Oil Price Volatility: How Can Oil Companies Responsibly Reduce Cost to Make More Profit?

The volatility of oil price in the last few years has continued to put pressure on government’s revenue projection and on profit margins of the oil and gas companies. The global shift from crude oil to renewable and clean energy powered technologies, such as solar and electric cars, has mounted concerns over the future of Nigeria’s oil-dependent economy. Soon, the entire global community will adopt the clean energy source not only for being responsible to the planet but for the cost advantage of clean energy.

Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, threatened that the country would halt oil production if the cost of operation remains high. The question is, what innovative approaches are possible in the oil and gas sector to balance operations and maximise profitability in the face of profit decline? Here a few quick ways via which we think this might happen.

Cost reduction strategies for crude oil production

Merger and collaboration by indigenous oil firms

As ways of cutting cost, independent operators could decide to go into merger or strategic collaboration to take advantage of the economies of scale and reduction in the cost of production.

Utilisation of local capacity

The country needs to develop local capacity in its quest to reduce cost of production. Without the development of local content and engagement of local capacity, the country will not be able to achieve operational excellence.

Benchmarking costs and expenditure with industry peers

Oil and gas companies can reduce their cost of doing business by benchmarking costs and expenditure with industry peers to see where they can reduce capital and operational expenditures. These include reducing the cost to acquire or upgrade physical assets such as property, industrial buildings or equipment; and fund spent on day-to-day basis in order to run a business or system.

Cost-effective procurement strategy

Additional savings could be achieved through scaling-up of supply chains for volume discounts and building long-term partnerships with contractors. With long-term agreements between organisations and their business partners, there is assured consistency in terms of cost and availability.

Effective time management

Cost is reduced when operating teams, contractors and owners collaborate to reduce the time needed for final project delivery. This does not necessarily mean that each group should try to maximise their own speed. Rather, they should identify cross-functional optimisation strategies to reduce wasted time and ramp-up productivity for the project as a whole.

Some experts have argued that cutting cost does not translate to operational excellence. According to the General Manager, West Asset, Seplat Petroleum Development Company Plc, Chima Njoku, “We may cut cost and end up polluting the environment”.

Therefore, consideration of responsible actions towards the entire ecosystem should be paramount in whatever strategy an oil and gas company adopts in its quest for cost reduction.

Source:

  1. Stakeholders prescribe cost reduction strategies for crude oil production. Guardian Newspapers. https://guardian.ng/business-services/stakeholders-prescribe-cost-reduction-strategies-for-crude-oil-production/
  2. IHS Costs Solution for Oil & Gas Industry. IHS Markit https://www.ihs.com/products/cost-solution-oil-gas.html
  3. Economies of scale: How the oil and gas industry cuts costs through replication. Economist Intelligence Unit Limited 2011 https://www.eiuperspectives.economist.com/sites/default/files/Oil%20and%20Gas_%20Economies%20of%20Scale.pdf