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Seven fundamentals

Published:  25 June, 2015

The recent report from PwC and The Oil & Gas Industry Council comes as no real shock to the industry.

The new cross-sector efficiency report highlights how the recent drop in oil price from $110 to a low of $45 a barrel, before rallying at $60, has brutally exposed a substantial escalation in cost base across UK oil and gas operations. Most businesses within the industry recognise or are now beginning to, that oil and gas firms must learn lessons from other UK industries and fundamentally change the way they operate if they are to successfully compete for international investment and maximise recovery across the UK continental shelf (UKCS) over the next 25 years.

The report highlights some genuine concerns that would be difficult to argue against. While some firms are taking action to implement sustainable, long term changes, the concern is that there are still many situations where short-term tactical measures to cut discretionary spend or apply familiar solutions from previous down turns are the norm. The reality is that making long term, structural change takes time and is not easy. 

So what is the solution that could help hasten this much-needed industrial transformation across the UKCS, enhancing collaboration, increasing trust with partners and across the supply chain, and delivering widespread efficiencies?

The report authors from PwC have set out seven fundamental steps that could turn the tide and secure a brighter future for the industry – and crucially these approaches have been tried and tested by many other leading organisations including multinational brands such as Rolls-Royce (aerospace), Bombardier and Jaguar Land Rover.

In the 1980s to 2000s, four heavy engineering based industry sectors - aerospace, automotive, chemical, and rail - dealt with a similar range of challenges, such as: significant safety requirements; extended periods of considerable cost pressure; economic downturns impacting trade; and increasing international competition for investment. 

Their responses were transformational and this report’s seven fundamental steps capture the key tactics used to dramatically cut their cost base and more effectively manage performance.

These include:

  • Building leadership teams with a strong, compelling vision for cultural and operational change that can engender trust inside and out.

  • Treating operations as a strategic asset that can provide the basis of competitive advantage rather than simply a cost of doing business.

  • Addressing the core/non-core dilemma – defining and building world-class capability across core competencies and collaborating with organisations better placed to deliver those that are non-core.

  • Boosting performance management by understanding and measuring what is important and using the data to drive change and improvement.

  • Developing an innovation culture and managing change effectively – constantly looking for better ways of doing things, and innovating across technology and processes.

    I have seen for myself how these seven steps have transformed heavy engineering in the UK and in many respects is still a process taking place in order to catch up with competitors in the US and Germany. However, while the seven fundamentals will go a long way to helping firms secure sustained efficiencies of up to 30-40%, the guideline target set by the regulator, the report authors do not believe they are sufficient on their own. Two other factors are crucial to maximising improvement potential and delivering the step change needed across the North Sea:

  • Encouraging sector wide collaboration between firms and across the supply chain will not only eliminate duplication, create scale and reduce costs, but will ensure the industry is able to swiftly react to future opportunities as they present themselves.

  • The report also highlights the influential role of a progressive regulator in helping firms implement best practice and successfully address market shifts, something that has been prevalent in driving change within the automotive, aeronautic, chemical and rail industries.

In my opinion, the essence of the report is sound but these fundamental changes need to have industry wide support and the desire for transformation. Only time will tell if there is both.

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