When the oil price drops below a certain point, it simply stops being worth the investment required for operators to extract it from the sea bed. Operators might be not be able to control the oil price, but they can control their operating costs, and set therefore the level the oil price needs to be at for them to report a profit.
In the U.K., North Sea oil fields are estimated to start losing money below $50 a barrel, whilst in Brazil, some analysts estimate that the breakeven price is as high as $120 a barrel. Consequently, much of the oil currently produced from these fields is not worth the cost to produce it. In the short term, companies may try and weather the storm due to the high costs involved with stopping production. However, all indications point to an unpredictable oil price being the new normal, meaning that these fields are simply unsustainable in the long term.
In order to remain profitable, the oil and gas industry needs to dramatically overhaul its processes in order to reduce operating costs, and therefore become profitable at a lower oil price. Some of these changes are relatively simple, whereas others are more complex and difficult to implement.
Here we’ve outlined three of the most effective steps that operators can make to reduce their operating costs:
Throughout the offshore oil and gas industry, huge efficiencies and savings could be made if all parties applied a greater focus to pre-sanction and design phases. To achieve optimum results, operators need to adopt a truly holistic approach that applies to the entire plan, build and operate phases of a project. This would allow for the creation of robust and balanced synergies that not only lead to dramatically reduced operational costs, but also much greater certainty.
Breaking down silos:
The offshore industry currently has a deeply-entrenched silo mentality, which makes it difficult for valuable and useful information to be shared between different divisions of an operator, or even the wider industry. The result of this is huge inefficiency and productivity. Where there should be effective collaboration, operators and contractors are too often blindly following established processes that add increased time and cost. Most crucially, this means that mistakes are repeated and economic value is lost.
To combat this, operators would benefit from installing a central figure or group to provide an overview of where the pieces of a project fit together, and bottlenecks or miscalculations can be quickly identified.
The offshore industry has a long-established problem with over-specification. Far too many producers opt to use over-complicated components with all manner of “gold plating” when a much cheaper but equally reliable item could be bought off the shelf. This is a practice that may have been tolerated in the years of a high oil price, but is inexcusable in the new environment where every penny counts. Instead, operators must realise that significant savings can be made if they prioritise finding solutions for projects instead of defaulting to gold-plated options that include expensive features that are nothing made than unnecessary luxuries.