Back to Menu
PROCEEDINGS, INDONESIAN PETROLEUM ASSOCIATION
Thirty-Third Annual Convention & Exhibition, May 2009
OPTIMISING COSTS IN THE CURRENT ENVIRONMENT
Stefan Petry*
ABSTRACT
It’s obvious that the recent fall in oil and gas prices
is having a major impact on the commerciality of
hydrocarbon resources. Development activity is
slowing down and, given the current worldwide
looming recession, it’s unlikely that we’ll such
levels of activity for the foreseeable future.
However, this slowdown does present an
opportunity to allow time and space to optimise
costs. With many companies having reaped the
harvest in recent years, perhaps now is the time to
invest these gains into improving internal
efficiencies in order to become stronger and fitter
for the future. The key will be to optimise cost to
ensure that any short term gains do not compromise
long term integrity of an asset.
Although benchmarking is useful, every operation
is different and the key is to develop an
understanding of the opportunity for a particular
asset and then implement changes which lead to
cost optimisation - a holistic approach that
facilitates understanding, fosters engagement and
sustainability, changes behaviours and actually
delivers optimal costs.
The paper presents a set of experiences and an
approach that allow companies to optimise their
operational costs in a sustainable way i.e. develop a
culture of performance management that allows
them to weather the storms ahead. It cites examples
– such as reducing maintenance costs by 18%,
reducing fuel costs by 15%, reducing materials
costs by 20%, reducing contractor costs by 25%.
All this has been achieved without affecting HSE,
production or long term technical integrity.
It is based upon not only on our work in oil and gas
but also from lessons we have learned from other
sectors such as manufacturing – many of whom
have not had the good fortune to enjoy record
operating margins in recent years.
* Renoir Oil & Gas
IPA09-E-203
INTRODUCTION
Renoir has undertaken many hundreds of
assignments focused specifically on improving
operational efficiency which, in turn, have led to
optimisation of costs. Many assignments have been
undertaken in the oil and gas sector – upstream,
downstream (including petrochemicals) and service
companies – and within the SE Asian region. Our
assignments both cover ‘analyses’ (i.e. analysing a
company to determine what needs to change and
quantifying the improvement potential) through to
full implementation of changes to deliver the
benefits.
Experience shows us that simply cutting costs
without changing underlying management systems,
business processes and behaviours is not
sustainable. Although this may deliver short term
gains, costs very quickly creep back in – and often
in an unmanaged way (e.g. increased hiring of
contractors. In addition, it is important to
understand which costs are impactible. For
example, cost of raw materials such as steel and
daily rig rates are by and large determined by
market forces. However, the consumption of
resources can be impacted. Improving efficiency
allows us to consume only those resources required
to achieve the business objective – whether it’s to
develop prospects or to produce from an existing
asset (such as a field or processing plant).
Therefore it is imperative that the underlying causes
of inefficiency are addressed. As the bulk of cost is
expended in the production phase of the lifecycle,
this the main focus of this paper. However, the
underlying principles can be applied to any activity
with the value chain – from exploration all the way
through to abandonment.
The manufacturing sector has learned the
importance of improving underlying efficiency,
whereas experience tells us that the upstream oil
and gas sector has some way to go to embrace
efficiency in terms of the activities in which it is
engaged. This is largely as a result of market
Back to Menu
pressure and the significant up front investment
required for oil and gas developments. Unless the
manufacturer has some unique or niche product,
quality and unit cost is the difference between
profitability and bankruptcy. However, for oil and
gas, the pressure is on to reach production as soon
as possible and to produce in a safe way. This drive
to produce often takes priority over efficiency.
METHODS
The methods used in our approach come within two
main phases of the cost optimisation effort – namely
the analysis and implementation phases.
Analysis
The first step in optimising costs is to understand
where the opportunities lie. In our experience, we
find that significant opportunities lie in all areas of
the organisation, from organisational structures
through to business processes and management
systems.
For the purposes of this paper, the focus is on
productivity, management systems, planning and
supply chain management. Each of these are
described in more detail below
a) Productivity
Productivity in this instance relates to the
proportion of ‘value added’ time displayed by
individuals working within the organisation – these
individuals can be employees or contractors. Value
added time refers to time that achieves the overall
objective of the task in hand. To take the example
of maintenance, value added time includes
obtaining parts from stores, undertaking the
maintenance activity, cleaning up and returning
tools/excess parts to stores. Non value added time
(NVA) would be searching for parts, rework
(repeating a maintenance activity that was done
previously but incorrectly), waiting for permits, etc.
Taking a sample of 10 analyses Renoir has
undertaken in oil and gas in the SEA region, we
typically find NVA values of around 30-50%. This
means that up to two thirds of a technicians time
can be wasted as a result of inefficient working
practices. Among the leading causes of inefficiency
are poor planning, excessive waiting times for
permits (typically at the beginning of the shift) and
poor time discipline (such as extended breaks).
Closely related to high levels of NVA is supervisory
effectiveness. In the same studies described above,
we typically find that where time spent on active
supervision is low (less than 10% of a supervisors
time actively supervising his team) then there are
high levels of NVA. Figure 1 shows a typical
example of this correlation.
b) Management Systems
The management system (also referred to as the
management control system or management
operating system) is key in ensuring that
performance is actively managed. Figure 2
represents key elements of a typical management
system – showing how forecasting, planning,
control and reporting relate to different time
horizons.
In many of our studies, we find that short interval
control is lacking. Short interval control is the
means by which performance can be assured ahead
of time. In the instance of costs, most companies
report actuals every month. As it would be too
onerous to report costs on a more frequent basis, it
is important however to control activities that drive
costs on a more frequent basis. For example,
contractor manhours can be measured on a weekly
basis and compared with a target figure so that there
is at least the chance to address variances prior to
month end financial reporting.
c) Planning
The effectiveness of planning is critical in ensuring
that resources are aligned at the time they are
required and that realistic expectations are set – as
the planning process goes across may functions, it
represents a key co-ordinating activity. Our studies
show that plans are often developed in isolation i.e.
without taking into consideration all required
resources such as operations (for permits, gas
testing, isolations etc) and services (such as
scaffolding and cranes).
Opportunities relating to planning are two-fold:
1) Developing a realistic plan. As well as omitting
supporting services, we find typically that job
times for standard activities are grossly
overstated by as much as 100% or more (i.e.
specified as needing twice as long as they
actually take).
2) Keeping to the plan. Best performers in the
manufacturing sector typically have 90%
Back to Menu
planned activities during the day. In the process
sector, this is rather less at around 70%. For the
oil & gas sector, we see planned versus
unplanned ranging from 20% to 50% - we
attribute to the desire to undertake work
immediately a problem becomes apparent,
regardless of priority.
Poor planning effectiveness significantly impacts
overall efficiency – low expectations are set,
backlogs increase and reliability suffers. To
maintain HSE and production therefore requires
additional resources over and above that truly
required.
d) Supply Chain
Supply chain in this instance relates to the provision
of parts, materials and services from outside of the
organisation – covering inventory management,
purchasing and contract management.
Figures 3.1 and 3.2 show a typical example of the
impact of poor inventory management. The study
shows an average of 148 days cover for short lead
time items – those items that are normally available
locally and are not specific to the oil industry. Not
only can purchasing costs be reduced but
warehousing costs can also be reduced as less space
is required to hold inventory.
Contract management also represents an area of
opportunity. Although most companies have
policies and tight procedures with respect to the
tendering process, we find that on-going
management of contract performance is lacking.
Figure 4 exemplifies weaknesses in managing
labour contracts – such regular reporting of
performance and auditing.
Implementation
The above discussion describes just some of the
opportunities available to optimise costs without
increasing risk to production, HSE or long term
technical integrity. Although these may be
recognisable by many companies, we find that
implementation of changes to realise the
opportunities is a weakness. Improvement
initiatives fail for a variety of reasons such as loss
of interest, lack of change management experience
etc. In particular, improvements are often
unsustainable as a result of lack of commitment or
engagement from a broad range of individuals –
such as operatives working at the point of execution
(supervisors, technicians etc.) – and not fully
implementing changes to management control
systems or business processes.
The high level change process shown in Figure 5 is
based on many years of experience in completing
successful performance improvement assignments.
The three main phases are summarised as follows:
- Definition. The definition stage allows a wider
range of individuals to understand the
opportunity by undertaking a series of studies
within their own area. By seeing the potential
for themselves, those who have responsibility
for an area of the business become engaged and
are more willing to commit to the improvement
target.
- Development. Once there is an understanding
of the potential, changes to working practices,
business processes and management systems
are developed again by those who have
responsibility for an area. Depending on the
scope of the improvement activity, changes may
be piloted (or ‘wet run’) in order to develop
further understanding of how the changes will
work in practice.
- Installation. The bulk of activity in this phase
is coaching and training in the new systems and
processes - the emphasis being on coaching to
ensure that changes are applied consistently.
As well as approach, it is also important to structure
the improvement effort appropriately. As implied
above, those who have responsibility for an area
must also lead the improvement effort. However,
staff in the line will not have the time to devote the
necessary effort to ensure that change is
implemented at the right pace. Figure 6 shows an
optimum improvement program structure – the roles
of each of the main groups are as follows:
- Steering Committee. The main purpose of the
steering committee is to ensure that the program
meets the business objectives and that barriers
to progress are removed.
- Management Action Teams. Comprising staff
on a part time basis, the management action
team leader will have direct line responsibility
for an area and will continue to perform his/her
main function throughout the change program.
- Task Force. Assigned on a full time basis to
the change program, the Task Force provides
Back to Menu
support to the individual management action
teams – in principle ‘working’ on behalf o the
management action teams.
RESULTS
The above approach has yielded significant benefits
for many hundreds of organisations across the
globe. Examples of benefits are as follows:
- Improving productivity by increasing value
adding time by 20%
- Reducing contractor costs by 25%
- Reducing payroll costs of 15%
- Reducing overtime costs by 35%
- Improving production efficiency by 5%
- Increasing ratio of planned vs unplanned
activities by 30%
- Reducing materials costs by 20%
- Reducing inventory values by 5%
In addition to the tangible results, other benefits
have accrued such as development of a continuous
improvement culture and less stress as activities
become more managed.
CONCLUSIONS
Every organisation has the potential to optimise
costs – regardless of how they rank with respect to
benchmarks. In order to develop the ‘case for
change, it is important firstly to understand the
improvement potential given the specific situation
and environment and secondly to implement the
required changes so that the improvements are
managed and sustainable.
However, there is a key distinction between
optimising costs and reducing costs. The former
requires a clear understanding of how weaknesses
in management systems, business processes and
structures are adding to the cost burden. It also
requires an approach that fosters engagement and
commitment from all levels of the organisation.
Back to Menu

Figure 1 – Correlation between Productivity & Supervisory Effectiveness

Figure 2 - Elements of the Management System for Maintenance

Back to Menu

Figure 3a – Inventory Management (High Usage Items)

Figure 3b – Inventory Management (High Usage Items)

Back to Menu

Figure 4 – Contract Management

Figure 5 – High Level Approach

Back to Menu

Figure 6 – Improvement Program Structure