Oil and gas companies are sharpening their cost reduction strategies to stay afloat in what is shaping up as a sustained period of low oil prices. Most are rationalizing staff, restructuring operations and cutting capital expenditure across the board—with operators slowing their project pipeline to better manage project execution and costs.
Some investment cuts may impact production, but this is unlikely to strengthen oil prices in the short term due to continued abundant global supply and rising inventories. In August 2015 oil prices were more than 40 percent lower year on year. OPEC crude production is at a three-year peak, supported not only by Saudi Arabia but also Iraqi production, which is at record levels of 4 million barrels a day.* Inventories are at an all-time high, while US oil production continues to be remarkably resilient to price declines.
There is a general deflationary effect now underway in the energy industry which is a big positive, lowering costs of, say, rig rates and allowing companies to further reduce capital expenditure estimates. However, this is putting oilfield services companies under pressure as oil companies want to renegotiate prices and contracts. Past cycles show some of these savings can take one to three years to work through the industry and its projects, so many upstream players will not see this pressure go away for a while yet.
The key to better management of the upstream business lies in fully capturing cost deflation benefits while continuing to plug operational efficiency gaps. Digital technology can help here. For example, the use of sensors in plants and in production infrastructure to understand data from plants and pipelines is now allowing companies to run operations much more safely and efficiently; such technologies that are fundamental to many of these cost reduction processes are becoming routine of late.
Listen here to find out how digital will continue to be an important driver of cost, as well as of upstream profitability and competitiveness.
*Source: “International Energy Agency Oil Market Report, August 12, 2015, © 2015 OECD/IEA, OECD (Organization for Economic Co-operation and Development)