Oil and gas sector needs to commit to long-term thinking to achieve meaningful cost cuts, says DNV GL

New research shows that the industry believes past mistakes are being repeated.

A majority of senior oil and gas professionals (56%) believe that the industry is repeating the mistakes of previous downturns and have concerns over the loss of jobs and experience and lack of efficiency, according to a new report published today by DNV GL, the leading technical advisor to the oil and gas industry. A new phase of cost management is needed, as nearly three quarters (73%) of senior oil and gas professionals globally are preparing their company for a sustained period of low oil prices. 

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 sector players¹, cost management is the top priority for 41% of respondents in 2016. The top three measures prioritized to impose stricter cost controls are:

• Tougher decisions on capex, down from 44% in 2015 to 31% in 2016, suggesting that opportunities for further capex reductions are limited.
• Prioritizing headcount reductions, up from 25% last year to 31% in 2016, signalling further job losses; and
• Increasing pressure on the supply chain, down from 31% in 2015 to 27% in 2016, indicating that suppliers have been squeezed as much as possible.

Elisabeth Tørstad, CEO of DNV GL – Oil & Gas, says: “With the low oil price, the industry has taken painful short-term cost-cutting measures by reducing the capex and headcount and squeezing the supply chain. Although 74% say they achieved their cost-efficiency targets last year and 65% believe the industry will be successful in cutting costs in 2016, not all parts of the sector have been able to achieve lasting lower cost levels during downturns. To prevent repeating past mistakes, real change is needed now - cutting complexity, increasing collaboration and driving standardization. These measures will enable the industry to adjust to the new reality and put it on a sustainable growth path for the long-term.” 

There are some promising signs that the industry is adopting longer-term thinking on cost management: six in ten (61%) respondents agree that operators will increasingly push to standardize their delivery globally, up from 55% in 2015 and 52% in 2014. 

Even in the current price environment, 49% say their company is taking a long-term approach to innovation and R&D. However, nearly one in five companies (18%) does not have a strategy in place to maintain innovation. The most common strategy for maintaining innovation with lower budgets is to increase collaboration with other industry players (45%). Nearly one in three (30%) plans greater involvement in joint industry projects in the year ahead. 

“Innovation and collaboration are even more important in this current price environment. It 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,” continues Tørstad. 

Other key findings include:

• The greatest barriers to growth in 2016 are the low oil price (63%), weak global economy (42%), uneconomic gas prices (21%) and growing regulatory burden (11%). Access to capital (16%) has also become more prominent in 2016.

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.