Oil Industry Ripples

Duncan MacKenzie-Williams
The continued fall in crude oil prices has altered the financial dynamics of the oil industries.

The oil price collapse has resulted in a high level of uncertainty, reflected in company balance sheets. After years of relative price stability, investor confidence in the oil and gas sector has dropped, and it’s unclear whether this is a long-term downward structural adjustment in the price of oil or a short-term temporary correction.

The next year will certainly be challenging for oil companies, oil-producing countries and global policymakers. Oil and gas companies are prudently responding by cutting budgets in an effort to reduce spending within sharply diminished cash flow.

Although the largest players are better able to withstand oil-price volatility when planning their investments, a significant number of exploration and production projects have inevitably been shelved or put on hold.

Oil and gas companies are prudently responding by cutting budgets in an effort to reduce spending...

Smaller companies and marginal producers are clearly more vulnerable. Not only does a low oil price put pressure on oil companies, it also creates a ripple effect through the supply chain and beyond.

Maintaining a state of readiness, while trying to do more with less money, are likely to be the watchwords for oil-dependent companies at this time.

As the industry moves into a rationalisation phase to weather the present situation, Faithful+Gould can lead cost optimisation strategies that centre on leaner processes and higher commercial agility in supply chain and contracts.

For some companies, this will be a good time to carry out internal assessments, reviewing project management office functions, to determine whether these are working effectively with the limited resources available. Uniformity of processes, clarity of roles and transparency and efficiency can be usefully assessed.

It’s also a good time to review contracting strategies, ensuring that these are optimal and sufficiently robust to withstand a more adversarial climate that inevitably attracts claims.

Maintaining a state of readiness, while trying to do more with less money, are likely to be the watchwords for oil-dependent companies at this time.

Certain compliance-based operations, such as maintenance shutdowns, have to continue regardless of oil price variance. There is a focus on safety, maintenance and turnaround projects, to ensure that effective practices are used to control the overall cost of these.

Robust turnaround management needs clear project scope, effective project management, contractor engagement, and strong project controls. Many of the same project management reviews are relevant here, along with a specific readiness review for the turnaround, incorporating careful preparatory work. This will ensure that over-runs are prevented and costs minimised.

We are currently helping companies manage their existing workloads by categorising their work, developing priority and viability matrices. We have seen the rigour in the Stage Gate processes getting tougher as teams have to improve their business cases to get funding. Risk reviews are part of this process.

Performing comprehensive holistic or specific cost and schedule risk analyses, and using value engineering techniques to retain essential functions while reducing any unnecessary costs, are seen as key indicators that the teams are well prepared.

We are currently helping companies manage their existing workloads by categorising their work, developing priority and viability matrices.

We find that our clients want to identify where they can add value in their processes and make these more effective. They are looking for more creative ways to streamline the process of undertaking engineering and construction works. The financial constraints for many companies involved in the oil industry are creating a strong environment for innovation. Those companies using their talent to innovate are bringing about real change in the way they undertake projects, though continuing to prioritise safety and responsibility.

There is no doubt that cashflow reduction is making bidding margins tight. Contractors may have to resort to claims to make up their margins, previously covered in their overhead pricing. We are therefore also seeing more distressed projects appearing and we are supporting our clients in making cost effective plans for addressing these.

The support provided to major oil companies is just one area of our expertise in the rapidly changing energy landscape. Drawing on extensive experience with some of the world’s most challenging energy projects, we assist clients in meeting time, cost, quality and strategic project objectives.

Our international energy sector portfolio includes clients in downstream refining and chemicals, nuclear energy, renewable energy technologies, power generation, transmission, and infrastructure.

Written by

Duncan MacKenzie-Williams SVP, Sr Director II - Operations Contact me View my profile >