Implementing Cost Cutting in the Oil Industry
Abstract
In the modern day, organizations across different industries across the globe are implementing new strategies focused towards enhancing the profitability. Cost cutting is one of the major strategies adopted by companies to enhance their profitability. In the oil and gas industry companies have been pursuing different cost cutting strategies aimed at enhancing their profitability an issue that has been of primary concern. Various strategies have been proposed towards enhancing cost cutting strategies and these include automation that facilitate a throughout system, heightened regulatory measures compliance, technical support and solutions as well as maximizing modularity and replicability. These are among the identified measures aimed at reducing cost without affecting the performance or operational efficiency of a company. It is essential to note that at time organization adopt cost cutting measure and affect their operational efficiency or performance and it is essential that a company formulate strategies that do affect these important aspects of an organization. As such, this study aims at evaluating the strategic cost cutting approaches that can be adopted by companies operating in the oil industry without affecting their operational efficiency or profitability.
Key Words: Cost cutting, automation, oil companies, operational efficiency, performance
Chapter One: Introduction
Background of the Study
The reduction of costs is not a new concept in the oil industry. Since time immemorial, this sector has been employing a wide range of strategies aimed at cutting costs and maximizing profits. However, the industry is still facing challenges. In the selection and planning of capital projects, inappropriate management remains to be a key drawback. The industry is revolutionizing every day thus requiring heightened attention. The case is especially so given the frequent fluctuation of crude prices. According to a survey examining the economies of scale in the oil companies, major difficulties highlighted included assessment of investment returns, prediction of long-term costs, and effective cash flow management over the life of a project (Griffin, et. al, 2014). The executives in these companies attributed these issues to the underperforming of projects, particularly capital projects.
In reaction to these challenges, most companies are embarking on mechanisms that balance major initiatives with the smaller ones. That way, the portfolio of the companies is diversified thus reducing uncertainty and increasing speed delivery and profits stream. Despite this strategic move, performance is not living up to its expectations. The primary problem is the collection and tracking of data throughout processes progressively (Chowdhury, 2016). The fierce competition surrounding this industry is triggering the resurgence of global energy which in turn promotes the daily evolution of the mentioned challenges. Hence, it is imperative to invest in automation as a strategy to implement cost cutting without affecting operational efficiency. In this case, automation is through the employment of a partner (Newswire, 2016). Today, there are parties which professionally understand this industry and helps oil companies in wading through tough times and maintaining their reputation.
As stated early, the challenges of this industry are growing on a daily basis. The firms have a lot on their table thus ineffectively capitalizing on this industry. They have to increase the efficiency of production, improve data collection, uphold operation safety, and comply with state or/and federal regulations. With all these responsibilities at hand, it is becoming difficult for the companies to keep up with real-time data and assessment of situations. For instance, the explosion witnessed at the platform of Deepwater Horizon led to a disastrous oil spill in the Gulf of Mexico (Newswire, 2016). The spill negatively impacted the environment and raised questions about the prevention measures adopted by oil companies. The rising challenges in the industry have continually necessitated the adoption of new strategies, which will play an important role in enhancing the effectiveness and profitability of the companies operating in the industry.
The industry is characterized by various uncertainties some of which can destroy the success and reputation of these companies should they occur. The case is especially so since a majority of oil companies have not embraced automation. They are quick to react when such events happen as it was the case after the detrimental oil spill. The impulsive reaction is contributed by the lack of efficient ways to handle data and maintain top-notch business processes. Communication between departments is on low due to the inability to obtain data in quick successions in spite of time or location. These situations are caused by the absence of automation. Consequently, it is daunting to implement ways of reducing such risks. The companies hardly or irregularly inspect equipment as a proactive measure to prevent life or environment threatening scenarios (Chowdhury, 2016). Therefore, the oil industry is finding it hard to constantly face new challenges and maintain profitability because the companies have not significantly automated their processes.
Justification of the study
It is evident that oil prices are falling and demand decelerating, especially since the world is discovering alternative energy sources. This is a wake-up call for these companies to not only evaluate their facilities but also upgrade them. Further, reducing the costs has been identified as a major aspect that can enhance the effectiveness of an organization and enhance profitability. Understanding the strategies that companies operating in the oil industry can adopt to reduce costs can play an essential role in enhancing their sustainability in the long run. The evaluation and improvement will increase production and save money. Automation enables the assessment of technology, processes and equipment in line with refinery and efficiency. During the Siemens Oil and Gas Innovations Conference which was held in Houston last year, the need for automation could not be over-emphasized. Among the great debate was the solid improvement of the automotive industry. In 2014, the industry registered an impressive production and capacity utilization – the highest in a decade (Hoover, 2016). The tremendous growth was as a result of automation.
The automation of certain processes caused the automotive industry to employ smart manufacturing practices hence increasing production and saving money. However, the aerospace industry did not record impressive results despite experiencing similar automation. This was because the sector is heavily backlogged, and significant results can only take time, probably over five years (Hoover, 2016). Nevertheless, there was no sign of the industry showing growth deceleration like in the previous years. Therefore, automation promotes visibility, reliability and efficiency. It operates with actual and most current data to promote the establishment of planned downtime and environmental issues. It also ensures the integration of monitoring and controlling systems. For this reason, studying factors that can enhance the sustainability of the industry through cutting of costs can play an important role because cost comprises a major determinant factor.
Purpose of the Study
Understanding the need for sustainability measures in the oil industry can play an important role. As such, in the wake of increasing challenges that face the companies operating in the industry, companies have been adopting measures to reduce the costs. For his reason, this study focuses on identifying the measures and strategies that can be adopted to enhance cost cutting a major factor towards achieving sustainability for companies operating in the oil industry. Automating processes can improve the production and capacity utilization of oil firms by reducing management costs and maintaining operational efficiency. The study aims at satisfying this statement. It will serve as the primary objective of this project. Other objectives include determining the factors barring the collective adoption of automation in this industry and challenges associated with this practice of optimizing production and profitability.
Chapter Two: Literature Review
A Throughput System
Automation increases the reliability of a company’s processes. Unlike the manual control strategies, it is not error-prone and does not consume time. A scale of reliability at a single site is magnified in various domains promoting consistency and efficiency. To automate processes, collection and delivery of data is essential. With the data, it is easier to carry diagnostic procedures, endure undesirable environments and meet upscale decision-making. The gathering, consolidation and analysis of real-time data ensure integration. All operations ranging from drilling to refinery aspects have increased visibility and asset utilization. The fine details of daily processes enable the creation of informed decisions thus optimizing production. Even better, it is easier to identify troubleshooting issues before they occur.
As such, this saves the lost revenues and the operation costs that would have been incurred if a project was compromised. The goal is to ensure appropriate allocation of resources in tandem with proactive and cost-effective approaches. Again, revered automation secures products and practices that exceed the standard of an industry. They account for possible rough conditions such as severe vibration, heat waves, salt water spray, and extreme temperatures. A company such as Siemens is known to provide automation software and hardware that have been tested with an agency to follow-up their performance upon implementation (Hoover, 2016). Clearly, automation prevents the exploitation of a company’s equipment, which may bring about failure or even halt projects. As such, organizations operating in the oil industry benefit significantly when they adopt automation strategies, which is an essential strategy adopted by organization across different industries.
Heightened Regulatory Compliance
Agencies like OSHA and EPA are continuously improving regulations and policies to match the growth of the oil industry. Automation helps the company to be safe, compliant and avoid the hefty penalties triggered after defaulting. The problem is that the regulations are ever-evolving, but communication is not catching up. Automation technologies host a central point of integrating all control systems and instrumentation. The central point serves as a supervisory area where transparency is augmented and some issues resolved automatically. For instance, automation products can trigger an alarm on certain issues to create attention and provide detailed reporting corresponding to the stringent regulation in place. Moreover, automation enhances the control of even unmanned locations.
Normally, collecting data from the unmanned location is a gruesome challenge. Automation houses various control applications ideal for remote monitoring. This allows visualization of systems and promotes compliance. Such scenarios are common in the marine industry. Through automation, ships have greater compliance across the whole oil value chain (De Mattos et. al, 2016). A company does not have to worry about additional hardware for safety. Automate processes are inherently safe. The connection within the entire system permeates quick detection and analysis of potential hazards. Upon the detection of possible hazards, the automation features immediately give a warning or shuts down. A company escapes from the events of being hit by penalties.
Technical Support and Solutions
A good number of operations in the oil industry are not located in the center of metropolis. They can be hosted in inconvenient locations, miles away. The processes in these places have been proven to incur additional costs especially when they encounter problems. It consumes significant time and cash in reviving these operations in cases where they break down. Automation has registered immense and timely reliability of processes even at such distances. Depending on the nature of the breakdown, the intervention can be done remotely or on-site. Usually, the technical support and solutions are offered by the automation partners. Following their insights on matters in this sector, they address the issues effectively whether the company is upstream or downstream. The partners are always available to provide technical issues ranging from emergency to repair scheduling. The availability of technical support and solutions can play an important role in ensuring efficiency of the flow of the activities.
If the solution must be on-site, they dispatch their technical staff to handle the problem. The staff exploits the existing automation products and services to commission and maintain the situation. Furthermore, the automation support and training is extended. As if the pre-sale and post-sale support is not enough, automation boasts a portal in which a company can consult about service-related questions for free (Griffin, et. Al, 2014). The platform has supporting documents that can be leveraged for consultation. Even better, it connects customers and major players in the industry – a factor that increases access to real-time information. The portal takes a convenient format saving costs of training and support. Organizations need to ensure the availability of technical support and solutions to ensure their activities and operations run in a smooth and effective way. As a result, such measures will play an important role in reducing costs and enhancing the sustainability of an organization.
Automation Engineering
Automation structural and virtual design fosters a straightforward and seamless transformation. The installation and integration of the automation into the existing system see learning become intuitive. Automation engineering is designed in line with the requested solution. However, it is advisable to automate the full system in a company in order to prevent the dilution of success by certain areas. The point is that automation increases transparency and reduced complexities because operators can learn in advance. Oil corporations without automation loss concrete production time to commissioning and training. As a result, this mitigates gains and delays return investments.
Even worse, bouncing back to the usual ways of performance is always a challenge. The firms may struggle in attaining and improving the previous efficiency levels since the new workflow can take time to settle completely (De Mattos et. Al, 2016). The automation engineering design shuns such ugly occurrences because it involves a centralized and projected system. It challenges companies to focus on the future in order to manage unprecedented incidents. The case is especially so since it gives security resolutions. It protects sensitive data and software through custom authorization and optimum communication integrity. Being an interactive system with many players does not mean that information on the technical know-how, access or manipulation is open to prying eyes.
Maximizing Modularity and Replicability
Automation is supposed to boost not only production and profitability but also the competitive edge. The idea is to make the system of a company distinct. It is based on the fact that uniqueness is a factor of competitiveness (Newswire, 2016). Hence, automation ensures the purchase of products and services which align with a company’s needs. For example, while some firms are in dire need for process analytics, others require industrial components. The needs can also differ in terms of simplicity and complexity on the market. Automation ensures that the needs are replicated in all operations as they act as the module of what perfectly fits the company. It is not a matter of pushing products but establishing distinguishable features which can, in turn, put a company at the edge of competition. That way, it is easier to stay consistent and identify additional needs for a company. Therefore, automation upgrades replicability to a promising level. It takes into account the various needs in different sites to prevent collisions. As a result, operations across the entire system match accordingly leading to efficiency. To that end, companies can comfortably operate irrespective of the expansion degree.
Chapter Three: Research Methodology
In undertaking research, research methodology comprises the processes, methods and approaches undertaken to facilitate the achievement of the research objectives. The primary aim of this study is to establish a strategy that can enhance oil companies to implement cost cutting approaches without an implication on operational efficiency or the performance of a company (Yin, 2003). This research is based on a social science subject, and a case study approach, or research design has been identified as an appropriate for the study. The research methodology chapter will have several subsections, which will include research paradigm or approach, participants of the study, data and information gathering approaches and data analysis.
Research Paradigm/ Approach
Research approach or paradigm is an essential aspect while conducting research because sets out the basis upon which a study is based on concerning common beliefs and agreements, which are understood and agreed upon by scientists. Research paradigms represent the theoretical frameworks of scientific disciplines and the formulated laws, theories and experiments are conducted to assert the paradigms. There are three fundamental research paradigm, which includes positivism, constructivism and pragmatism. For the positivism approach, scientists argue that there is a single reality that is known and can be measured, which makes this approach predominantly use quantitative methods.
A constructivism approach is based on the belief that there is no single reality or known truth, which makes a quest to find a reality through interpretation and the approach is more likely to adopt a qualitative method to facilitate the achievement of the several realities that can be achieved. Pragmatism, on the other hand, is based on the argument that reality has to be renegotiated, interpreted and debated and it can use either qualitative or quantitative, as well as a mixed approach as long as facilitate the achievement of the set objectives (Woodside, 2010). This study will adopt a pragmatic approach because there is no specific known truth and the study can have various outcomes, which makes the approach appropriate for this study.
Participants of the Study
The participants of a study play an important role in the achievement of a research’s objective. In this case, the objective is to identify strategies that can be implemented to facilitate cost cutting in the oil industry without affecting the performance and operational efficiency of the companies. As such, the study will predominantly rely on secondary data of companies on the oil industry, with an objective of primarily focusing on companies that have adopted cost-cutting measures without affecting their operation efficiency or performance of their companies. However, the study will conduct a primary research through phone interviews with top managers in different oil companies (Gagnon, 2010). The study will seek the audience of five operational managers of Abbot Group, British Pipeline Agency and Anglo-Saxon Petroleum. The phone interviews will be conducted using structured questions to ensure they are focused towards achieving the objectives of this study.
Data and Information Gathering Approaches
This study will involve derivation of significant information and data from secondary sources such as government websites, company annual reports and other credible, reliable and academic sources. The majority of the data and information such as the one used in the literature review will be sourced from online available and academic sources. However, the collection of primary data and information from the operational managers will be collected using phone interviews, and they will be based on a structured questionnaire. As such, the structured questionnaires were considered in this study because they ensure a focused approach towards the issues under study. Further, structured questions are essential in enhancing standardization of the questions asked to the respondents. It prevents variations, ensuring that all the respondents are asked the similar questions, which increase the reliability of the study and responses given by the respondents.
Data Analysis
After the collection of data, analysis has to be done to ensure that important information aimed at achieving the objectives of the study is achieved. In this case, the focus is on establishing the strategic approaches of cost cutting in oil industry without affecting the operational efficiency or the performance of a company. This study will analyze using qualitative and quantitative approaches in the achievement of the study objectives. Quantitative analysis will be done through a presentation of data tables that will illustrate the relationships of various variables of the study. Further, the analysis will also be based on a descriptive analysis where charts and graphs will be used in illustrating various relationships between the variables under study.
Theoretical Framework of the Study
A theoretical framework is essential in facilitating the explanation, prediction and understanding phenomena focused towards challenging or extending the current knowledge within the binding assumptions to such phenomena. As such a theoretical framework can be used to support a theory as established in a research study. The dependent variable, in this case, is cost as in the case of an oil industry. The independent factors under consideration in this study include a throughput system, technical support and solutions, automation engineering, maximizing modularity and replicability, among other factors as established in the literature review. The relationship between the dependent variable and the independent variables can be illustrated using the diagram illustrated.
Cost in the Oil Industry
The diagram illustrates that cost cutting in the oil industry is dependent on various factors and strategies, which include the adoption of a through system that ensures effective operations and reduces stoppages. Technical support and solutions have also been identified as an essential strategy that can be adopted in enhancing the reduction of costs and enhance the operational efficiency of an organization. In the modern day, automation is a major aspect nearly in all industries operating in different industries and it is also a major strategy in enhancing efficiency, which will in turn reduce the costs. As such, automation engineering can be adopted and ensure efficacy and reduce cost enhancing the profitability of an organization. The maximization of modularity and replicability plays an essential role in reducing the efforts and costs that are used in developing systems that can be replicated. As such, replication reduces the costs associated the need to develop new systems, which can be costly and time consuming.
References
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Gagnon, Y.-C. (2010). The Case Study as Research Method: A Practical Handbook. Québec City, : PUQ.
Griffin, M. A., Hodkiewicz, M. R., Dunster, J., Kanse, L., Parkes, K. R., Finnerty, D., & Unsworth, K. L. (2014). A conceptual framework and practical guide for assessing fitness-to-operate in the offshore oil and gas industry. Accident Analysis and Prevention, 68(Systems thinking in workplace safety and health), 156-171. doi:10.1016/j.aap.2013.12.005
Newswire. (2016). Trilliant and Siemens Partner to Deliver Smart Energy Networks for Distributed Automation and Advanced Metering Infrastructure for Mexico's CFE. PR Newswire.
Woodside, A. (2010). Case Study Research: Theory, Methods, Practice. New York: Emerald Group Publishing.
Yin, R. (2003). Case Study Research: Design and Methods. London: SAGE.
