A Nigerian oil industry expert, Leesi Gborogbosi (PhD), floats a template to help bring down oil production cost through what is known as ‘third party costs savings’ system.
The Federal Government in June 2020 pegged crude oil production cost per barrel at $10 whereas it had been about $18. This was in the face of oil price crash to below production cost levels due to a freeze in industrial activities all over the world. The economic freeze was induced by the coronvavirus pandemic. This situation seemed to open the eyes of Nigerians that high production costs can no longer be sustained.
As oil companies grapple with the order for a drastic reduction of costs, industry experts and management consultants have started digging into their bags of tricks to find the formula for reduced, competitive, and sustainable production cost scheme in Nigeria.
Gborogbosi, a management consultant who worked for over 26 years in Shell, has boldly come out with his formula for low cost production and how this could serve as savings tool for marginal field investors and bidders.
Gborogbosi says the new task is to help bring down operational costs in the oil industry so Nigeria’s oil sector could cope with increasing global competition. He has thus pinned down what he calls ‘third party costs savings’ as the area of interest.
According to him, ‘third party costs’ are costs that companies incur in their business relationships with third parties (e.g, contractors). Whereas an oil company would have a range of costs it incurs in-company with its own staff, there are costs passed to an oil company by its contractors and partners that have huge bearing on overall cost of production per barrel.
Now, companies are expected to take actions that would touch these ‘third party costs’ to arrive at the FG cost objective to arrive at same overall business goal (under-$10 production cost per barrel). “When this is done, we can then say the company has achieved at ‘third party cost savings’.
The expert whose doctoral degrees are in strategy and business studies from IE Business School, Madrid, said: “In the oil and gas industry, companies that manage their costs effectively will gain competitive advantage. The oil market has less manoeuvrability. Oil cartels determine international price oil.
He said; “Cost profile is one of the key areas that oil and gas companies can have flexibility. In some companies, you may find that about 70 per cent of their costs come from third parties through contracts and procurements.”
Dr Gborogbosi, the CEO of Gabriel Domale Consulting, said his firm helps companies in Africa to grow by providing insights to leaders that transform institutions. He gave technical definition of ‘third party costs savings’ concept as; “The difference between the latest estimates for the third party spends and the annual planned budget. Third-party costs savings for projects is determined over the full lifecycle and on an annual basis.”
He said it is challenging to manage the process of third party cost savings, but that by engaging rated and experienced consultants, these challenges could be overcome. He is one of those who have had hands-on experience on similar cost-saving initiatives environment.
On cost implications of this type of cost management, the expert whose doctoral dissertation focused on how managers can collaborate with host communities to create mutual benefits and execute strategy, said solutions are available.
With about three decades of finance leadership experience in the oil and gas industry working with expertise in finance, strategy, corporate governance, cost reduction, transformation, institutional reforms and leadership training, he said operators and investors spend a significant portion of their capital expenditure on field development.
“The assumptions as stated by Department Petroleum Resources (DPR) are that there will be seven key implications for the field developers including ownership of the asset, low investment cost, lower risk of development, early time to production, shared infrastructure, regulatory support, and scalability.”
On low investment cost, Gborogbosi said this is projected at between $50m and $100m as opposed to capital investments by the major oil companies.
He hinted that for marginal fields now under bidding, the time between investment and production is between 18 and 24 months.
He said investment in the marginal field is scalable; thus investors can start small and grow big. On shared infrastructure as an example, he said operators are encouraged to collaborate on common usage of facilities to ensure optimum utilisations for crude transportation and export. “Regulatory Support: Government will enforce regulatory practices of general application. However marginal field producers will enjoy significant support to enable growth in line with government aspirations.”
Gborogbosi analysed the cost implications of marginal field investment where he mentioned what he termed assured marginal economics, exploratory well drilled, portfolio rationalization, and president’s discretion factors.
Challenges in cost savings:
Gborogbosi used his experience to illustrate the challenges rampant in trying to create third party cost savings. He said at one time, the organization he worked for expressed the desire to have a uniform and clear definition of the third party cost savings (TPCS). This was to aid common understanding and shared vision across the organisation.
“Responding to request by the leadership of a business function for support to enable the delivery of cost reduction program, the finance team took on the responsibility of designing and developing a robust structure for reporting cost savings.
“We had the challenge of setting stretched targets. Our team had to secure the buy-in of project cost managers to ensure planned cost savings targets were delivered.
“There is the need to have the “third party cost savings” signed off timely to have a transparent process for the organisation-wide cost reduction programme.
“Another key challenge is to get the managers in your company to agree on the distinction between cost savings and cost avoidance. We can define cost avoidance as the reduction in budget scope.
“As managers are the ones expected to deliver on cost savings, they are often tempted to adopt cost avoidance approaches. And in some cases this may be good savings behaviour, it is in itself, not cost savings.”
He went on: “I discuss this cost savings strategy by using an example of how I successfully executed the strategy to achieve third party cost savings at a leading multinational E&P oil and gas company in Nigeria.
“Managing ‘Third Party Cost Savings (TPCS)’ is a key component of executing a company’s cost reduction programme. Receiving commendation from management is a sign that the work can be cascaded across the organisation.”
He mentioned categories such as Senior leadership support: “Senior leadership need to fully support the third party cost reduction programme. This makes the entire organisation focus on the cost reduction programme. This focus led to the organisation having a competitive advantage in best costs and project delivery on schedule.
Strategic levers: To achieve third party cost savings, we will adopt six strategic levers. These include contract optimization reviews, category management and technology-driven cost reduction initiatives, among others.
Cost savings structure: Our detailed process flow-maps provided the needed transparency to the cost savings process and aided a better understanding of cost savings. We provided a structure for defining cost savings, capturing, verifying, and reporting of actual cost savings achieved.
The organisation adopted the cost savings template and the reporting structure as best in class. Removal of barriers and resistance; “This removed barriers and resistance to the organisation’s cost reduction programme. This work enabled the assessment of the level of cost savings performance. Our work enabled the organization to have the assurance that the cost savings programme will be delivered.
“With this transparency and understanding of the cost savings process, managers will be willing to undertake more cost savings projects. They will identify new cost savings projects to replace other projects that are not delivering on the plan.
“Cross-functional collaboration: We provided advisory to the contracting and procurement leadership and finance function that the innovative and sustainable solution is to have greater collaboration between the contracting and procurement function and finance function in driving the cost ambition programme.”
He talked about a shared vision and said: “Organise third party cost savings workshops for the business managers, business finance managers, contracting and procurement leadership team. Some of the outcomes of the workshop will be a better understanding of the “third party cost savings (TPCS)” process; timely sign-off of cost savings achieved.”
He advised that any changes that are to the “cost savings” guidelines should be cascaded across the organisation, and an agreed verification process by all key parties.
He talked about responsible parties: “The project and finance managers should review the cost savings that will be reported. The project manager, contracting and procurement manager, and finance manager should off on the 3rd party spend savings.
Conclusion:
Marginal field investors and operators need expert advice to avoid the pitfalls that earlier investors fell into that made them to pull out from the marginal fields. He however said choosing the right adviser is the tricky part.
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