BEYOND THE HORIZON After the cost-cutting

When a journalist asked the eminent physicist Stephen Weinberg how many people understood his theories on the big bang and the mathematically intricate string theory, he paused thoughtfully and answered perhaps ten. My company has been involved in numerous petroleum industry assignments dealing with benchmarking, right-sizing, downsizing, and re-engineering since the mid-1980s. At first, these restructuring exercises centered on the upstream exploration and production segment of the industry. More recent efforts focused on re-engineering the downstream refining and chemical parts of the business.

Strangely enough, however, it seems that few within the industry truly comprehend the full impact or the hard-won lessons emerging from these tough re-engineering "wars." Perhaps not much more than ten.

Why this lack of reflection on the historic events that transfigured the petroleum industry? The hard truth is that in the recent competitive business wars, top management was quicker to react to the pressures or heat of the moment than to seek the elusive lights of reason. The need to cut staffs, to sell assets, to consolidate departments, to slash the budget has taken precedence over any effort at understanding the "big picture". The why? Quite simply put, the short term too often totally dominated the long-term.

Thus, it is our aim to somewhat re-establish the balance by noting some lessons learned, some trends observed, from our multi-year experiences in the re-engineering business. We believe this summing-up is interesting and instructive to those still traveling the road of change and improvement in the petroleum industry. In no particular order, these are the observations and insights culled from our participation in recent petroleum re-engineering tasks:

• Danger for large firms: Increasingly, petroleum executives are learning that it is important to link-up strategy, structure, and size in their strategic thinking. Mounting evidence shows that size strongly influences, or even dictates, the appropriate strategy/structure. This means, simply, that strategies and structures appropriate for majors are almost always inappropriate for independent oil firms. Dangers and opportunities are very different for the two categories. A few scientific analogies are instructive to this point. For example, the force of gravity is a major danger for large size creatures. If one should drop a rat or a human body down a thousand yard mine-shaft, the rat would be killed and the body completely broken. However, if one drops a mouse down the same mine-shaft, it is stunned, but walks away. Even smaller creatures like an insect are not perturbed at all, since gravity is no danger to its existence.

• Danger for small firms: Gravity is a danger for the big, but not the small. However, there are likewise dangers for the small that are of no concern to the big. Consider, for example, the matter of surface tension in a liquid. A man coming out of a bath carries with him a film of water about one-fiftieth of an inch in thickness. This film weighs about one pound. This is of no consequence to the man. A wet mouse, however, coming out of a bath has to carry about its own weight in water - a real hardship. An insect coming out of a liquid must carry several times its own weight and thus is in mortal danger. Therefore, an insect going for a drink of water faces the danger of surface tension, a life and death threat. To sum-up: the lesson here is that the opportunities and dangers facing large and smaller petroleum companies are quite different.

  One should not blindly copy concepts of organization without giving thought to size. Big and small entities inhabit quite different universes.

• Technical staff shrinkage: In recent years, petroleum central technical support staffs are on average 50% smaller. The staff reductions, proportionally, are greater for smaller domestically oriented petroleum firms than for international rivals. The domestically oriented petroleum firms tend to focus on having the lowest cost central services. They want to maximize cost efficiency.

  The larger petroleum companies want low cost services but also need sufficient central staff to support their international ambitions in exploration and production and refining and chemicals. They need larger staffs to support growth.

• Outsourcing R & D: The trend in the upstream and downstream petroleum sectors is to merge research and development and technical support staffs. The reason is that many petroleum firms are viewed as mature, with little chance of major technical breakthroughs. Thus, there is little competitive advantage to investing heavily in research. Rather, operations divisions are looking for technical support and improvements to help lower costs. More and more basic research is outsourced, rather than performed in-house.

• Upstream, downstream mergement: Increasingly, there is a merging of central technical support staff for upstream and downstream activities. This trend is fed by a need to trim costs and by a recognition that certain specialists can serve both businesses.

• Narrowing core competencies: As central staffs decrease in size, they are increasingly specialized. Management will keep only those specialists essential to maintain core competencies and core memories. Interestingly enough, what is core is defined in ever narrower terms, fostering more outsourcing. Increasingly, routine technical staff work is being done at the plant or field level, not at headquarters.

• Accounting ignored: Petroleum company accounting systems are frequently incapable of properly measuring the real economic cost of maintaining a central technical staff. Everything is re-engineered except the accounting systems. In our experience, the problem of measuring cost for central services is far worse in the downstream - refining and chemicals - than in the upstream sector of the petroleum industry.

• Falling central services costs: In the early 1990s, the cost of central services on a cost per barrel basis averaged over $0.25/bbl, exclusive of research and development. Recent study results indicate that the cost-per-barrel is ranging from as little as $0.02/bbl up to $0.14/bbl. In several cases, oil company staffs are only one-third the size they were early in the decade.

J. P. Chevriere
President, Transmar Enterprises
Boston, Massachusetts

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