Oil & Gas Cost Reduction Projects With 50% IRR Go Undone

Even in today’s poor commodity climate – many cost savings projects with a 2-3 year payback (50% IRR) period go undone. If you don’t recall what the payback period or IRR is, please see my post:

“Who likes making money? Payback, RoI, IRR explained…” https://www.textor.ca/2016/03/who-likes-making-money-payback-roi-irr-explained/

iStock_000013530407SmallThere are two things to note about cost savings projects. They typically:

  • Reduce periodic General and Administrative (G&A) costs – so the savings that impact periodic payments do not “end” and could go on indefinitely.
  • Are beneficial in a good or bad commodity environment. There is no commodity price dependency!

Based on this, a company should always do periodic cost reduction projects – in a good or bad commodity environment since it increases the profit margin in good times and allows a company to survive longer than its competitors in bad times (and survivors always do the best in the long run).

pumpjackI have been in Oil & Gas for over 17 years. And during that time I’ve been aware of more rural connectivity projects that have these characteristics than I could possibly handle… if only they would be approved and added to the queue. To add to the malaise, network costs are a top IT cost. See my article “Top Ongoing IT Costs – Data Centres and… Networks” https://www.linkedin.com/pulse/top-ongoing-costs-data-centres-networks-trevor-textor

Correct me if I’m wrong… but from what I recall from what Oil and Gas executives have told me, any Oil & Gas project with over a 30% IRR is always approved. However, it’s been entirely up-hill trying to convince Oil & Gas to approve these projects.

I’m going out on a limb here though…. Maybe the reason why is that they are connectivity (telecommunications) projects for rural areas? Connectivity usually falls within the IT department and from my interviews with CIOs, there is little focus on connectivity costs. That is, they feel that connectivity is not really an IT role but it gets lumped into IT so they suffer through it. I agree with them – IT is getting dumped on due to poor understanding of connectivity at the leadership levels. After over a decade doing rural connectivity, I believe that connectivity should be an engineering role and connectivity commissioning and operations should be in IT. This arrangement makes the basic procurement management build (engineering) vs rent (off the shelf) calculation possible. Let’s face it, IT is not engineering. IT is only going to rent. But most of the time, it is more effective to build in rural Oil & Gas locations.

The final nail in the coffin for this whole scenario is that connectivity is critical infrastructure (like water, electricity). This basically means you can’t do things that are expected of a company operating in the current economic environment without it. I have had to deliver the bad news to hundreds of promising Oil & Gas projects because the current network they have cannot support anything but the basics (e.g. kilobit per second SCADA – or what I call “tin can on a string” data). The cost of this one fact alone is colossal. I explain more about this in my presentation “Understanding the Remote Field Data Communications Challenge”

http://www.slideshare.net/TrevorTextor/understanding-the-remote-field-data-communications-challenge

Anyone care to chime in? Anybody have an Oil and Gas producer or midstream company (operates rurally with large footprint) who does not focus on connectivity and would love to save money?

Leave a Reply