Cost Reduction in Oil & Gas Industry in USA & CANADA - Analysis by the Center for Excellence in Project Execution

Innovation - a much talked out but often misunderstood concept - is analyzed from the perspective of Energy industry in North America by the Center for Excellence in Project Execution (CEPEX)

Innovation is a buzzword which is being touted as the solution to Industry problems, whether it is IT, Oil & Gas, Mining or any other major industry with high capital costs. The Center for Excellence in Project Execution (CEPEX) discusses that indeed Innovation can be the solution but it is an abstract concept until the specifics the laid out for the industry to emulate and follow. For the Oil & Gas Industry, which is facing severe headwinds due to the falling commodity prices and increased regulation, Innovation is promoted as the ‘Out’ for the industry from its current troubles. In reviewing how Innovation can be applied in a tangible manner, Oil & Gas industry is a good example for such an analysis. There are several reasons why Oil & Gas makes a good representative for application of Innovation concepts: it involves software and hardware, the inputs and outputs are both tangible in the sense that a real tangible manufacturing facility needs to be set up, raw material is pumped/mined from the ground and processed to create output of crude oil and hydrocarbon products, depending on whether the focus is upstream, midstream or downstream sections of the industry.

To further bring into focus the applicability of Innovation in the Oil & Gas industry, the upstream sector can be selected. Narrowing the focus down further to capital intensive upstream operations, Alberta Oil Sands industry is a suitable candidate as it deals with high capital and operating costs which run into Hundreds of Millions or Billions depending on the technology used, and high greenhouse gas emissions associated with it.

In the era of low oil prices and a fragmented narrative on future of energy, Innovation has become not only a 'value added' initiative, but a necessity which will determine which companies or even industries survive in the next 10 years. For Oil & Gas, the choice has never been so stark even comparing back to the 'Peak Oil' days. Innovation - of technology, business process, design methods, construction methods, and procurement channels - will determine survival of the fittest in the extremely competitive Energy industry today.

Anirudh Kumar, Project & Construction Specialist, Principal, Center for Excellence in Project Execution (CEPEX)

So the question becomes, how can the Alberta Oil Sands Industry apply innovative practices to reduce costs, enhance competitiveness and safeguard the environment?

Innovation can be looked at as a phenomenon, which needs the right environment to take place. The intent for successful business should be to not just have innovation as a transient phenomenon but rather a continuous process. Therefore, the goal should be that the environment for the industry should encourage innovation and the environment itself needs to be able to adapt to continue to allow the phenomenon of Innovation to take place. This should be seen through as a continuous process with a feedback loop rather than a batch operation. Innovation is organic, and organic processes are seldom discrete processes, and Innovation needs to be viewed and practiced keeping this perspective in mind.

To create a ‘stable’ environment for innovation, it is essential to build the foundation first. This means getting rid of inefficient and low-value-addition processes, and replace with streamlined and efficient systems. To achieve this, there needs to be a common objective for the industry, a common set of rules for the industry to follow, as a basic requirement. In other words, this industry needs to Standardize, as the first step in being truly innovative. The first step of Standardization is the most critical as it allows the industry to have a common voice to its stakeholders – the suppliers, vendors, equipment manufacturers, module fabricators, designers & engineers, construction & trades personnel and finally operations and sustaining capital groups. With a common voice, the communication within the industry becomes coherent and efficient. This allows the industry to continue to improve standardization and streamlining. The benefits of this would result in almost immediate savings in design, procurement and construction. The industry will be able to leverage its collective resources by benefiting from a virtual ‘economy of scale’.

Step 1: Standardization of Design

  1. Create a common set of standards, specifications and line classes. Allow each company to deviate from the common standards on an exception basis only. Use industry best practices to develop cost effective standards with input from the various stakeholders.
  2. Create a common set of ‘detail’ drawings to be used across the industry. These details can be broken down in terms of process units / applications and commodities.
  3. Establish an Industry Council to manage these Standards on behalf of the member businesses. Institute a streamlined and logical Management of Change Procedure.

Step 2: Standardization of Project Management

  1. Create an industry specific Project Management Manual to be followed as a guideline. Outline the minimum requirements, and companies which wish to go above and beyond the basic guidelines would be able to implement their own methodology.
  2. This creates a common set of expectations for the service providers, vendors, equipment suppliers and project management practitioners, which helps to reduce surprises during project execution.

Step 3: Standardization of Modularization

  1. Establish a common set of standards and guidelines for modularization based on the standardized designs.
  2. Entire process units / skid packages can be standardized based on best practices for modularization.

The above 3 steps create a solid foundation for the industry as a whole which has immediate spin-off benefits aside from streamlining and cost reduction through ‘economy of scale’. Through proper training, the industry as a whole creates a knowledge and skills base which can be easily interchanged within the industry with minimal retraining. This allows for efficient re-allocation of resources within the industry as one project winds down and another picks up. Payoffs also come with increased reliability and consistency in design, end result and costs associated with doing projects within the industry. This allows investment dollars to flow into the industry due to lower risks and more precise project financial projections. The other benefit is increased transparency throughout the industry, and the ability for newer and more motivated players to join into the industry, thus leveraging market competition to optimize costs.

After the first 3 steps are in place, the industry environment can be considered conducive to innovation and ready to reap the benefits of innovative practices. The innovative practices can come in a number of areas, such as coordinated logistics to reduce overall carbon footprint of the industry; or encouraging certain education streams or areas of study based on forecast demand for specific skills; changing the mix of energy sources required for energy input into the industry, among many others. The right ecosystem for innovation allows the people within the industry to unleash their potentials to hopefully perpetuate the cycle of innovation and positive change.

Numerous examples abound in the business world where standardization brought on a whole new era of growth to the industry. Take for example the Standardization of Shipping containers which revolutionized transport and trade in the second half of the twentieth century. The ‘Containerization’ led to streamlining of the transport and handling process, increased reliability and resulted in a significant reduction of freight transportation costs. This was if not instrumental, at least critical to enable the massive growth in global trade. As was the case with Standardization of shipping containers, and the resulting growing pains, such growing pains can also be expected with Standardization in the Alberta Oil Sands industry as well. The growing pains are unavoidable, but they can be utilized for constructive feedback to reach the point of a stable ecosystem for the industry.

In order to facilitate implementation of the above strategies, a new kind of leadership is required, which can help transform the regular practices - Transformation Leadership - to go hand in hand with creating a conducive 'ecosystem' for innovation. A new generation of Transformational leaders would be needed, who create teams based on their approach. Change has to be 'top down' and 'bottom up'.

Stay Tuned for the next series on strategies for Transformational Leadership for the Oil & Gas industry. Also coming up in the future release from Center for Excellence in Project Execution (CEPEX) is the HUPP concept for implementation of Oil & Gas projects, indeed any project of sufficient complexity. HUPP stands for Holistic Upfront Project Planning with focus on front-end loading in project planning.

About The Center of Excellence in Project Execution 
Based in Calgary, Canada, the Center for Excellence in Project Execution is a boutique management consultancy serving oil sands, oil & gas sectors worldwide providing niche consulting services covering cost reduction, project management, special projects and continuous improvement. 

Parth Mukherjee, P.Eng, PMP, Expert Principal, Center for Excellence in Project Execution, Calgary, Canada

1-403-397-8469 /

Anirudh Kumar, P.Eng, Principal, Project & Construction Specialist, Center for Excellence in Project Execution

1-403-397-8765  /

Source: Center for Excellence in Project Execution (CEPEX)

About Center for Excellence in Project Execution (CEPEX)

Center for Excellence in Project Execution (CEPEX) is a management consulting & analysis firm focused on achieving Cost Reduction in the Oil & Gas and Mining sectors.

Center for Excellence in Project Execution (CEPEX)
3553 31 Street Northwest
Calgary, Alberta
T2L 2K7

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