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Lean times in oil and gas

During the past year, the sustained reduction in oil price depressed earnings for most resource companies. For many expensive resource developments the collapse in oil price led to negative cash flow, reserves write-downs, and ultimately takeover or bankruptcy of the operating companies.

Kai Eberspaecher Senior Associate

by Kai Eberspaecher

Senior Associate, Brisbane

24 August 2017
LNG ship, tanker

The latest earnings season confirmed the impact on the sector. Merger and acquisition activity is increasing due to opportunities to acquire high-quality producing assets without any exploration risk, at cheap prices. The majority of companies however, need to reduce costs to remain in business.

This article illustrates a number of ways companies can improve their bottom line; exploring process improvements that increase efficiencies, and streamlining engineering and project execution by economizing designs and optimizing decision-making processes.

 

infographic

Figure 1: Frugal strategies for cost reduction

 

Process improvement

Example 1: Spud to put-on-production (POP) optimization

An operator was losing the opportunity to realize revenue on a drilling program of 400 to 600 wells per year. The operator’s issue was that recently drilled and completed wells were sitting idle, awaiting tie-ins. The underlying decline in oil price and potential legislative changes added further to the urgent need for taking action.

In working with the operator, the team established that the issue was not in the process itself but in defining clear roles and responsibilities. Furthermore, the operator needed to improve timely communication of status and actions.

The team approached the project with two goals:

  • Process improvement to develop a streamlined approach in construction with enhanced communications and clear accountabilities
  • Develop a system that allowed the operator to manage the process and track performance

In implementing the new process within the client organization, the team was able to align with the company culture, fostering ownership. Training and coaching at all levels in the organization were key in leaving behind a sustainable process. Improving communications between various departments within the operator broke down silos and optimized site selection upfront, during the staking of a well location. The assignment of a focal point for internal and external decisions relating to a specific location greatly improved ownership.

At project completion, the operator identified savings in excess of $1 million USD. In addition, the client was equipped with new tools and applied these to other areas — almost tripling the benefits of the initial project through continuous improvement.

Example 2: Production improvement

In this case, the operator was a large, independent exploration and production company. The company’s assets consisted of a significant number of oil and gas producing wells. Their strategy involved growth through an aggressive drilling program along with the acquisition of wells from other producers. The company’s growth also required optimizing production of its existing wells.

An assessment revealed the absence of lease operator production targets and standards, data integrity issues, a lack of usable operational performance reporting, and deficiencies in lease operator training.

The company faced the issue of attrition within the lease operator ranks through retirement, promotions, and resignations. The company realized they needed to affect behavioral change throughout the operator and foremen groups, implement enhanced management controls, and improve the operator skill base to absorb planned growth and lay the foundation for sustainable production optimization. They committed to implementing significant operational improvements without compromising safety.

Working collaboratively with the company’s asset team, the focus was to implement well production optimization improvements while minimizing downtime. Initially, a production optimization management system was designed, developed and implemented with broad client workforce participation. The system comprised key performance indicators aligned with corporate metrics and reporting requirements. In addition, production targets were displayed visually showing actual versus target performance. These metrics were collected in production reports for wells, operator routes, foremen and superintendent areas along with other commentary. Root cause analysis was used to augment well downtime reporting, and regular production review meetings focused on resolving root causes. Follow up actions were instituted.

To address the requirement for training, a lease operator handbook was developed that included safety information, standard operating procedures, best practices and quick reference guides. In addition, an electronic library including video clips of commonly performed tasks and safety considerations was instituted. By standardizing the work methods, roles and responsibilities were clarified and a new focus on continuous improvement was embedded. On this basis, formalized lease operator training was implemented using newly developed skills matrices, including the creation of a training coordinator role.

Having established the natural decline of the base wells at the start of the project, the team was able to measure that through these efforts, a 1% to 3% improvement in production above the baseline was observed. The company’s discounted return on investment was $15 dollars returned for every $1 invested.

Engineering and project execution examples

Example 3: Lean engineering

The operator required a new approach to remain competitive in a falling gas price scenario. Hundreds of well sites and reserves were at risk from failing to meet economic hurdles. The target was to reduce cost while maintaining safety, schedule and functionality.

The objective was to reduce cost and delivery cycle times to optimize well lease development cost. The team applied a Lean methodology to embed continuous improvement in the engineering lifecycle. Key to success was early stakeholder engagement, and building a lifecycle approach spanning engineering, project, operations and procurement. Despite being a technically led project, the change management component was very important to make the improvements sustainable and successful.

The team tackled the complexity of project execution by allowing design steps to progress in parallel, instituting clear roles and responsibilities within engineering procedures for specific locations and standardizing engineering deliverables. The approach of design once, use many times became the norm.

Furthermore, the team standardized on three basic designs for all development settings. Required designs became a variation of these three modules using smart standardization to great effect. The impact on the supply chain and maintainability increased productivity and lowered cost in the operations phase.

The operator was able to reduce CAPEX by more than 20% per well and full lifecycle costs by 15% per well, equating to a saving of more than $4 million for a 15 well program. Furthermore, given the redesigned processes, the teams were able to deliver engineering deliverables 30% faster than prior to the smart customization.

Example 4: Project portfolio management

The company was a downstream refining company and has been in business for a number of decades, and sought to improve the execution of its portfolio of ongoing projects. In addition, risk identification outpaced risk mitigation in the portfolio and needed to be addressed.

The team was able to set a target of reducing project cycle times by 15% without impacting safety, quality or cost. In the assessment, a joint team identified five focus areas and a number of key actions that were implemented within the client organization.

The first focus area addressed the visibility and communications relating to the project portfolio. The team decided to enhance the monthly reports by disseminating these further in the organization. Additional segmentation in the portfolio allowed identification of high-priority projects to ensure priority in their execution. Projects at risk were also identified and stored in a register. The second area targeted maintaining continuity in project execution, while decisions were made within the client’s value assurance framework. The measures taken were to release full funding for engineering activities in the scoping and front-end design of projects, as well as allowing critical path engineering to progress in detailed design prior to achieving full approval. The third area developed integrated schedules linking engineering activities to execution deliverables, to allow for simpler decision impact analysis. In addition, all project managers received formal project controls training to increase the capability in this area. In the fourth focus area, processes were simplified using Lean methodologies such as value stream mapping to achieve fit-for-purpose processes. This effort led, for example, to the consolidation of certain engineering and risk reviews and an overall reduction in process complexity. As a result, the fifth focus area clarified the role of the project managers in guiding the contractor organization.

A year on from implementing these changes, the project cycle times have improved by 25% and remained sustainable.

Key Learnings

To achieve sustainable results in an organization, firstly senior sponsorship is required to drive accountability of an improvement. Secondly, most of the changes addressing communications and workflows require their implementation to center on mentoring and coaching staff and management in creating better habits, with clarity on roles and responsibilities.

In times like these, the industry has the opportunity and the mandate to look at the way it does business and implement frugal strategies to survive lean times —  and thrive when the commodity prices increase again.

View the SlideShare: Lean Times in Oil and Gas from Advisian

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