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The full ramifications of cost-cutting

Monday, March 22, 2021

The full ramifications of cost-cutting. A question to be considered

A question to be considered, the potential cost to be calculated. With headcount reductions remaining high on the agenda, the ongoing trend for cost-cutting raises questions around unintended consequences?

Author: Emma Smillie

 

 

Like many sectors, the oil and gas industry is still weathering the storm caused by the COVID-19 pandemic. Compounding the issue, businesses across upstream, midstream, and downstream are in a state of broader transition, responding to the global shift to renewable energy and facing an increasing need to address carbon neutrality expectations.

The acute financial pressures faced last year may have eased somewhat, with the recent OPEC+ announcements and the predicted impact of the vaccine rollouts pushing prices above $60 a barrel for the first time since late 2019. However, headcount reductions remain high on the agenda as companies look to increase their margins and recoup the historic losses they incurred in 2020. This ongoing trend for cost-cutting raises questions around unintended consequences and the potential to impact how businesses maintain agility, operational performance, and preparedness standards with a reduced workforce and lower investment levels. 

In terms of oil spill response, twelve months from the outbreak of COVID-19, OSRL has seen the number of oil spills decrease in line with the reduction in oil demand. To many, it would therefore seem that the overall risk profile should have also reduced. Unfortunately, risk simply doesn’t work like that.


 

 

The risk profile is changing; an unforeseen crisis could come from a wider range of sources.

If you were to question the general public, for many, their enduring memory of an oil spill will be a recent subsea incident. In this area of the industry, significant attention has been paid to preparedness, with increased safeguards at every level. Indeed, the subsea sector is now likely well prepared in the event of another major spill. Nevertheless, it is entirely plausible that the next big incident will come from a less apparent risk – with ageing pipelines and increased oil storage in less-regulated regions representing just two areas of potential danger. 

In fact, despite reduced global traffic, there was actually a spike in shipping incidents in 2020, partly due to COVID-19 related issues, such as a disruption to essential maintenance programmes, lack of access to spare parts, reduced or delayed statutory surveys and port inspections, and crew fatigue as a result of extended periods at sea.

Equally, geo-political tensions remain near boiling point, with many oil-rich territories situated in regions characterised by political uncertainty. For example, an oil refinery could be a target for another high-profile attack, similar to the tragic events at the In-Amenas refinery in Algeria in 2013. The subsequent In-Amenas report highlighted a ‘failure of imagination’ to conceive that an incident of that nature could occur and urging a widespread shift in how the operator considered its risk profile.  

In response, oil and gas operators must ensure that they can adequately consider, prepare for and respond to a wide range of events and scenarios across their operations, including those they may not have contemplated in the past.


 

 

The cost of oil spill preparedness and response is a real cost, but the impact of not being prepared is even greater.

The cost of oil spill preparedness and response is a real cost, but the impact of not being prepared is even greater.

The oil and gas sector is under greater regulatory scrutiny than ever before, and potential fines for non-compliance are ever-increasing. Reputational risk has also never been higher, exacerbated by the speed at which news of an incident now travels, making it increasingly difficult to influence, let alone control the narrative.

In these modern digital times, the implications of inadequate preparedness and response are significant. Satellite companies actively search for oil spills at sea and publish their findings to the world in minutes. Everyone has a smartphone and can send pictures to content-hungry journalists and social media networks at the click of a button. 

Environmental, social and governance (ESG) goals and programmes are a key focus for the industry, and this has not slowed despite the COVID-19 pandemic. In the past decade, pressure on the sector for environmental action has increased exponentially. 

The energy transition debate continues to gather momentum, driven by state policy and international regulatory initiatives (the UN’s Sustainable Development Goals being prominent among them). 

Compliance and reporting requirements imposed by these programmes are on the increase, and in many jurisdictions, they extend beyond the environment to social and governance targets. 

The mounting pressure from stakeholders, including investors, combined with the ever-growing power of digital communications, particularly social media, creates an environment where there is little room for error. 

A poor response to an incident will live long in stakeholders’ memories and could haunt an organisation for many years or destroy it completely. The world is watching. Reputation takes years to build and moments to destroy. It is simply too important to leave to chance.

 


 

 

The loss of key personnel is leaving a potential skills black hole.

Delayed projects, tighter margins and reduced demand have impacted oil and gas companies from the largest to the smallest organisations. Larger companies have responded by shedding assets, with smaller businesses and newly formed investment vehicles rapidly acquiring them. Budgets are subsequently scrutinised, with headcount reduction often top of the list, sometimes without a firm understanding of the long-term implications.  

It is not the first time this has happened. Just speak to the older generation in the industry. 

In the early 1990s, the oil industry decreased its workforce significantly, then recruited again many years later when the oil price recovered. Many experienced experts never returned to the oil sector, opting for industries with less volatile career prospects.  

The oil, natural gas, and chemicals industry in the U.S. eliminated 107,000 jobs between March and August of last year alone, according to a report released by Deloitte on the future of work in the sector. It is the “fastest rate of layoffs in the industry’s history,” the report states – a remarkable pace even for a sector famed for its sky-high peaks and punishing lows.  

Many of the people in the positions that would deal with oil spills have been among the casualties, either through choice or necessity. Within these groups lie a wealth of knowledge and skills that have largely not been passed to the next generation. In difficult times, it is hard to justify positions that don’t immediately contribute to the bottom line, however, the cost of the knowledge vacuum left behind could be significant.


 

 

The learning curves for many are steep, and an oil spill provides no time to learn.

Whether it’s people taking on more responsibility due to loss of personnel, or smaller, inexperienced companies acquiring new assets, the fresh faces need time to learn. But, if the people to teach them are not available, the processes and procedures might not even exist, or they may have been inherited with little or no qualitative handover. 

An oil spill will not wait for a process to be written or learnt. During the recent spill in Mauritius, teams mobilised to the incident described their experience as ‘the steepest learning curve of their lives’. This is a terrifying statement. An active spill is simply not the time for a steep learning curve. What could be the impact if the next big oil spill is under the watch of an organisation with inexperienced staff, with a lack of preparedness, process, and procedure? Potentially huge to the environment, the organisation’s reputation and its financial viability. 


 

 

Outsourcing may be a solution, but not just any old outfit will do.

As organisations in the oil and gas industry restructure, they need to consider how they maintain a cost-effective and efficient preparedness and response capability. 

The people you need in an incident are the ‘safe hands’, the ones with the experience. How does an organisation replicate this when these are the very people they have needed to say goodbye to? 

One solution could be to outsource this capability but with this comes additional risks. Any outsourcing needs to be carefully considered. As American oil well response specialist Red Adair once said: ‘If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur,’.

For something as important as oil spill response – which undoubtedly affects people, the environment, company assets and reputation – the third-party organisation’s pedigree and experience are essential. 

The fundamental ‘need’ is for a trusted partner, rather than a vendor, for a pair of safe hands able to handle any response. Too many response organisations make bold claims, but due diligence in the selection process is vital.


 

 

In Conclusion

The oil and gas industry is facing unprecedented challenges in terms of maintaining effective spill prevention, preparedness and response capabilities. Several competing factors influence the types of risk an operator could face and the potential consequences, which are arguably more severe than ever before. 

The cost of preparedness and response is rising, particularly with large swathes of experienced people exiting the industry. Without that experienced personnel, the oil and gas industry must think innovatively about how it meets this capability gap. 

There are solutions, such as outsourcing, but it’s essential to recognise that any company’s future may rest in how well or poorly a future incident is managed. This may be one of the areas where demonstrated quality and experience has to be the primary deciding factor. 

With reduced exploration activities, the risk level may seem lower. However, this is no time for complacency. In these unique times, the potential consequences of not adequately responding to an incident are greater than ever before.


 

 

About the Author.

 
 

Emma Smillie

Emma Smillie small.jpgEmma is the Global Marketing and Communications Manager. With over 17 years marketing and communications experience, Emma has worked at OSRL for the last seven years. Her main focus has been on developing OSRL's digital engagement tools to ensure that the latest insights, updates and trends are communicated effectively to members and industry. 

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