Operational Excellence: A Key to Prosperity in Disruptive Markets

Crude oil and natural gas are predicted to remain the principle sources of energy worldwide through 2030, and developing country demand is likely to drive consumption up 50% by then (Daniel Yergin et al).

New technology applied to production of “tight” oil has reversed the decades-long decline in US oil output and may limit the upside in prices, thanks to a boom in places such as the Bakken shale in North Dakota and the Eagle Ford shale in Texas. The possibility of price reversion to the mean, triggered by potentially vast new sources of supply, suggests that firms in the upstream segment of the oil industry should structure their business to be able to operate profitably at a price below $32.50/bbl (the median inflation-adjusted price since 1970).

Natural Gas accounts for almost a quarter of US energy consumption. Currently, the monthly average price of gas for delivery at the Henry Hub is below $2.30 (its lowest inflation-adjusted price in 16 years). Some producers are truncating or postponing drilling programs in cases where the plummeting price of natural gas has driven projected ROI below target.

Yet the discovery of enormous new gas supplies, which may drive prices even lower, could precipitate a great change in the global economy, opening enormous opportunities to domestic producers who can rise to the challenge.  The US, the “Saudi Arabia” of natural gas, can flip from a large energy importer to a large exporter.

Royal Dutch Shell’s chief executive, Peter Voser, told the Financial Times that Shell has more than 40,000Bn cubic feet of gas reserves in the US and Canada already and it was “now time to deliver that”. He added that “Shell’s priorities were bringing down production costs and maximizing revenue for the gas…we have enough on our plates concentrating on those issues.”

From integrated majors like Shell to energy producers of all sizes, the factor that will most likely differentiate the victors from the victims of such turbulent and disruptive markets will be operational excellence.

Operational excellence involves identifying and removing root causes of any effort that does not add value to the end-to-end business process. Removing activity that slows down the outlay-to-cash cycle or which creates avoidable waste and rework enables the enterprise to:

  • extract more volume of salable products at lower cost
  • acquire the agility to rapidly adjust product mix, turning price volatility into opportunity
  • accelerate revenue and profit by bringing new developments, techniques and  practices to market much more rapidly

Typical areas in which operational excellence can shorten cycle time, reduce errors and add value include:

  • Faster permitting for land use e.g. geophysical exploration, drilling, production facilities and pipelines
  • Faster cycle times and fewer errors with synchronized inputs, streamlined hand-offs and clearly defined decision filters through appraisal, drilling, production, development, transportation, rehabilitation and decommissioning etc.
  • Bridging communication gaps between strategic planners and personnel executing tactics to reduce cycle time and rework in the Spud to Rig Release cycle
  • Applying Lean principles to reduce Rig Move to Spud cycle time
  • Reduced rig cost and accelerated readiness for POP through use of KPI, COL & BRT tools to ramp up multi-well drilling programs
  • Faster commissioning of production facilities with Lean, SMED, standardization, Poka-Yoke and 3PC collaboration
  • Improved maintenance planning including more effective leverage of existing Computerized Maintenance Management Systems for radically higher availability of production plant and equipment and faster “Formula 1” shut-downs
  • Significantly improved equipment uptime and production output while reducing lost time injury incidents through formal assessment and skill gap training for all levels of Lease Maintenance personnel (high proportion of new hires in areas of labor shortage)
  • Additional improvements in safety, cost reduction and equipment availability through Route Optimization enabling more effective deployment of Lease Maintenance personnel in areas containing multiple wells and/or wide geographical dispersion
  • Cost reduction through superior Supply Chain Management and Demand Management
  • Shorter time-to-market with accelerated revenue streams due to elimination of indeterminism from the R&D process

Process Value Management

Companies in the oil & gas space today could benefit from analyzing and identifying areas where the highest positive impact can be made in the organization, and from the application of relevant tools and methodologies that transform mundane systems into synchronized, streamlined end-to-end business processes that consistently and punctually deliver value to the enterprise and its customers.

The outcome is a seamless end-to-end business process with minimized waste, generating faster and better results, using fewer resources.