Surviving the downturn, building for the future
Richard Avant, Victor Burk, and Lee MaginnissAlvarez & Marsal Houston
As the world economy stumbles and energy demand sinks to its lowest level in years, oil and natural gas companies are seeing significant pressure to improve top- and bottom-line performance. Current market conditions have created downward pressure on cash flow and liquidity, causing many E&P companies to shut in wells, divest assets, cancel programs, and/or reduce their capital budgets. Combined with the current uncertainty in future oil and natural gas prices, E&P leaders have also realized a need to increase flexibility to adapt to changing market conditions.
Historically, E&P companies have had mixed results in attempts to manage costs and increase efficiency. Often, cost management is directed at suppliers and internal headcount. Many organizations have implemented strategic sourcing or other supply chain initiatives with some significant results, but they have reached a limit. Instead of focusing on core operations – acreage acquisition, well planning, drilling and completions, and field operations – they have streamlined back office functions such as procurement, business planning, accounting, IT, and human resources. Consequently, many E&P companies are now recognizing the need to examine and manage operations more efficiently and effectively.
E&P companies should consider examining and proactively utilizing Lean tools to implement efficient processes in operations now – while economic conditions demand improved cost structures and increased flexibility. The timing is right as service providers are motivated to become more efficient and many E&P organizations are still staffed from the recent energy boom. Focusing under-utilized resources on process improvement now will allow organizations to weather the current economic storm and be poised for future growth.
Lean tools and techniques have proved to be effective in delivering substantial gains in productivity and reducing capital and operating costs across a variety of industries, including pharmaceuticals, high-tech, automotive, aerospace, and banking. E&P companies are now turning to Lean to implement process improvements that increase production rates and capital efficiency in a market where capital is scarce. By eliminating non-value-added activities and time, Lean approaches can increase drillable inventory levels, lower capital and operating costs, and yield higher production.
Lean is a process-centric improvement methodology aimed at accomplishing more with less. Lean process improvement focuses on waste elimination and shortening process cycles by benchmarking against theoretical maximum performance. Thus, Lean thinking puts an emphasis on value-added activities and overall system efficiency by eliminating steps that add to the time and cost of making a product or delivering a service, but do not add value from the customer's point of view.
Successfully applying Lean to E&P
Some leading North American E&P companies have looked to Lean to address challenges related to their cost structures. By applying Lean concepts, they have identified and eliminated costs and built foundations for profitable future growth. These leaders have tackled well planning, midstream activities, drilling and completion operations, procurement and finance issues through a series of focused Lean tool deployments. Successful Lean deployments have been scoped narrow and deep to drive significant results in a 10- to 15-week timeframe. With results in place, these leading companies have been able to methodically propagate solutions and results across geographic regions and business units.
Rig mobilization
Lean tools and techniques have been successfully applied to field operations, which closely resemble the tangible repetitive nature of manufacturing. Initially, rig activities are observed and measured to establish a baseline and assess rig operations for improvement opportunities. Rig activities from spud to spud are measured and classified as either value added or non-value added – "waste" (Figure 1). The resulting analyses reveal the percentage of actual drilling time is considerably less than expected, thus presenting an opportunity to improve rig mobilization, as well as to reduce time spent moving equipment, pipe and people around the rig site.
Standard rig mobilization processes are established through a series of kaizen events, which analyze existing work processes and focus on driving out non-productive time. Rig move activity cycle times are measured and tracked against targets using visual controls to minimize variation. In turn, effective communication and planning significantly eliminate non-productive time – such as waiting on third party moving crews or equipment at the new location. Rig move cycle times are typically reduced by 35% to 50%, resulting in savings of up to $120,000 per move depending on daily rig rates and move distance. Rig mobilization Lean efforts have been replicated across multiple organizations and asset teams to prove applicability to long and short cycle time rig moves (Figure 2).
Time is critical when it comes to drilling and completing new wells, connecting wells to gathering lines and pipelines, and recompleting existing wells to enhance production. To complicate matters, lead times may be increasing for everything from valves to drilling permits. Maintaining an accurate drill schedule has been hindered by significant variability from title attorneys and regulatory agencies.
In many E&P organizations, the drill schedule changes weekly and the well planning team must work diligently to chase the changing priorities. This unpredictability forces teams to increase the number of planned wells in the hope of finding a few easy ones to ultimately drill.
Implementing Lean tools has enabled several well planning teams to reduce lead times, decrease the number of wells being planned at a given time, and increase the number of well concepts that actually spud. The well planning process, traditionally viewed as unique to each individual well, is redesigned to look like a structured, repeatable manufacturing process, while continuing to provide a flexible drilling program (Figure 3).
Breaking down the process allows teams to focus on discrete tasks, which can be planned, scheduled, analyzed and improved. Utilizing a demand-pull system, wells are now planned according to the pace drilling rigs spud new wells. Size-based kanbans are used to determine how many wells should be planned or "Available-to-Drill" at any time. These teams also develop simple visual controls to monitor the current status of the number of Available-to-Drill locations against the target.
Each kanban is sized to cover for demand variability (spud-to-spud cycle time variation), supply variability (planning lead time variation), supply process capability (wells planned, but never drilled), as well as demand over replenishment time using historical data. The days of constructing locations based on guesses of which wells could be drilled are long gone.
These custom-tailored Lean solutions are developed by cross-functional teams from Land, Geology, Drilling, Reservoir Engineering, and Regulatory. Results consistently show 40% to 50% well planning cycle time reductions, from well concept to spud. At the same time, the number of "cut" wells significantly diminishes and constructed locations are actually drilled.
Revenue accounting
Several E&P firms have deployed Lean tools to accelerate the revenue accounting process. Unsatisfied with the magnitude of rework in the accounting process, their goal is to expedite the monthly close process and provide more accurate revenue accounting.
These efforts begin by delivering current state value stream maps, which identify potential areas for subsequent Lean activities and educate participants from Revenue Accounting, Midstream Accounting, and Land Administration on the entire revenue accounting cycle. In most cases, no individual fully understands how the process works from beginning to end (e.g., steps, hand-offs, individuals involved, etc.).
As a result of initial analyses, immediate improvements are identified and executed. Examples of immediate improvements realized include elimination of unused accounting reports, simplified price deck maintenance activities, and standardized deduction nomenclature across pricing areas.
One of the most significant findings is the rework inherent in the revenue accounting cycle in the form of reverse and rebook activities. In severe cases, more than 20% of all revenue accounting postings are reversed and rebooked. By conducting thorough root cause analysis, one team determined that 64% of the reverse and rebook activity was related to changes in Division of Interest (DOI) decks – primarily the use of estimated DOI decks. A stage gate process was tied closely to the aforementioned E&P well planning process so that the use of estimated decks was greatly reduced by ensuring the timely creation of complete DOI decks.
Other applicable areas
Many E&P companies are experiencing similar issues with speed, flexibility, and costs throughout other parts of their business as well. Lean tools and techniques have delivered results across Portfolio Planning, Well Planning, Drilling, Completions, Production, Well Connect, Facilities Construction, Marketing, Supply Chain, and Finance/Accounting processes (Table 1).
Managing the change
E&P management teams face significant challenges in attempting to drive sustainable transformational changes. A lack of new talent entering the industry over the past two decades has resulted in few young professionals who possess the leadership experience needed to drive organizational change. To compound matters, most E&P companies are organized functionally, which results in a lack of holistic understanding of business processes and problems amongst core employees. Additionally, long project cycle times associated with some E&P areas means benefits realization can take longer than expected.
While the change is significant in Lean initiatives, these challenges can be successfully managed. By mobilizing cross-functional teams and developing integrated operations teams (IOTs) centered on core business processes, employees gain a better understanding of how their work affects those outside their functional expertise.
Measuring and visually tracking metrics related to E&P success is also a useful method in creating a comprehensive view for core employees. Communicating direction and vision clearly to the organization, and establishing a constant presence of visible executive support will help employees maintain a focus on desired behaviors when benefits realization may be extended.
Conclusion
Implementing Lean tools may seem intuitive and straightforward, but it requires discipline, focus, and the right people. Resources must be dedicated to support the efforts, and the organization must be committed to suffer through the casualties of change. However, the step change results that can be achieved will dramatically shift the way the business operates and impact bottom-line performance. Leveraging the experience of other industries, E&P organizations stand to compress cycle times from 30% to 50%, yielding accelerated production, increased resource recovery, and lower human capital per barrel.
About the authors
Richard Avant and Victor Burk are managing directors and Lee Maginniss is a senior director in the Houston office of Alvarez & Marsal Business Consulting. Founded in 1983, Alvarez & Marsal is a privately-owned professional services firm with 1,600 professionals in 38 cities. The firm's service offerings are business consulting, tax, dispute analysis and forensics, transaction advisory, and restructuring. For more information about Alvarez & Marsal, go to www.alvarezandmarsal.com. The authors can be contacted at [email protected], [email protected], and [email protected].
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