MICHELIN STAR TASTE, FAST FOOD BUDGET
There is a simple but seldom mentioned truth within the Oil and Gas industry, and that is that very few people executing maintenance work take the cost of the job into account when deciding if it is to be executed.
This is not a criticism of those involved as there has never been a genuinely strong expectation for them to do so. Whilst I realise job descriptions and process flows often state that costs should be considered, up to this point there has been little real reinforcement or encouragement to do so. To quote Leif Babin “It’s not what your preach, it’s what you tolerate”, and to date the industry has tolerated a lack of focus on costs.
For example:
The technician who identifies that a piece of equipment has failed or is failing doesn’t consider the cost of the job, their role is to highlight that something is broken and needs to be fixed.
The people who validate this scope of work will focus on the consequence of equipment failure and the likelihood of this consequence occurring. Very rarely will they consider the cost of executing the scope.
The individuals who prepare the job for execution by capturing the labour resources and materials required are generally focussed on the easiest and fastest way for the work to be carried out. Cost is almost never even considered.
When the prepared work is submitted for approval, Supervisors and those who approve it for execution will check that the estimated hours are correct, the right materials have been added, the work method is appropriate, vendor scopes have been correctly identified, the correct dates have been captured, and so on. The cost of the job is very rarely considered.
Often times the only person who will consider costs is the requisition approver, who is responsible for approving the procurement of materials and services, but this will often amount to no more than a cursory question or two being asked. In reality they are very rarely able to prevent any expenditure or cancel the scope by this point as the scope has already been approved for execution.
The truth is that the cost of the job is very rarely considered for four reasons:
There is the basic premise that if something is broken it needs to be fixed.
The cost of the job is more often than not weighed up against the cost of lost production, which always trumps everything as the loss of a days production almost always amounts to more money that the cost of the widget being requested, for example. However, this is true for many other industries such as manufacturing but that doesn't prevent them from being extremely cost conscious.
Focusing on costs just isn’t all that interesting and so there is no burning desire for anything to change.
Historically there has been a lot of money in Oil and Gas, and so there has been the perception that keeping an eye on all costs doesn’t need to be a priority. Visitors to Aberdeen will no doubt have noticed that there is a considerable number of prestige cars buzzing about the city. What is rare in Glasgow where I grew up is commonplace in the Bon Accord car park. There is a feeling embedded within the culture of Oil and Gas that it is a prestige, high margin, lucrative industry, so scrutinising costs just hasn’t been made a high priority.
However, the reality is Oil and Gas isn’t a high margin industry anymore and changes, i.e. control over costs, must be made to reflect this:
If something is broken then yes, it is true, steps have to be taken to rectify it, however, that’s not all there is to it: Does it have to be replaced or can it be fixed at a lower cost? Could cost-effective steps have been taken prior to this point to have prevented the failure in the first place?
Whilst the work may have to be done in order to reduce the loss of production days, the work must still be completed in the most cost effective way possible. The risk of production loss also has to be accurately assessed. If there is robust redundancy or mitigation in place that prevents the loss in production then it should be used, with premiums for expedited delivery not simply approved as a matter of course.
Focusing on costs may not be interesting but it is now essential. Leaders need to make this important and ensure it forms a major part of people’s roles and incentives, including their own.
With the established trend of sawtooth Oil and Gas prices, the industry can’t be thought of as a high margin in the North Sea anymore. In times of high margins, the profit made must be maximised to provide a buffer in the times of low margins.
The question the industry must ask now if to is to recover is “How do we get everyone to genuinely recognise that high-margins are not guaranteed?” Currently, the industry is similar to someone who has grown up in a position of privilege and wealth. The person is used to an exotic lifestyle of lavish parties, Michelin stars and supercars. They haven’t had to ask how much the bill is, they were able to lay the plastic down and add a 20% tip. Sadly those days are in the past. They were living off the family’s estate and the money has now ran out. Despite this they can’t bring themselves to eat in fast-food restaurants instead of Michelin Star restaurants. They struggle to shake off their mindset of excess, where frugality is scorned as something for other people. Whilst this is admittedly an exaggerated example to make a point, the point remains.
I realise it’s not a popular statement to make but changes need to be made if the industry is to survive for as long as possible. Given how undesirable the change is for many, it is a change that must be led by senior leadership. This does not mean that the senior leadership should approve all expenditure, as that would just suffocate an organisation. Leadership must ensure that the cost of executing every work scope is taken into consideration by all involved in the work’s identification and execution. Scopes have to be developed with the most cost effective solution in mind, which is not always the quickest or the easiest. Scopes have to be challenged to confirm they are worth the cost of completing. The actual costs of a job have to be reviewed and waste has to be analysed as every pound saved could be invested in executing another scope.
Whilst not easy, achieving this is possible. A number of years ago I helped an operator implement an initiative where cost was given focus and was closely reviewed by the asset teams themselves with support provided from supply chain and finance. The meetings were difficult to begin with, they were unpopular and were avoided wherever possible, but we persisted and gradually they became part of the daily rhythm, and the benefits started to be felt:
Those involved in the identification and execution of work began to get a feel for what things on the asset cost.
Jobs were prepared with cost in mind.
Corrective maintenance was given a higher priority than it previously was to ensure equipment was repaired before it failed, thus saving costs.
The habit of buying two when only one was needed was reduced.
Materials were purchased only for jobs that were highly likely to go ahead, and not bought and stored for the day it may be needed.
Unfortunately over time the initiative died away. People moved on, the oil price rose and momentum was lost, however, the concept was proven. It is possible. Whilst no one wants to trade-in their A5 Kobe Strip Steak for a Big Mac, if you can’t afford the bill at the end of the meal the choice may remain unpleasant but it is obvious. The industry no longer has a Michelin Star budget, and the sooner this mindset is instilled the better.