February 10, 2016
Have you “variabilized” your cost structure yet?
By: Pierre Mawet

Volatility in oil and gas prices is challenging the industry, and especially companies burdened with high fixed costs. As a result, many companies are seeking to “variabilize” their cost structure after years of ramping up production with little concern for cost.

Reducing fixed costs has become a top priority, and transportation is a primary example. For most of the current decade, some of the fastest-growing transportation fleets belonged not to logistics companies but to energy companies. As an example, businesses with hydraulic fracturing operations built up large fleets to deliver material and services to multiple sites. They built garages for oil changes, tire changes, and to fix radiators and overhaul engines. A staff of mechanics was also added to the payroll.

After oil prices dropped, there has been much less need for trucks, garages and mechanics, yet energy companies have been stuck with these fixed costs. Since transportation repair and maintenance is not a core competency for most energy companies, more flexible solutions could be found to reduce the financial pain. One option is to contract with a third-party service provider offering a turnkey, full-service solution for truck repair. The energy company can lease its garages to the maintenance provider.

Another large fixed cost involves payroll for the “pumpers” who travel to inspect wells and address maintenance issues. An outside service provider might be able to do the job at lower cost at similar or higher quality levels. Or, a company could integrate instrumentation, sensors, and technologies to monitor wells remotely and continuously, thereby saving on payroll and transportation costs.

Another way to reduce fixed costs is by removing excess inventory, an approach many companies have already tackled. When demand and prices are high, companies fear running out of supplies needed for fracking. So they maintain huge levels of chemicals, which also adds costs for storage, forklifts, people to unload trucks and to restock shelves. A more flexible method is to work with distributors to store and maintain the needed supplies. Service-level agreements can be set up to obtain needed material from them within 24 hours of a request.

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