Logistical improvements should not be overlooked when evaluating costs

When oil prices fall, forcing companies to make drastic cuts to their expenditures, what else can they reasonably do?

Mar 10th, 2016

When oil prices fall, forcing companies to make drastic cuts to their expenditures, what else can they reasonably do? Many organizations have had to ask this tough question, but never before has it been asked so intensively in oil and gas industry logistics.

The supply chain is an obvious first place to look and is receiving much more senior management attention. For even larger savings, offshore oil and gas companies are now widening their focus with a view toward optimizing their operations, warehouse, yard, and dock utilization; reducing inventories; and integrating the supply chain.

Logistics accounts for around 10-15% of the operating costs of a typical offshore oil or gas facility, with marine logistics representing a very high proportion of spend for these developments. So, every improvement can make a significant contribution to the bottom line.

Below are some top recommendations for streamlining and optimizing offshore oil and gas logistics.

Integration. Offshore logistics can be complex and expensive, especially the supply of pipes, chemicals, tools, and other materials to rigs and platforms. This marine logistics element absorbs as much as 75% of total logistics operating expenditure, and yet it is not typically integrated with the supply chain. It is fair to say that marine experts are not supply chain experts and, similarly, supply chain experts cannot replace marine experts. The contribution of both can be strengthened with better end-to-end planning; by using methodology from other industries; and through integration. This can achieve significant cost savings.

Standardization. Over time, many offshore operations grow to include multiple subcontractors with multiple long-term contracts and multiple vessel types. There are ample examples of vessel fleets being allocated to only one specific part of the business (projects, operations, drilling) and operating independently from each other. By standardizing on a multi-purpose vessel, companies can increase vessel utilization and inevitably reduce subcontractor numbers, fleet size, and marine logistics costs.

Vessel pooling. Some companies use different sets of vessels for projects and for operations, which can often lead to needless, siloed complexity. When an operation uses multi-purpose vessels, these can be pooled and used more effectively. There is also the potential to share vessels with other companies. This pooling is certain to reduce fleet size and operating costs.

Scheduling. Every alteration to offshore operations - for example, the addition of a new production platform or a change in the drilling program - can provide the opportunity to rethink vessel schedules, routes, and even cruising speeds. The issue of vessel speed is particularly relevant today, given the need to balance delivery schedules with fuel consumption. Getting the balance right can save substantial sums of money.

Space optimization. With extreme restrictions on platform storage and personnel space, it is essential to ensure that the equipment and people needed for the job are delivered as near as possible to scheduled start times. The key is to plan and prioritize in advance to optimize deck space, tank space, and vessel payload.

Contingency planning. The operating cost of a typical platform is between $300,000 and $500,000 per day. Even an hour’s delay is likely to cost more than $10,000, and that is before accounting for costs like lost production, the rental of expensive equipment, and the use of contract personnel for longer than planned. Companies must make optimal use of all their transport assets, including fast crew boats and helicopters, to efficiently synchronize urgent or just-in-time delivery of tools, equipment, engineers, and other key personnel.

Renegotiation. With the drop in oil price, operations should be benefitting from reduced vessel day rates.

Capacity planning. Looking ahead, a longer-term perspective on capacity planning can save considerable cost. Companies should consider projected rig numbers, drilling schedules, vessel requirements, project lifecycles, and more.

Consolidation. Also looking to the longer term, it is essential to regularly review the number and location of marine bases, making sure that these are optimized for future variations in operations. This often provides opportunities for cost-saving base consolidation and the use of third-party owned and operated onshore warehouses and other facilities. In addition, consolidation leads to inventory reduction when supply warehouses are merged and consolidation points are established to allow sharing between sites.

While the above recommendations can help oil and gas companies access substantial cost savings, it is also important to remember that requirements will change over time. The intensity of logistics support for a facility will vary during its lifespan. One platform may run multiple wells, and each of these will be at a different stage of its own lifecycle. The same equipment will operate in different locations and at different times, and many assets are being used on an increasingly global basis.

These changes will have a significant impact on logistics planning. It is not enough to just consider and reconfigure the final link in the logistics chain. To maintain adequate and cost-efficient logistics support, offshore oil and gas companies must also conduct regular root-and-branch reviews, which ensure that the logistics from the top to the bottom of the entire organization have been reviewed and analyzed. This is the way to reveal and exploit the most valuable cost reduction opportunities.

Steve Harley

President

DHL Energy Sector

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