Why Alberta Oil patch Needs Cost Reduction More Than Ever Before
Plunging oil price had already crimped the revenue of the owner companies in the Alberta oil patch which resulted in reduction of planned capex in 2016. On top of that came the devastating Fort McMurray fires which has, as per some estimates, resulted in more than $1 billion of oil sands production lost and counting. If that was not enough, potentially crushing burden might have to be borne by oil and gas companies in Alberta (and other Western Canadian provinces) to support the ambitious commitments made by Canada in Paris last December to reduce greenhouse gas emissions.
In view of the abovementioned situation, each oil company is assessing its own revenue based on different WTI numbers and thereby its ability to spare capital for its new projects. The owner companies are understandably hesitant to commit capital for new projects unless there is stability in oil prices at a level that supports their financial plan. Almost intuitively, the company bigwigs are looking for more ways to reduce costs. The top global oil companies have reportedly reduced capex in 2016 by more than 30% as compared to 2015.
Cost cutting is being driven mainly through deferring new capital projects, cutting non-essential expenditure and layoffs. While this provides interim mitigation to the balance sheet, the fact remains that the oil companies will necessarily have to implement new projects to drive revenue growth and profitability. It is also getting obvious that WTI price will stabilize towards end of 2016 and inch slowly upwards north of $50/barrel in 2017. Thus, the revenues will increase and pressure on capital for new projects will ease.
So, what should the companies need to do in the new reality world of lower-for-longer and limited capital? This question brings us to a very important point: Companies will have to change the way they have been implementing their new projects as of now – whether new capital projects or sustaining capital projects. It should be pointed out here that whereas most of the new capital projects will be a combination of greenfield and brownfield, the sustaining capital projects will be mostly brownfield in nature.
Next, how should the owner companies change their way of implementing their projects (new or sustaining capital projects)? The answer is: The owner companies will need to find innovative ways to implement cost efficiency, in a holistic manner. Cost efficiency could be achieved through one or the combination of the following:
· Cost reduction
· Cost avoidance
· Performance/Value Improvement
· Cost Containment
The above can be achieved without doubt – it just needs a structured, systematic and patient approach and most likely this would need help of specialist folks who can parachute in to the project implementation group of the companies for a limited period. Goal of achieving cost efficiency is, at a high level, akin to goal of weight reduction – abstract and devoid of specifics. The specialists alluded to above can help achieve the goal of finding cost efficiency by working with the key personnel of the owner company, identifying areas where cost and work efficiency can be found, and then developing suitable strategies and specifics to derive those efficiencies.
CEPEX is equipped to provide support to owner companies in finding cost and work efficiency. It is up to the owner companies to make the move and take advantage of the expertise CEPEX brings to table.
What are your views about finding cost and work efficiency in regard to new projects?
Partho Mukherjee is Owner Principal of CEPEX.