92% of energy companies have yet to shift to long-term strategic cost management
Thriving in the new era of resource abundance requires methodical approach
(Calgary, April 7, 2015) In a new era of lower oil prices, a recent EY survey of senior executives in the Canadian oil patch finds many companies appreciate the need for a more balanced and structured approach to cost management, yet 92% report having either minimal or no long-term strategic cost management strategies actually in place.
“Our survey finds that most companies reacted quickly when oil prices collapsed in late 2014, but have only implemented tactical and short-term measures to manage their costs in the current economic environment,” says Lance Mortlock, EY’s Canadian Strategy Services Leader. “In the face of what may be a longer-term shift in prices, organizations really need to be more long-term and strategic in their approach. There’s a unique opportunity in this environment to make changes to the business that will benefit an organization in the long term — but companies must make those changes in a sustainable way with pace to avoid collateral damage in the process.”
EY’s survey, A new energy world: why costs matter in an era of resource abundance, finds the biggest issue companies are facing in this environment is achieving needed cost reductions while maintaining the capacity to run the business with fewer resources. Still, close to half of respondents haven’t implemented a central group or team to focus on their cost management agenda.
“Our survey results indicate respondents understand conceptually the impact that lower oil prices will have on the industry, and they’ve responded by making dramatic and rapid short-term cuts in headcount, capital and expenses,” says Mortlock. “But few have turned their attention to achieving more sustainable structural change.”
“The oil and gas sector has experienced periods of uncertainty before, but this time is different,” adds Barry Munro, EY’s Canadian Oil & Gas Leader. “The industry is undergoing a structural shift, from an era when businesses were built around a ‘resource scarcity’ model to a new era where businesses will have to thrive in the face of ‘resource abundance’.”
EY’s report notes that in a resource abundance world, future commodity prices won’t preserve or rescue high-cost projects or unconventional plays with higher operating costs.
Munro and Mortlock agree: “Waiting and wishing for oil price recovery while only making short-term and tactical cost reductions during this period of uncertainty isn’t a sound strategy. In this environment, winners will be those that harness the opportunity to drive new lean business models, and renew their focus on, operational excellence, globally aligned business models and innovation. Those that fail to adjust won’t be so lucky.”
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About the survey
EY surveyed a carefully constructed, representative sample of more than 130 senior executives in a range of Canadian energy-related organizations. Respondents represented all aspects of the industry value chain, including fully integrated oil and gas; upstream oil and gas; pipeline/midstream; oilfield services; power and utility; and engineering, procurement and construction (EPC) companies. The sample included representation of companies of all sizes, from fewer than 100 employees to more than 5,000.
About EY’s approach to cost management
Cost management transformation must be managed just like any other project — using the right tools and accelerators at each stage. Companies must think through their ideas and build a roadmap. There needs to be a logical, balanced approach that addresses both short-term and long-term challenges. To learn more about EY’s approach visit ey.com/ca/energysurvey
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