Operational expense and LOE control

The Situation

Our client is a large independent oil and gas producer with both conventional and coal bed methane (CBM) operations within the Permian, Rockies and Uinta Piceance.

The methods and effectiveness of monitoring and controlling operational expense, primarily LOE (Lease Operating Expense), were as variable as the operations in the different assets. At the time, vendor prices had hit a new high, while commodity prices experienced a downward market correction. Increases in the cost of operations were eroding profit margins, and the client was underperforming, compared to industry peers, in the area of cost control.

The asset management teams had successfully implemented production optimization initiatives, but realized they needed better control of operational costs. They were given a directive from corporate to drive down operational costs, while maintaining efficient and safe operations.

Approach

The initial assessment phase conducted with Advisian resulted in proposals to address the unique challenges in each operation. The solutions were agreed upon by both sets of management teams. Members of the client’s organization were teamed up with Advisian to design, develop and roll out an asset-wide Execution Control System (ECS^SM), which establishes metrics, reporting, regular performance reviews and accountabilities. Advisian provided extensive coaching and training of field personnel and front-line management in new tools, concepts and methodologies, ensuring sustainable behavior change to achieve lasting improvement.

Solutions Implemented

During the project phase, client teams worked alongside Advisian professionals to address obstacles to controlling spend.  Advisian also coordinated across assets to ensure standardization of approach and solutions, while allowing the implementation of the solution to be tailored to the asset’s individual processes.  It was also key that implementation efforts did not negatively impact production or health, safety or environmental (HSE) performance. Each team developed an ECS^SM that delivered both improved visibility and control of the spend within the month and added rigor to the review of metrics following the reporting cycle.

Some of the process changes key to operational improvement that were developed and implemented:

• Standardized coding for internal and external transactions and all operational activities
• Use of field tickets/estimates and increased use of Well View® to track costs within the reporting cycle
• Vendor-company work groups for process and service level reviews
• Streamlined P-card review process
• Line-item budgets and goals down to the foreman level
• A “market basket” to track changes in the cost of materials and services
• Standard analysis packages for review of variances to budget
• Cost controls including weekly and monthly reviews, estimated $/Mcf and BOE and well economics for current and planned workovers
• A route optimization system to drive effective utilization of manpower and equipment

Value Delivered

• Achieved a sustainable reduction in controllable operational expense of 28 percent, resulting in annualized savings of $18.4 million
• Reduced total net operational expense by 17 percent or $34 million in savings
• Achieved $540,000 in efficiency gains in pilot route optimization

Conclusion

While the client was motivated initially by a compelling business need to control costs, the strong commitment on the part of the company’s leadership to implement sound management practices and hold people accountable for operating expenses culminated in a highly successful joint Advisian-client effort that far exceeded savings projections. Additionally, foremen and managers adopted a “business owner” mindset, expressing a high level of satisfaction at having the information they needed to operate their area of responsibility like a business. Ownership for the changes implemented is high due to the high level of client involvement throughout the process. A project ROI of between 8:1 to 11.5:1 was achieved across the different assets.

As a result of this effort, client assets that were once assured of having negative margins were on pace to achieve sustainable monthly growing margins.