Australian oil and gas sector must accelerate meaningful cost cutting, says DNV GL

Currently job cuts are the key strategy to control costs in 2016.

A new phase of cost management is needed as three-quarters of senior oil and gas professionals in Australia are preparing their company for a sustained period of low oil prices, according to new research published today by DNV GL, the leading technical advisor to the oil and gas industry. Short-term measures to cut costs are evident, with around a third of respondents (32%) prioritizing headcount reductions in 2016 to impose stricter cost controls.

According to A New Reality: the outlook for the oil and gas industry in 2016, a DNV GL report based on a global survey of 921 senior professionals in the sector¹, more than three-quarters of Australian respondents (76%) stated that their company had met cost-efficiency targets for 2015. However, nearly nine in ten Australians asked (89%) stated that cost management will be a key corporate priority for the year ahead, in line with global opinion (88%).

Tougher decisions on CAPEX are the top priority to impose stricter cost controls for 37% of Australian respondents, compared to 33% globally. After headcount reductions, nearly a third (29%) of the Australians questioned plan to optimize the production efficiency of existing assets.

Respondents tend to lean away from standardization, with just over half (53%) believing that operators will increasingly push to standardize their delivery globally, compared to 61% globally. A minority (45%) believe their organizations will achieve greater standardization in tools and processes, compared to 59% globally.

Richard Palmer, country manager for Australia, DNV GL – Oil & Gas, says: “With the low oil price, a high number of projects have been delayed or cancelled. The industry has taken painful short-term cost-cutting measures by reducing headcount and squeezing the supply chain.

“The sector must accelerate meaningful cost-management changes that do not compromise safety and which enable Australia to adjust to the new reality. That means cutting complexity and increasing collaboration and standardization, which will put the industry on a sustainable growth path for the long-term.”

The main strategies to maintain innovation within a cost-pressured environment are to increase collaboration with other industry players (42% compared to 45% globally) and greater involvement in joint industry projects (39% versus 30% globally).

Elisabeth Tørstad, CEO of DNV GL - Oil & Gas, added: "While the industry is understandably preoccupied with generating shorter-term value, we must also keep an eye on where longer-term value and efficiency gains can be achieved. Nearly one in five companies globally does not have a strategy in place to maintain innovation.

"Innovation isn't just about finding the breakthrough technologies - although that's important too - it's also about making things simpler and more efficient and ultimately helping the industry to safely cut costs. At DNV GL, we are continuing to invest 5% of our revenue in R&D as we see this as a key enabler for sustainable long-term competitiveness,” she continues.

Other key findings of the report include:

• Fewer than four in ten of the Australian respondents believes their organization’s response to the downturn has primarily focussed on generating longer-term value in headcount (36%) innovation/R&D (38%) and overall cost base (38%), all below global averages.
• Nearly six in ten respondents (59%) saw a weak global economy as a barrier to growth, with 56% stating that uneconomic oil prices will affect business development.
• Eighty-eight per cent stated that their company will increase consolidation within the oil and gas sector in 2016.
• The survey found that FLNG is the new/emerging technology to make an impact on the wider oil and gas industry – 35% cited this technology as the most important one, compared to 23% globally.

1. A New Reality. the outlook for the oil and gas industry in 2016 is an industry benchmark study from DNV GL, the leading technical advisor to the industry. Now in its sixth year, the programme builds on the findings of five prior annual outlook reports, first launched in early 2011. During October and November 2015, we surveyed 921 senior professionals and executives across the global oil and gas industry. More than a third (35%) of respondents work for oil and gas operators, while 60% are employed by suppliers and service companies across the industry. The remaining respondents come from regulators and trade associations. The companies surveyed vary in size: 40% had annual revenue of USD 500m or less, while 14% had annual revenue in excess of USD 10bn. Respondents were drawn from publicly-listed companies and privately-held firms. They also represent a range of functions within the industry, from board-level executives to senior engineers.