Meaningful long-term thinking needed on cost cutting, says DNV GL.
Despite the already difficult North Sea market and painfully high cost levels, a new research report published today by DNV GL reveals that more short-term cost cuts are expected in 2016. Sixty-five per cent of UK respondents think mistakes made in previous downturns are being repeated, with more than twice as many UK respondents (30%) concerned about layoffs and loss of experience than the global average (14%).
According to A New Reality: the outlook for the oil and gas industry in 2016, a DNV GL report based on a survey of 921 senior professionals in the sector1, investments in CAPEX, OPEX and R&D are expected to be cut even further in the UK in 2016, deeper than at a global level. A decreasing headcount this year is also expected by 58% of UK respondents compared to 51% globally. However, increased spending on improving the efficiency of assets in operation is expected by 39% of those surveyed.
Eighty-one per cent of UK respondents say they were highly or somewhat successful at achieving cost-efficiency targets in 2015, compared to 74% globally. Nevertheless, 12% expressed concern about cost control and lack of efficiency. More than half (56%) stated their organization has taken a short-term approach to headcount.
Hari Vamadevan, regional manager, UK and West Africa, DNV GL – Oil & Gas, says: “The downturn is being felt by the global industry, but nowhere more acutely than on the UK Continental Shelf (UKCS). The previous long period of escalating prices has made the drop particularly painful in a region with ageing assets, high costs of production, high taxation and relatively high capital expenditure for new fields.
“As an industry, we have taken quick, cost-cutting action, which has been particularly apparent through a raft of major job cuts over the past 12 months, and further short-term measures are expected, despite concerns over the skills drain. To have sustainable growth in the ‘new reality’, the oil and gas sector will have to accelerate meaningful and healthy cost-management changes – that means reducing complexity, boosting innovation, enhancing collaboration and extending standardization.”
The research shows that the downturn is leading to more joint industry projects and this year 22% of UK sector professionals expect their company to collaborate with other firms to deliver cost savings. Increased collaboration is expected by 46% of respondents to be the most prioritized strategy for maintaining innovation.
Subsea (39%) and EOR (28%) are envisaged to be the highest impact new/emerging technologies, followed by unconventional oil extraction (25%). However, 42% of respondents expect spending on R&D and innovation to be cut even further in 2016; 6 percentage points more than at a global level.
Elisabeth Tørstad, CEO of DNV GL – Oil & Gas, says: “While the industry is understandably preoccupied with generating shorter-term value, we must also keep an eye on where longer-term value and permanent efficiency gains can be achieved. Nearly one in five companies globally does not have a strategy in place to maintain innovation and R&D investment is expected to fall during the year ahead.
“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,” continues Tørstad.
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.