Pipeline Perspectives: Four Opportunities for Effectively Managing the Bust Cycle

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Robert SilversOil prices have fallen 60 percent in the last 12 months, continuing the boom and bust cycle that has been a hallmark of the oil and gas industry since the 19th century. Based on the market’s current supply and demand balance, many pundits predict prices will not rebound within the next 18 months. While planned pipeline completions in 2016 rose 64 percent compared to last year, long-term plans beyond this year show a sharp decline in investment.

To meet low price commodity challenges, pipeline developers need to better manage their processes to control costs and deliver more predictable pipeline development.

There are several opportunities in the oil and gas sector where organizations can focus their efforts, including supply chain, maintenance, advanced analytics and cyber security.

Supply Chain

Oil and gas organizations generally lack advanced and sophisticated supply chain capabilities that allow them to manage business performance. Many of the functions that comprise the supply chain — procurement, logistics and materials management — remain siloed. This creates inefficiency in managing supplies and inventory, resulting in:

• An inconsistent ordering process that lacks the advantage of scale in ordering.
• A lack of visibility/tracking of
ordered components.
• Inventories that contain too many of the wrong parts and not enough of the right ones at the right time.

The nature of oil and gas as a high-volume, low-complexity industry provides significant opportunities for cost elimination and efficiency gains. Such improvements support greater operational availability through cohesive process development, within the original equipment manufacturer and at a macro level through shared services models such as third-party logistics and material sequence centers. Oil and gas companies that have improved their supply chains have seen costs drop by 5 to 30 percent.

Preventive Maintenance

Downtime related to failed equipment and leaks can cost hundreds of thousands of dollars. Given the capital-intensive nature of the industry, it comes as a surprise that many organizations have not created an effective preventive maintenance program to address these problems, by implementing:

• A metrics system that provides real-time data on maintenance, work orders, downtime hours per month and mean time between failures, etc.
• A bill of material documentation for all assets and spares.
• Maintenance schedules for all key assets is complete and readily available.
• Trained resources and schedules to execute all maintenance activities.
• Associated software to help manage and track performance.

Many oil and gas companies are now implementing programs such as zero-based, condition-based or process-based maintenance. While these complex programs have many benefits, organizations must first ensure that they measure and address the basics of a preventive maintenance program.

Advanced Analytics

Recently, a lot of fanfare has surrounded the Digital Oil Field, which affords oil and gas companies numerous opportunities to improve operations and reduce costs. The concept leverages recent advances in big data and advanced analytics to provide unprecedented tools for diagnosing, predicting and addressing potential issues. While firms can apply advanced analytics and big data to almost all aspects of the oil and gas value chain, implementing analytics in supply chain and maintenance creates synergistic improvements and delivers the greatest benefit.

For example, companies with the ability to analyze larger data sets and leverage new analytic techniques will have access to greater insights regarding asset performance. Identifying ordering patterns in supplied parts leads to more effective contract negotiation and a deeper understanding of costs, enabling companies to better manage suppliers. By installing sensors in hazardous situations, organizations can leverage advanced analytics of previously inaccessible data to identify unknown conditions that result in asset failure. Companies that take advantage of these concepts will have an opportunity to improve performance and reduce costs.

Cyber Security

As the oil and gas industry leverages more sensors and technology to manage and control their processes, cyber security emerges as a new concern. While ensuring these systems remain secure does not reduce costs, it will mitigate any significant risk or exposure that attacks may cause to operations that would result in significant costs.

The oil and gas industry faces two primary types of attacks: information technology systems and operational systems. IT systems attacks have been popular for many years, but the threat of operational systems disruptions became fully realized in 2010 when the Stuxnet worm was discovered. The pervasiveness and accessibility of devices and networks requires careful consideration, always planning for the worst and staying one step ahead of malware. Although the return on investment may seem limited, investing in security systems is as essential and critical as performing preventive maintenance.

To address these challenges, companies need a pragmatic, integrated, and coordinated approach, coupled with an implementation that leverages cyber security management systems to protect from compromise, detect malicious attempts and bring about the recovery of the system to a safe and secure state in the event of an attack. Locked-down devices, networks and systems are a necessity even if they inconvenience users.

Conclusion

The energy industry has been through a number of boom and bust cycles over its history. Most of the major oil and gas companies, along with their suppliers, tend to react to these cycles in the same way: By reducing capital expenditures, eliminating low-risk investment opportunities, seeking concessions through the supplier chain and laying off personnel.

This current cycle appears to be more severe. For the first time, many of the supermajors are not fully replenishing their reserves as a means to reduce costs. Companies that can effectively address these issues in the short term will be well-positioned for more prosperous and long-term, predictable performance.

Robert Silvers is managing director of SSA and Co., a global management consulting firm.

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