai l u re t o m o n i t o r p e rf o rm an ce .

4. Asset reliability and integrity management Key challenges

T he p i n n acl e o f g re at o p e rat o rs i s t he i r ab i l i t y t o re l i ab l y m e e t p ro d u ct i o n targets and expectations. This requires t he m t o t ran s i t i o n cap i t al p ro j e ct s i n t o p ro d u ci n g as s e t s , i m p ro v e d ay -t o - d ay as s e t u p t i m e an d m i n i m i z e t he i m p act o f p l an n e d o u t ag e s .

• ► Maintenance, reliability and integrity processes: When an organization fails to define asset strategies, identify critical risks, institute appropriate barriers of protection, an d o p t i m i z e as s e t an d p e rs o n n e l p e rf o rm an ce , t he i r as s e t p e rf o rm an ce s u f f e rs .

• ► Shutdown and turnaround management: Too often, organizations fail to effectively p l an , s che d u l e an d e x e cu t e t he s e m aj o r f aci l i t y i n s p e ct i o n s / re p ai rs i n a w ay t hat e n s u re s o n - t i m e co m p l e t i o n , co s t co n t ro l an d s af e co m p l e t i o n o f act i v i t i e s .

• ► Operational readiness planning: When integration and planning are inadequate, operators face increased difficulty in reaching the new assets to anticipate p ro d u ct i o n n u m b e rs o n t i m e an d o n b u d g e t , w i t ho u t e x p e ri e n ci n g re cu rre n t i s s u e s t hat u p s e t p ro d u ct i o n .

5. Cost efficiencies Key challenges

T he m o s t s u cce s s f u l o rg an i z at i o n s i n s t i t u t e s y s t e m at i c ap p ro ache s t o i d e n t i f y an d t he n e l i m i n at e s o u rce s o f v al u e l o s s , t arg e t i n g t he hi g he s t - re t u rn areas first.

• ► Cost drivers: Often we see organizations focused on first- and second-level drivers without adequately understanding the third- and fourth-level drivers, leading to the true causes of inefficiency and cost escalation to be misdiagnosed, ultimately l i m i t i n g t he i m p act o f p ro p o s e d s o l u t i o n s .

• ► Production management optimization: Through production planning, a robust m an ag e m e n t s y s t e m , l o s s re p o rt i n g an d ro o t cau s e an al y s i s , p ro d u ct i o n o p t i m i z at i o n can o ccu r. F ai l u re t o p ro p e rl y m an ag e an y o f t he s e are as ro u t i n e l y l e ad s t o s u b o p t i m al p ro d u ct i o n , d i re ct l y i m p act i n g b u s i n e s s re s u l t s .

E Y | A s s u ran ce | T ax | T ran s act i o n s | A d v i s o ryA b o u t E YE Y i s a g l o b al l e ad e r i n as s u ran ce , t ax , t ran s act i o n an d advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets an d i n e co n o m i e s t he w o rl d o v e r. W e d e v e l o p o u t s t an d i n g l e ad e rs w ho t e am t o d e l i v e r o n o u r p ro m i s e s t o al l o f o u r stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for o u r co m m u n i t i e s .

E Y re f e rs t o t he g l o b al o rg an i z at i o n , an d m ay re f e r t o o n e o r m o re , o f t he m e m b e r o rg an i z at i o n s o f E rn s t & Y o u n g Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by g u aran t e e , d o e s n o t p ro v i d e s e rv i ce s t o cl i e n t s . F o r m o re i n f o rm at i o n ab o u t o u r o rg an i z at i o n , p l e as e v i s i t e y . co m .

H o w E Y ’ s G l o b a l O i l & G a s S e c t o r c a n h e l p y o u r b u s i n e s s T he o i l an d g as s e ct o r i s co n s t an t l y chan g i n g . I n cre as i n g l y u n ce rt ai n e n e rg y p o l i ci e s , g e o p o l i t i cal co m p l e x i t i e s , co s t m an ag e m e n t an d cl i m at e chan g e al l p re s e n t s i g n i f i can t challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with e x t e n s i v e e x p e ri e n ce i n p ro v i d i n g as s u ran ce , t ax , t ran s act i o n an d ad v i s o ry s e rv i ce s acro s s t he u p s t re am , m i d s t re am , downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our g l o b al re s o u rce s an d art i cu l at e p o i n t s o f v i e w o n re l e v an t s e ct o r i s s u e s . W i t h o u r d e e p s e ct o r f o cu s , w e can he l p y o u r o rg an i z at i o n d ri v e d o w n co s t s an d co m p e t e m o re e f f e ct i v e l y .

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EYG No. DW05721508-1612119_SWED None

T hi s m at e ri al has b e e n p re p are d f o r g e n e ral i n f o rm at i o n al p u rp o s e s o n l y an d i s n o t i n t e n d e d t o b e re l i e d u p o n as acco u n t i n g , t ax , o r o t he r p ro f e s s i o n al ad v i ce . P l e as e re f e r t o y o u r ad v i s o rs f o r s p e ci f i c ad v i ce .

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