With the recent fall-off in oil prices, companies in virtually all sectors of the oil, gas and chemicals (OGC) industry worldwide are going to have to plan and manage their projects for greater capital productivity, something they weren't doing particularly well before the price-drop, and along the way create a "cost culture" inside their companies.

That's according to the new study "Capital Productivity in the Oil, Gas and Chemicals Industry", which includes a survey of 250 high-level industry executives around the world, released today by AlixPartners, the global business-advisory firm.

The executive survey finds that just 30% respondents say their companies had explicit return-on-capital targets for projects prior to the crash in oil prices and, perhaps most surprising, that just 12% believe their companies are any better than their competitors at project execution. Meanwhile, over half (51%) of North Sea operators say they find it difficult to kill projects no longer meeting expected returns.

The study also delves into the reasons behind suboptimal project management to date. According to the executive poll, just 34% of respondents said they "agree" or "strongly agree" that project management is executed at the "company level" across all projects, suggesting that many projects are not benefitting from economies of scale, institutional knowledge, etc. Only 39% of respondents-and just 30% of oil and gas drillers-said they have a strong series of checks and balances to ensure projects stay on track. And only 11% of all respondents said they employ a stage-gated process to assess project viability at defined milestones when developing a new capital program.

Overall, when asked to name up to three ways in which they are most challenged in keeping projects on budget, the top reason chosen (by 39% of all respondents) was "company culture isn't focused on project management."

"Strong energy prices in recent years have allowed companies to delay putting an emphasis on project management, as they focused instead on the urgent need of achieving greater throughput. But that was then and this is now," said Dennis J. Cassidy, managing director at AlixPartners and co-head of the firm's global Oil, Gas and Chemicals Practice. "In the current environment of falling prices, plus increasing geologic and technical challenges, a new focus on building a 'cost culture' into each and every project is mandatory."

The survey results also suggest that as projects grow more complex, many companies have attempted to boost returns, not by tightly controlling costs internally, but by looking outward, toward such things as developing partnerships. For instance, when asked to list the most important criteria used in selecting new capital projects, 60% in the survey cited "partner/syndicate relationships," a tie for first place with the project's projected net present value. And, among the firms in the survey with the highest(self-reported)corporate ROCE (return on capital employed), 64% cited partner/syndicate relationships as most important, compared with 51% of those representing the companies with the lowest self-reported ROCE who said that, suggesting that partnerships may indeed have been a successful strategy for boosting returns-in the past.

AlixPartners research accompanying the executive survey notes that, despite an average 10% per annum increase in industry capital spending globally since 2010, compounded ROCE averages for all major sectors of the industry (integrated oil and gas, chemicals, upstream, downstream, midstream, and equipment and services were in reality negative for the period 2008-2013-i.e., even before the recent drops in energy prices.

Sector Highlights

Below are some of other key survey results by sector:

• Fully 70% of those from oil and gas drilling companies said partners/syndicate relationships are the most important determinant in deciding whether to conduct a project, vs. 60% of total respondents.
• Just 55% of executives from integrated oil and gas companies said they "always" or "very often" deliver their projects on time, vs. 74% of total respondents.
• Only 30% of leaders from oil and gas drilling companies said they have a strong set of checks and balances in place to ensure projects stay on track, vs. 39% of total respondents.
• 55% of those from integrated oil and gas companies said their company culture is not focused on project management, although half said they do complete reviews at key project milestones.

Meanwhile, while 58% of total respondents said they are "focused" or "highly focused" on creating a "cost culture" within the companies the study finds that many companies are not taking the right actions to match their words.

Regional Highlights

Here are survey highlights by region:

• 49% of those from North American firms said their project planning process efficiently integrates input from key stakeholders, vs. 60% of total respondents.
• Only 9% of North American respondents said they are likely to use tighter criteria for selecting projects, vs. 26% of Middle Eastern respondents.
• African operators said they are more likely to close unprofitable operations-64%, vs. 45% of all respondents; 30% said they are plagued by insufficient data (vs. 20% of total respondents); and they said they are less likely to be investing in new infrastructure (13%, vs. 20% overall).
• 56% of executives from South American firms say they are challenged by "limited synergy with planning and operations" (vs. 41% of total respondents) for getting projects completed on time; 58% cited too much intramural competition for project resources and skills (vs. 36% of all respondents globally) for completing projects on budget.

The executive survey also found that prior to the crash in prices "improving throughput" was indeed the single-most important focus for improving capital productivity, globally, with 63% of total respondents saying they were "quite" or "highly" focused on increasing throughput of existing operations. It finds as well that only 30% of those surveyed formally identify and quantify project risks in advance of undertaking new projects, and that, in an era where new digital technologies help define the drilling environment, just 39% have a formal knowledge-management process in place.

The AlixPartners study does, though, offer hope to companies looking to crack the code on efficient project management in today's brave new world of lower energy prices-and a lot of it starts with proactive leadership. For instance, the executive survey finds that the companies which are best ROCE performers according to those surveyed are also more likely to be creating tighter criteria for project approval (36%,vs. 29% of all respondents), and that top leaders in those high-ROCE companies review all projects on a semi-annual or annual basis (53%, vs. 43% of total respondents).

Furthermore, the survey results suggest that OGC-industry leaders themselves view the creation of an overall cost culture inside their companies as a powerful generator of returns in the year ahead. According to the survey, 46% of respondents believe doing so will yield at least 5% savings for their firm over the next 12 months, a greater improvement than they believe could come from improved purchasing/resource acquisition (41%), higher subcontractor productivity (39%), SG&A improvement (27%) or technical-cost reduction (19%).

"The good news is that creating a true, soup-to-nuts cost culture can not only yield significant returns, if implemented properly it can be the approach that offers a lower degree of social impact, which of course can be of use once markets change yet again," said Dennis J. Cassidy, managing director at AlixPartners and co-head of the firm's global Oil, Gas and Chemicals Practice. "If history is any guide, companies that simply go into shut-down mode given today's tough market will rue the day when the market turns yet again." 

About the Study

Capital Productivity in the Oil, Gas and Chemicals Industry: An AlixPartners Study included a global survey of 250 C-level executives and business-unit leaders globally in the oil, gas and chemicals (OGC) industry, 75% of whom work at companies with reported revenues last year of more than $1 billion. The survey was conducted for AlixPartners by Oxford Research. Respondents who said they work for exploration and production firms represented 36% of the sample, refiners and marketing companies 30%, oil-and-gas field services 42%, offshore projects 40% and refining 17%. Nearly two-thirds of respondents said they oversee projects located in the Middle East or Africa, 40% said they oversee projects in the Asia-Pacific, 30% said they oversee projects in the North Sea, 17% said they oversee projects in North America and 35% said they oversee projects in Russia, Central Europe or the rest of Europe. (Note: Both project locations and types of firm add up to more than 100% because many of the respondents oversee projects in more than one region and many of the companies they work for are multi-sector.)