An interview with Nuri Demirdoven
Upstream oil and gas companies have driven down costs by reducing discretionary spend and by driving suppliers’ prices down. Are those savings gains sustainable? We asked Nuri Demirdoven, Accenture managing director, North America, to share his thoughts on options ahead for upstream companies.
Will companies be able to sustain the cost-cutting gains achieved during the past two years of low oil prices?
Those gains will be difficult to sustain once oil prices rebound. Suppliers will feel they have made enough sacrifices, and exploration and production companies will need, once again, to pursue growth. We have already seen leading suppliers talking about price increases in latest quarterly releases.
There are ways, however, for upstream companies and their suppliers to work together creatively so the prize gets bigger and there are enough gains for both sides to share.
What are some of those ways?
At Accenture, we talk about the emergence of an Intelligent Collaborative Supplier Ecosystem—ICSE, for short. This collaborative ecosystem is typified by supply chain players working closely together to improve cost performance by 30 percent to 40 percent.
How is that actually possible?
At a fundamental level, the idea is not a new. Simultaneous cost and quality improvements have been achieved in other asset-intensive industries, such as auto manufacturing and aerospace. Japanese automakers did this decades ago, working with suppliers to devise smarter ways to build cars that were lighter and more fuel-efficient, yet still safe to drive.
Similarly, oil and gas companies can call on their suppliers to help sharpen company strategy, and come up with performance metrics that help to guide the work for all parties, targeting increased value from end-to-end.
What’s new today is there are additional improvement levers, such as digital technologies, that enable intelligent supply chains and dynamic collaboration.
Could you give an example of how closer collaboration between oil and gas companies and their supplier ecosystem could significantly boost productivity?
In our work with a hydraulic fracturing company in North America, we documented that more pervasive collaboration with suppliers resulted in a doubling of productivity, measured by stages per crew per month.
In this project, we worked with both parties to uncover an untapped source of productivity. Our industry experience has shown that, in envisioning overall efficiency, one third of planned gains can be influenced by suppliers, another third by oil and gas companies. Typically, an elusive third remains unrealized due to lack of broader collaboration.
Are there quantitative targets companies can aim for?
Oil and companies could target overall gains ranging from 30 percent up to 40 percent throughout the supply ecosystem. The largest share typically comes from dynamic collaboration, from 10 percent to 13 percent, and from strategic alignment, from 9 percent to 12 percent. Improvements in the digital supply chain can yield another 6 percent to 8 percent, with commercial innovation adding another 5 percent to 7 percent. Of course, the magnitude of the gain will vary based on sophistication of the existing supply ecosystem.
With cost control still the industry theme, isn’t innovation on hold?
Not necessarily. It is true, for example, that oilfield service companies are having a harder time charging a premium today for their technological advances. Risk-reward arrangements, however, can enable innovative technologies to be offered on a sliding scale.
The pitch is this: Would you be willing to restructure responsibilities across the workflow or, in some select cases, spend a bit more to get a lot more production to increase your margins? If the new arrangement doesn’t deliver gains as expected, you don’t pay. But if the innovation works better than the prior method, the supplier can claim added benefits either in the form of increased scope or longer commitment from the operator. It’s a potential win-win for both sides.
What are the barriers that prevent upstream companies from achieving these cost savings?
The industry’s challenge is to break down cultural barriers and historical working relationships that continue to hinder gainful collaboration. Sustainable cost and quality gains are definitely possible in oil and gas, as they have been in other industries, but it will require greater trust and collaboration, rather than pursuing the same zero-sum game.