Navigating the Crude Cycle: 4 lines of attack for US E&P energy companies to achieve strategic cost reduction

Navigating the Crude Cycle10 strategic actions for US exploration and production energy companies

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IntroductionAmid volatile “how-low-will-they-go” oil prices, exploration and production (E&P) companies are facing strong headwinds. Learning from past cycles, it is likely the leaders will position themselves to win not by slashing costs across the board but by finding judicious ways to maximize production while bending down the cost curve. Accenture suggests 10 actions to consider now.



Strategic Cost Reduction – 4 lines of attack

1. Improve Productivity

Focus only on those (core) activities that contribute the most value to the asset, lean out processes, cross- functional collaboration, and use digital to automate as much as possible

2. Simplify Structure

Decrease people costs and complexity by delayering, aligning capabilities, and streamlining operating model

3. Lower Consumption

Rapidly reduce non-people costs by utilizing analytics and improving policies and compliance to decrease frequency and volume in key cost categories

4. Decrease Supplier Cost

Negotiate and realize better pricing by strategic sourcing, managing contract compliance and value-led costing

Fundamentally Reduce Cost Base while maintaining or improving Asset Reliability, Integrity, and Safety

1. Turn core suppliers into business partners.

Meaningful change in the cost base requires rethinking supplier relationships with a focus on mutual value creation. Once core suppliers are identified, longer-term agreements can be renegotiated for immediate benefit in return for continuing and expanding business. Revised agreements can include risk sharing, innovation and investment, and joint-performance targets and incentives.


2. Obtain more favorable terms with non-core suppliers.

Consider short-term tactics to help reduce costs and search for more favorable terms: increasing spot buying, extending payment terms, reducing safety stocks, moving maintenance, repair and operations inventories off the balance sheet (i.e., to vendors), and simplifying supply-chain processes and channels.


3. Maximize capital efficiency through workovers and targeted investments.

As capital availability declines, getting the biggest “bang for the buck” is critical. The efficiency of well workovers, along with careful portfolio evaluation, can help to optimize outcomes. Analytics can help companies reduce cost and downtime by identifying wells with the greatest potential to boost production. Analytical tools also can supply detailed data to help streamline planning and scheduling.


4. Flex your acquisition muscle.

Low prices lead to acquisition opportunities. Be ready to take advantage of the chance to reshape portfolios to appeal to long-term investors. The winners will move decisively with an eye to rebalancing asset portfolios rather than simply looking for bargains. Selective acquisitions can help build portfolios that attract additional investment capital.


5. Harvest data to improve production.

It is tempting during downturns to put the brakes on investment. But companies can use this time to increase uptake of digital data and boost field-operations productivity. Examples: Mobile-enhanced field workers can maximize productivity through route prioritization, asset information and status. Predictive analytics can be used to reduce equipment downtime.


6. Make scale a genuine advantage.

As they grow, organizations can become lethargic, weighed down by their size. To be both large and agile, Accenture experience suggests structuring certain functions to have a broader reach. Greater centralization allows information to be shared and decisions to be made that benefit the whole organization rather than separate business units.


7. Restructure functional operating models for long-term advantage.

Reviewing organizational structure, with an eye to enhancing efficiency and effectiveness, allows for improved long-term outcomes in support functions:• Consolidate functions to bring together similar capabilities. • Relocate consolidated functions to cost-advantaged locations and consider outsourcing options.• Continue to integrate prior acquisitions—whether assets or full businesses—to streamline and

standardize processes.


8. Modify headcount with a scalpel, not an axe.

Companies need talent-retention strategies and training to mature young talent for the better times ahead. When necessary, make cuts judiciously to the bottom-performing 10 percent of the workforce. Some of the best talent may be open to a change, so consider backfilling a portion of reductions with top talent.


9. Upgrade your planning processes.

Simplify the process to consider multiple scenarios and to update more frequently.

Consider:• Running multiple scenarios at several price

points. Build in leading indicators that enable identification of emerging scenarios to prompt decision-making and action.

• Replacing the traditional annual planning process with a rolling, eight-quarter outlook. Planning that is refreshed quarterly can lead to better decision-making.


10. Zero in on value.

Take a hard look at which activities help deliver improved results vs. those that merely support core activities. This exercise helps to prioritize where limited resources should be refocused. The objective is to drive the most value to the organization while identifying capabilities that might be delivered more effectively through an offshore or outsourced model.



Strategic Cost Reduction – 4 lines of attack

1. Improve Productivity

Focus only on those (core) activities that contribute the most value to the asset, lean out processes, cross- functional collaboration, and use digital to automate as much as possible

2. Simplify Structure

Decrease people costs and complexity by delayering, aligning capabilities, and streamlining operating model

3. Lower Consumption

Rapidly reduce non-people costs by utilizing analytics and improving policies and compliance to decrease frequency and volume in key cost categories

4. Decrease Supplier Cost

Negotiate and realize better pricing by strategic sourcing, managing contract compliance and value-led costing

Fundamentally Reduce Cost Base while maintaining or improving Asset Reliability, Integrity, and Safety

ConclusionEffective leaders use times of crisis to make changes that might take years to accomplish amid organizational inertia when times are flush. Seize the opportunity and take decisive action to improve margins, increase agility and position your company for high performance.



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Navigating the Crude Cycle: 4 lines of attack for US E&P energy companies to achieve strategic cost reduction

Technology

cost base

cost curve

strategic cost reduction

noncore suppliers

asset portfolios

key cost categories4

favorable terms

capital efficiency