6 Ways to Adapt Quickly to Low Oil & Gas Prices03/23/2015
Lowering operating expenses is a quick ticket to free cash flow for upstream firms
This is the first in a series of six blog posts that covers the six key ways for upstream oil and gas companies to adapt to today’s low-price environment. This post addresses the topic of reducing operating costs.
Upstream oil and gas operators are going through a difficult transformation. Over the past few years the industry has been ramping up debt to lease and drill as quickly as possible. Now with low oil prices, companies are squeezed to generate free cash flow to service the debt and remain viable and profitable. In the short term, operators need to increase positive cash flow. Longer term, they must transform their operational model to become sustainable with current prices and drive profitability going forward.
In working with our clients and researching industry trends, P2 has identified six ways to adapt to the low-price environment as well as best practices for each way to adapt. These best practices help E&P organizations drive free cash flow and earnings while ensuring sustainability and profitability. The six ways to adapt are:
- Reduce operating costs
- Increase production
- Better manage capital expenditures
- Streamline A&D activities
- Reduce risk
- Make back-office processing more efficient
I will discuss each of these in more detail in future blogs. Today, I will focus on the first point – reduce operating costs.
Lowering operating expenses is probably the quickest way for companies to increase free cash flow. At the same time, it is equally important that the reductions not impact the performance or production of your facilities. For example, many companies are closing field or district offices and laying off staff. These will certainly reduce costs, but they may also lead to lower revenue through decreased production. Below are two best practices that help drive lower costs without negatively impacting production.
Many companies have very defined departmental boundaries, including those that limit workers’ ability to access data and visualize the operation. LOE is a prime example of important data that often is not readily available to the operations team and pumper. For example, the pumper will know how much chemical is being used but not the cost of chemical per barrel produced. Having this visibility between the front and back office can immediately lead to better business decisions and more efficient chemical usage in the field. A leading best practice is to have this data available in the field on mobile tablets and phones.
Building on the mobility story above, it is critical that pumpers have an easy-to-use collection device and visibility into the operations – not just LOE, but production and operating conditions as well. Having this visibility enables pumpers to focus on the high-value activities and exceptions. One company I worked with experienced a 4% increase in production/sales by having SCADA data of down wells and rates available to its pumper before he left on his route. This enabled the pumper to utilize his time more effectively and focus on the down and under-performing wells. Together, operational visibility and the solution’s ease of use drive upward of a 10% increase in the number of wells a single pumper can manage. The next evolution of this best practice is to have an exception-based route process that includes automated well and facility monitoring that feeds a process to focus pumper time.
My next blog will cover the second item on our list, increasing production. So be sure to check back in next week.
About the Author
Tim Wadle, a Director of Product Management at P2, has more than 18 years’ experience developing software solutions for oil and gas companies and has served on many industry committees along the way, including the American Petroleum Institute’s Committee on Production Measurement & Allocation and the Energistics PRODML Executive Committee. His work has been published in Oilfield Technology magazine and he has also been a featured speaker at the Offshore Technology Conference. When he’s not behind his desk, you’ll likely find Tim either skiing one of Colorado’s slopes or biking one of its trails.