It’s time for a culture change in companies across the oil, gas and chemicals (OGC) industry worldwide, executives are saying. During the U.S. shale boom, companies in virtually all sectors of the OGC industry lacked a “cost culture,” according to a recent study by AlixPartners.
However, if companies are to survive the current downturn in commodity prices, they are going to have to plan and manage their projects for greater capital productivity.
“Strong energy prices in recent years have allowed companies to delay putting an emphasis on project management as they focused instead on the urgent need of achieving greater throughput. But that was then and this is now,” said Dennis Cassidy, managing director at AlixPartners and co-head of the firm’s global OGC practice.
“In the current environment of falling prices, plus increasing geologic and technical challenges, a new focus on building a ‘cost culture’ into each and every project is mandatory,” Cassidy added.
In the survey, 250 high-level industry executives around the world said the biggest drawback in keeping projects on budget is that “company culture isn’t focused on project management.”
The survey found that just 30% of executives said their companies had explicit return-on-capital targets for projects prior to the crash in oil prices. Also, 12% of the executives said they think their companies are better than their competitors at project execution.
Meanwhile, only 19% of North American firms say their companies finish projects on budget, compared with 29% of all respondents globally.
The firm said that many projects aren’t benefitting from economies of scale or institutional knowledge. For example, just 34% of the executives polled agreed that project management is executed at the “company level” across all projects.
Only 39% of respondents—and just 30% of oil and gas drillers—said they have a strong series of checks and balances to ensure projects stay on track. And only 11% of all respondents said they employ a stage-gated process to assess project viability at defined milestones when developing a new capital program.
The survey also suggests that as projects grow more complex many companies have attempted to boost returns, not by tightly controlling costs internally but by looking outward toward such things as developing partnerships.
For instance, when asked to list the most important criteria used in selecting new capital projects, 60% in the survey cited “partner/syndicate relationships,” a tie for first place with the project’s projected net present value.
Among the firms in the survey with the highest self-reported, corporate return on capital employed (ROCE), 64% cited “partner/syndicate relationships” as most important, compared with 51% of those representing the companies with the lowest self-reported ROCE.
Additionally only 30% said they formally identify and quantify project risks in advance of undertaking new projects, and 39% said they have a formal knowledge of the management process in place.
The study offers hope to companies looking “to crack the code on efficient project management in today’s brave new world of lower energy prices,” the firm said
A lot of it starts with proactive leadership.
For instance, companies that are the best ROCE performers said they’re more likely to be creating tighter criteria for project approval (36% vs. 29% of all respondents). Also, top leaders in those high-ROCE companies review all projects on a semi-annual or annual basis (53% vs. 43% of total respondents).
Furthermore, the firm said the survey suggests that OGC-industry executives view the creation of an overall cost culture inside their companies as a powerful generator of returns in the year ahead.
According to the survey, 46% of executives think creating a cost culture will yield at least 5% savings for their firm over the next 12 months.
What executive said will produce savings for their companies over the next 12 months | |
Creating a cost culture | 46% |
Improved purchasing/resource acquisition | 41% |
Higher subcontractor productivity | 39% |
Selling, general and administrative cost improvement | 27% |
Technical-cost reduction | 19% |
Source: AlixPartners |
Although 58% of executives said they are focused on creating a cost culture, many companies are not taking the right actions to match their words, the firm said.
“The good news is that creating a true, soup-to-nuts cost culture cannot only yield significant returns, if implemented properly it can be the approach that offers a lower degree of social impact, which of course can be of use once markets change yet again,” Cassidy said. “If history is any guide, companies that simply go into shut-down mode given today’s tough market will rue the day when the market turns yet again.”
Highlights:
- 66% of executives from exploration firms said it takes significantly longer to see returns on capital from projects, vs. 38% for those from integrated oil and gas companies and 47% from drillers;
- 70% of those from oil and gas drilling companies said partners/syndicate relationships are the most important determinant in deciding whether to conduct a project, vs. 60% of total respondents;
- 55% of executives from integrated oil and gas companies said they “always” or “very often” deliver their projects on time, vs. 74% of total respondents;
- 30% of executives from oil and gas drilling companies said they have a strong set of checks and balances in place to ensure projects stay on track, vs. 39% of total respondents; and
- 55% of those from integrated oil and gas companies said their company culture is not focused on project management, although half said they do complete reviews at key project milestones.
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