How Oil Companies Adapt to the New Normal of Low Prices

Posted by Rick Yvanovich

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Depressed demand and increased supply have caused oil prices to fall from over US$100 per barrel in July 2014 to $30 in February 2016. Even though prices have increased somewhat since then, with Brent reaching a five-month high of US$55.99 per barrel on September 15, many experts remain sceptical about the outlook of oil’s US$50-plus status1. Oil and gas companies, therefore, are bracing for an extended period of low oil prices.

There are a number of actions the industry has been taking to lessen the impact of this oil prices slide, ranging from cutting costs to deploying cutting-edge technologies.

How oil companies can adapt to low prices

1. Cutting Costs to Survive Low Prices

In the wake of declining oil prices, exploration & production companies find themselves scrambling to cut costs. From changing FIFO (fly-in, fly-out) rosters to sharing rental costs of drilling rigs, operators are aiming for a 20-30 per cent reduction in the cost of new projects2.

According to Wood Mackenzie, during the period from Q4 2014 to Q3 2015, most industry operators slashed their capital investments by up to 30 per cent, with those in the Middles East region being the only exception2.

These belt-tightening measures may help in the short run, but there must be a more sustainable approach that can ensure long-term success.

Read more: CFOs revamp sustainability performance with financial management systems

How Oil Companies Adapt to the New Normal of Low Prices

2. The Digital Oil Field

As other sectors, such as retail and manufacturing, have fully digitalised many key areas of their operations, oil and gas companies are also betting on emerging technologies like the industrial internet of things (IIoT), data analytics, cloud computing and mobility to improve their financial and operational performance.

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The market for digital oil field solutions, therefore, is expected to be worth more than US$30.7 billion by 20203, growing at a compound annual growth rate (CAGR) of 7.9% through 2019 and 5.6% up to 20244.

The concept of the Digital Oil Field involves the convergence of operational technology and information technology in order to eliminate waste, maximise productivity, and improve the profitability of oil and gas production, transportation and processing.

Digital Oil Field is made possible by the increasing ubiquity of low-cost sensors, availability of powerful analytics and high-speed wireless connectivity, and other advanced innovations in cloud computing and artificial intelligence.

Read more: A new robotic revolution in manufacturing

Examples of Digital Oil Field applications include predicting when a piece of machinery can break down and scheduling preventive maintenance accordingly, providing workers in the field with real-time information about potential hazards, remotely monitoring assets, and supporting collaboration across upstream and downstream operations.

According to IHS CERA, Digital Oil Field has resulted in production increases of 2 to 8 per cent, operating expense reductions of 5 to 25 per cent, and capital expenditure reductions of 1 to 10 per cent over the last decade6.

Technology alone, however, is not enough. “You can’t expect a sensor or a communications network to produce results,” John Elmer, executive vice president of Endeavor Management, a Houston-based consultancy, explains6.

How Oil Companies Adapt to the New Normal of Low Prices

3. Thriving in the New Normal

The impact of the current period of falling oil prices on upstream operators has been greatly amplified by the declining efficiency, ageing assets and escalating costs across the industry over the past few years.

According to EY, over half of worldwide oil and gas production comes from assets that have passed the midpoint of their life cycle5. Meanwhile, the number of barrels of oil equivalent per day (BOE/D) produced per US$1 million in the capital went down from 45 in 2008 to just 27 in 2012.

As low oil prices have become the new normal, energy companies have to adapt by fundamentally changing how they operate. Many industry insiders believe it’s past time for oil companies to start vigorously streamlining their operations2, and their financial management systems lie at the core of this effort.

TRG has identified four criteria of advanced accounting systems for upstream oil companies. Please refer to our next blog post to learn more about these 4 must-haves. 

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1. US Crude Passes 6-Week High, but Analysts Unconvinced of Oil's $50-Plus Sustainability. Sept 2017.

2. Oil price slide forces companies to rethink how they operate.

3. The next-generation digital oilfield. Sept 2017.

4. Bridging The Gap: The Digital Oil Field And Its Data. Nov 2016.

5. “Driving Operational Performance in Oil and Gas,” EY, 2015.

6. “Digital Oilfield Outlook Report,” Accenture, Oct 2015.

Topics: Financial Accounting Management Software

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 Rick Yvanovich
 /Founder & CEO/

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