CASE STUDY

Aggressive Cost Cutting Leads to a Billion-Dollar Loss for a Major GOM Upstream Operator

Across-the-board cost cutting decisions are difficult. The wrong strategy can impair production efficiency, reliability performance and sustainability in the long run, far offsetting cost savings.

CHALLENGE

An upstream operator lagged in production efficiency compared to other operators and desired to improve. A prior across-the-board cost-cutting exercise was noted as the potential cause of missed opportunities. Solomon engaged to uncover insight and make recommendations.

SOLUTION

The operator participated in Solomon’s Offshore Study and relied on the proprietary data and expert insight to reveal where their performance gaps compared against top performers.

RESULTS

Solomon identified significant reductions in maintenance cost compared to peers resulting in a deterioration in production efficiency and reliability performance, making the assets unavailable to capture positive market opportunities. What the client lost in production revenue offset all their maintenance cost savings. Solomon estimated a 1.1B USD opportunity in production cost enhancement, as well as an estimated 950M USD in production efficiency and reliability.

CLIENT JOINS SOLOMON STUDY TO COMPARE OPPORTUNITIES HIGHLIGHTED FROM OTHER 3RD PARTIES

A major Gulf of Mexico (GOM) upstream operator was a consistent participant in the Solomon Worldwide Offshore Production Operations Performance Analysis (Offshore Study). After a couple of years of not participating in the study, Solomon approached the operator with a proposition to renew their participation and evaluate the results. Since the operator’s prior participation, the study had evolved to include deeper insight and expanded views of sustainability, operational excellence, and a more detailed breakdown of maintenance, turnarounds, slowdowns, execution period, and startup periods. The joint goal was to identify opportunities highlighted in the Offshore Study and compare recommendations to those that the operator took from other parties.

TOP Q1 PERFORMANCE SHOULD INCLUDE A SUSTAINABLE WELL-BALANCED APPROACH

During the industry downturn, the operator decided to aggressively cut costs across the board, especially in maintenance, which was apparent in the trend analysis of the last 3 years’ operational data provided to Solomon. Solomon’s Offshore Study benchmarking results found the client had indeed reduced overall costs. However, results identified their production efficiency, reliability, and production operations had deteriorated over the period since last Solomon study participation.

The deterioration led back to the client’s focus on cutting maintenance cost.

The client was previously advised to focus on cost reduction, believing that to be a top performer one had to be the lowest in all cost criteria.

Solomon’s data and experience prove that is not always the case, and production efficiency needs to be maintained to reap rewards long term. Maintenance cost and personnel cost should not be among the lowest in the peer group if one wishes to properly sustain the asset at a high performing level. Solomon believes top Q1 production efficiency, reliability, and operational performance is sustainable with a balanced scorecard of KPIs.

The data showed the client underspent on sustaining maintenance by about 100M USD, ~30% below Solomon’s sustainable low maintenance target.

COST CUTTING IS NOT ALWAYS THE ANSWER TO INCREASED PROFITABILITY

The client understood what the data was telling them and stated, “other companies told us to be focused on cost, but we’re still trying to improve production efficiency.” Solomon experts identified how production efficiency was impacted by the decisions made.

During the pandemic, many operators resorted to cost-cutting measures, as did this client. However, a peer group comparison of the Gulf of Mexico region revealed that other operators in this region maintained a focus on production efficiency and reliability, not cost cutting alone. Revenue for these other companies were much higher as their focus was a long-term proactive strategy that minimized losses and protected volumes. Results realized were of hundreds in millions of dollars in additional profit. Due to the decision and advice from the other third party “to cut costs at all costs”, the client was not ready for the upswing in the market that others were prepared for.

What the client lost in production revenue more than offset what they had saved in cutting maintenance cost.

Solomon believes prudent cost management is always a robust strategy, regardless of current market conditions. However, continued primary focus on obtaining and retaining reliability and integrity is even a more robust strategy, and has proven repeatedly to deliver the lowest sustainable costs.

Years of benchmarking data proves cost cutting is easy in the short term, but reliability is needed to ensure long-term profitability and leads to sustainable maintenance cost reductions. Cut too deep and integrity issues will result and overall performance will degrade.

BENEFITS & OPPORTUNITIES

Results from the Offshore Study identified an estimated 1.1B USD opportunity in production cost enhancement, as well as an estimated 950M USD in production efficiency and reliability.

The client noted Solomon’s study in comparison to the other third party’s had a more detailed analysis on an operational level. The operator further appreciated the Solomon study dug into the details so the operational staff would know what they needed to do to improve their efforts and profitability.

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