Oil and gas sector needs to commit to long-term thinking to achieve meaningful cost cuts

A majority of senior oil and gas professionals believe that the industry is repeating the mistakes of previous downturns and have concerns over the loss of jobs and experience and lack of efficiency, according to a new report published by DNV GL. A new phase of cost management is needed, as nearly three quarters of senior oil and gas professionals globally are preparing their company for a sustained period of low oil prices.

According to A New Reality: the outlook for the oil and gas industry in 2016, a DNV GL report based on a global survey of 921 senior sector players, cost management is the top priority for 41 per cent of respondents in 2016. The top three measures prioritised to impose stricter cost controls are:

• Tougher decisions on capex, down from 44 per cent in 2015 to 31 per cent in 2016, suggesting that opportunities for further capex reductions are limited.
• Prioritising headcount reductions, up from 25 per cent last year to 31 per cent in 2016, signalling further job losses.
• And increasing pressure on the supply chain, down from 31 per cent in 2015 to 27% in 2016, indicating that suppliers have been squeezed as much as possible.

“With the low oil price, the industry has taken painful short-term cost-cutting measures by reducing the capex and headcount and squeezing the supply chain,” Elisabeth Tørstad, CEO of DNV GL, Oil & Gas, says. “Although 74% say they achieved their cost-efficiency targets last year and 65 per cent believe the industry will be successful in cutting costs in 2016, not all parts of the sector have been able to achieve lasting lower cost levels during downturns. To prevent repeating past mistakes, real change is needed now – cutting complexity, increasing collaboration and driving standardization. These measures will enable the industry to adjust to the new reality and put it on a sustainable growth path for the long-term.”

There are some promising signs that the industry is adopting longer-term thinking on cost management: six in ten respondents agree that operators will increasingly push to standardise their delivery globally, up from 55 percent in 2015 and 52 per cent in 2014.

Even in the current price environment, almost half say their company is taking a long-term approach to innovation and R&D. However, nearly one in five companies does not have a strategy in place to maintain innovation. The most common strategy for maintaining innovation with lower budgets is to increase collaboration with other industry players (45 per cent). Nearly one in three plans greater involvement in joint industry projects in the year ahead.

“Innovation and collaboration are even more important in this current price environment,” Tørstad adds. “It isn’t just about finding the breakthrough technologies – although that’s important too – it’s also about making things simpler and more efficient and ultimately helping the industry to safely cut costs. At DNV GL, we are continuing to invest five per cent of our revenue in R&D as we see this as a key enabler for sustainable long-term competitiveness.”

The greatest barriers to growth in 2016 are the low oil price (63 per cent), weak global economy (42 per cent), uneconomic gas prices (21 per cent) and growing regulatory burden (11 per cent). Access to capital (16 per cent) has also become more prominent in 2016.