Are We Ready For The New Normal?

By Gede Manggala

Independent Consultant

Finding The Best Strategy during Low Oil Price Regime

for Oil & Gas Companies in Indonesia

Jun’14 ($104)

The Rapid Decline: From $104/Barrel

https://www.dailyfx.com/crude-oil The use of WTI chart is only for making a statement. Indonesia is using ICP for price reference

Jun’14 ($104)

Mar’16 ($38)

Going To $38/Barrel, As Of March 2016

Jun’14 Mar’16

3038

Lifting Cost ($/bbl)Oil Price ($/bbl)

30

104

Oil Price ($/bbl) Lifting Cost ($/bbl)

High Profit Margin Is Quickly Gone Away

The range of lifting cost for oil and gas companies in Indonesia is estimated between $20-40/bbl, so I use the simple average $30/bbl

} High Margin

} Low Margin

Current Common Strategy?

•Review big capital projects: hold, reschedule or “kill”

•Reduction of operating expense (including review of structure organisation, headcount, facilities )

•Renegotiation with suppliers and contractors

…And Waiting Oil Price to Increase?

NO! We cannot just wait for the increasing oil price

Oil price can’t be controlled

by Indonesian government

nor companies Too many factors; All are externals

Our focus should be on the other part of the equation…

Jun’14 Mar’16

30

104

Oil Price ($/bbl) Lifting Cost ($/bbl)

…We Should Focus On Reducing The Lifting Cost

3038

Lifting Cost ($/bbl)Oil Price ($/bbl)

Remember…

Majority of existing oil & gas fields in Indonesia is “brown field”: old age, declining production, increasing operation/maintenance cost

While the new fields,

Most probably located in more remote spots or deep water (which might not be economics in the current low oil price regime)

A new strategy and operating model to ensure oil and gas industry in Indonesia survive and thrive in the future

A new way of thinking is needed.

Design for value

Lean Operating Model

What strategy?

All require higher TRUST among all stakeholders: government, O&G companies, suppliers, contractors

Innovative Collaboration

Design and plan the business using the low oil price as the new normal; for long term

Design for value

Push The Current Cost Reduction Initiative Further

3038

Lifting Cost ($/bbl)Oil Price ($/bbl)

} Low Profit Margin

“Fit for purpose” design/engineering equipment/technology facilities

Redesign the business:

But There Are Room For ImprovementsBy Challenging The Current Practices

Technical: e.g. Does the current design fit the low oil price?

Standardisation: e.g. Can we reduce the variation in design, equipment, process, technology?

Organisation: e.g. Do we need that many layers and approval level?

Safety Is Still No 1 Priority

Key Focus: Procurement, Supply Chain Management and Core Processes (e.g. POP or Well Down Response process)

Lean Operating Model

DISCOVERING “FACTORY” IN OIL & GAS COMPANIES

With the low profit margin, we need to run critical and repetitive processes like a factory.

The good news?

The Information Technology can enable this operating model.

Many oil & gas companies have been embracing Lean key principles

to make people, process, and products FLOW seamlessly.

Currently, Many (Repetitive) Process Are Disintegrated

Process is planned & managed in departmental centric organisation that Is based on specialisation, such as Sub Surface, Surface, Drilling, Maintenance, Production

Company

Dept

A

Dept

B

Dept

C

To Make A Seamless Process, A New Operating Model Is Needed

Manage the core and repetitive processes through the real value stream. The advance of IT such as existing collaboration tools ENABLE end-to-end process seamlessly

Company

Dept

A

Dept

B

Dept

C

Example#1: Lean Contract Development Process

Contract process is highly repetitive and involving cross functional team. This kind of process could be designed to be faster and less rework process through a a single dashboard view and tracking.

Company

Engineering SCM Production

This graph is an oversimplified illustration

Drilling

Company

Surface

FacilitiesProduction

Example#2: Lean Put On Production (P O P) Process

POP is another example of process that is repetitive and involving cross functional team. We can design POP faster with less rework by integrating the end-to-end process and make them transparent through a a single dashboard scheduling.

This graph is an oversimplified illustration

Embracing the industrial internet, holistic-system thinking and the sharing economy as the new paradigm

Innovative Collaboration

+

OIL & GAS COMPANIES SHOULD MOVE TOWARDS INDUSTRIAL INTERNET

Collaboration Within A Company: Machines Connectivity + Big Data

Connecting critical machines equipments from upstream to downstream could improve efficiency, reliability and response time of the entire value stream. For the exploration and development segment alone it is estimated could reduce 1% of capital expenditure, an estimated $90 Billion over 15 years lifetime.*

oil

Source: Saving estimation number from GE Software

Collaboration Among Companies-Suppliers-Regulators

Regulations, Policies, and Business Process Procedure should be revisited with a new mindset: system thinking. It requires TRUST to collaborate among the stakeholders

CompanySuppliers/Contractors

Customers Regulators

Stakeholders

Adopting the platform/sharing economy (like eBay, Tokopedia or even Uber, Gojek) to improve efficiency of logistics and inventories across ALL oil & gas companies in Indonesia? Fund innovators/startups to work on this (old) idea with better technology and system/process/procedure?

Future Collaboration?

Design for value

Lean Operating Model

Strategy to the new normal

A new paradigm is needed

Innovative Collaboration

By Gede Manggala

This is a personal observation for triggering discussions among stakeholders in Indonesia

Solution Leader at Senior Associate at

www.ipqi.org www.variancereduction.com www.gedemanggala.com

Independent Consultant

References & Credits (In Random Order)

• Lubiantara, Benny. Indonesian Oil and Gas Industry: The Challenges Ahead. IATMI Luncheon Talk, 13 Jan 2016

• Graham, Pat, et al. State of the Oil & Gas Industry: Never let a good crisis go to waste. McKinsey & company, Dec 2014.

• Simadiputra, William. Indonesia Industry Focus: Oil & Gas. DBS Group Research, 15 Dec 2015.

• The Big Picture. Simplified. Data sheet from GE Digital. Accessed from GE.com/digital

• Annunziata, Marco. Oil Prices got you down? GE, 23 Mar 2016. Accessed from https://www.ge.com/digital/blog/oil-prices-got-you-down

• Hartmann, Berhnard and Saji Sam. What Low Oil Price Really Mean. HBR, 28 Mar 2016. Accessed from https://hbr.org/2016/03/what-low-oil-prices-really-mean?utm_campaign=HBR&utm_source=facebook&utm_medium=social

• Thanks to all my colleagues for providing insights through discussions using multiple platforms (WhatsApp group, Facebook, Linkedin): Raymond Petrus, Lucky Hadinata, Vendy Hendrawan, Emir Syahrir, Isham Sudrajat, Agung, Mukti, Muchlis Ridho, Freddy Simanjuntak, Dwi Marwandono and many others who add their thoughts and experiences during the discussion.

• THANK YOU, ALL!