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CNOOC International
2015-03-20 14:36:59

Cost Reductions and Risk Management in Low Commodity Price Environment

In January 2015 Wood Mackenzie published an article that noted "As long as operators can move to the core areas of plays and sub-play breakevens continue to fall with the drop in service costs, producers will keep chugging along [...]"

Cost reduction initiatives on a gobal scale however can introduce significant contractual risk; financial and operational both to service providers and E&P's. Any thoughts from community members on balancing these two important topics?

 •  World Commerce & Contracting  •   2015-03-27 13:21:59
Darryl, this is one of the topics that is driving increased discussion about levels of transparency in contract relationships. In many areas of critical supply, there is mutual interest in maintaining financial viability, which may include increased use of techniques such as open book accounting. But to lead to true collaboration, that must be a mutual endeavor, where both parties are working to identify ways to reduce costs and / or improve value. If it is only about apportioning what is already in place, it is unlikely to yield a positive result.
 •  Dassault Systemes  •   2015-04-22 00:43:27
In Australia we have seen the impact of suppliers not playing ball with some of the iron ore companies and the operators have literally stopped operating due to making a loss. Its worth considering in a project based environment the supplier is in for a defined scope of work therefore the opportunity to build a wider relationship to leverage from is key. Offering additional work packages or increasing their spend but reducing their margin or getting them on-board is key. In a previous role we have supplier conferences where we got all our project suppliers into a room and explained that for us all to win the next tranche of work and all make a profit we all need to make cuts. Some suppliers will play ball and some will not. For those who do not want to work in a much wider capacity with the organisation should be reviewed and energy spent on finding alternative suppliers who want to work in a collaborative manner.
 •  Dept of VA  •   2015-05-12 10:06:50
To paraphrase Mr. Fenlon's comment, making suppliers see that mutual cost reduction practices equates to taking a smaller slice of the pie...but this becomes much more palatable if you make a bigger pie. This works in two ways: Those who do not wish to participate will withdraw, leaving more pie for others; those who remain will focus on practices which successfully enlarge the pie.

I cannot (even with a mirror) accurately give myself an excellent haircut. Having someone whom I trust look at the back of my head (or my company's practices) enables me to identify issues and practices which, while "sufficient", may not be "best". Mutual transparency and open book accounting are advertising in and of themselves. These practices say, "We are such an efficient and amazing company that you can see everything we're doing- and we'll still be successful because you'll want to either work with us or emulate our practices, either of which benefits us." Collaboration, especially in an area with such significant long-term gain (particularly in the area of trust, whose goodwill and benefits are so great as to be incalculable) is so massively beneficial that one must question the business sanity of any company unwilling to forego the easy dollar for the long-term tenner.
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