Standardization Is The New Hero In The Oil & Gas Survival Story
I have, in many of my previous articles over the last one year, mentioned how critical it is for oil and gas companies to build cost rationalizing strategies, given the prevailing slump in the sector. An effective cost reduction program must first begin with cost incurring areas, which may be hidden between layers of cap-ex and op-ex costs. One strategy which is being proposed lately by oil & gas consulting firms lately is the adoption of standardization practice as much as possible to reduce cost, the biggest challenge ahead, especially, of EPC companies. In fact, standardization is being propounded as a vital element of supply chain management strategies to release pressure from suppressed margins. Besides direct cost reduction, there is another inherent importance of standardization, or alternatively, following a certain standard. It leads to a certain basis for comparison or benchmark, which is very important during a project planning stage or to evaluate performance of a process or sub-process.
According to a global survey of senior executives in the oil and gas industry, conducted by DNV GL, 88% of respondents said that cost reduction would be a top or high priority for them in 2016, which was even higher at 93% for the publicly listed companies. The survey further goes on to establish that the supply chain optimization could account for 10-15% of the total 20-30% average costs reductions on projects. As I noted earlier, standardisation is being looked at as a dependable cost reduction strategy, the survey validates that it was a major theme last year. Almost half of upstream companies (44%) in the survey stated that they would increase standardisation. A starting point for many project planners is to adhere to some kind of international standards.
Overall, standardization approach is applicable in equipment or technology, processes and systems. Standardization in equipment can make for a large chunk of cost reduction potential. One possibility is where manufacturers produce standard equipments vis-à-vis customized, cost of production is lower due to economies of scale benefits, which may reduce the price for buyers eventually. Again, from procurement perspective, buyers can negotiate better if they are placing order for standardized equipment in bulk, besides saving administrative costs in case of multiple smaller orders instead of single bulk order.
Standardization, not only of equipment, but also process, is increasingly being seen by the industry as a way to reduce project cost over-run. By implementing standard processes, operations can be streamlined and made more predictable. For example, it takes 6-8 months between casting a subsea forging and delivering it to an equipment manufacturer. The time can be significantly reduced if those forgings are available in inventory. But, time and complexity are added by customized requirements, design approvals etc., which could eliminated with improved trust in the supply chain and a common set of standards.
Standardization in systems such as compression or pumping systems can make the monitoring and performance evaluation much better. As the industry is looking at moving towards imbibing elements of Internet of Things (IoT), remote data collection and assessment of performance data, followed by comparison across various nodes of operation, can become much more efficient.
There have been evidences that top oil & gas companies are indeed turning towards standardization to adapt better to the changing oil & gas market dynamics. Majors such as Statoil and Total all talked about reducing upstream project costs through standardization and replication of platforms and wells. Very recently, executive vice-president of a global EPC firm looking after operations in Middle East, said implementing standardized designs and adopting a modular approach to processing units can significantly reduce project budgets, project schedules and construction site work, by as much as 30%. There have been plenty of other examples where standardization is being adopted at a fast pace. One such area is designing of blowout preventers, which critical for improving operational and financial efficiencies. Even processing vessels are becoming increasingly standardized. Another niche area to look out for increasing standardization trend is going to be re-engineered, reusable or overhauled parts and equipment.
Large number of companies is operating across the hydrocarbons value chain, so the approach to standardization may be different for each, based on their scale, role and stage of project involvement. There are immense opportunities for standardization to help ease the margins in the oil & gas industry, during a time new landscape is being designed as companies are burning midnight lamps to devise and execute adaptation strategies.
According to a global survey of senior executives in the oil and gas industry, conducted by DNV GL, 88% of respondents said that cost reduction would be a top or high priority for them in 2016, which was even higher at 93% for the publicly listed companies. The survey further goes on to establish that the supply chain optimization could account for 10-15% of the total 20-30% average costs reductions on projects. As I noted earlier, standardisation is being looked at as a dependable cost reduction strategy, the survey validates that it was a major theme last year. Almost half of upstream companies (44%) in the survey stated that they would increase standardisation. A starting point for many project planners is to adhere to some kind of international standards.
Overall, standardization approach is applicable in equipment or technology, processes and systems. Standardization in equipment can make for a large chunk of cost reduction potential. One possibility is where manufacturers produce standard equipments vis-à-vis customized, cost of production is lower due to economies of scale benefits, which may reduce the price for buyers eventually. Again, from procurement perspective, buyers can negotiate better if they are placing order for standardized equipment in bulk, besides saving administrative costs in case of multiple smaller orders instead of single bulk order.
Standardization, not only of equipment, but also process, is increasingly being seen by the industry as a way to reduce project cost over-run. By implementing standard processes, operations can be streamlined and made more predictable. For example, it takes 6-8 months between casting a subsea forging and delivering it to an equipment manufacturer. The time can be significantly reduced if those forgings are available in inventory. But, time and complexity are added by customized requirements, design approvals etc., which could eliminated with improved trust in the supply chain and a common set of standards.
Standardization in systems such as compression or pumping systems can make the monitoring and performance evaluation much better. As the industry is looking at moving towards imbibing elements of Internet of Things (IoT), remote data collection and assessment of performance data, followed by comparison across various nodes of operation, can become much more efficient.
There have been evidences that top oil & gas companies are indeed turning towards standardization to adapt better to the changing oil & gas market dynamics. Majors such as Statoil and Total all talked about reducing upstream project costs through standardization and replication of platforms and wells. Very recently, executive vice-president of a global EPC firm looking after operations in Middle East, said implementing standardized designs and adopting a modular approach to processing units can significantly reduce project budgets, project schedules and construction site work, by as much as 30%. There have been plenty of other examples where standardization is being adopted at a fast pace. One such area is designing of blowout preventers, which critical for improving operational and financial efficiencies. Even processing vessels are becoming increasingly standardized. Another niche area to look out for increasing standardization trend is going to be re-engineered, reusable or overhauled parts and equipment.
Large number of companies is operating across the hydrocarbons value chain, so the approach to standardization may be different for each, based on their scale, role and stage of project involvement. There are immense opportunities for standardization to help ease the margins in the oil & gas industry, during a time new landscape is being designed as companies are burning midnight lamps to devise and execute adaptation strategies.
