Sustaining Cost Reduction in Upstream Energy: Challenges and Strategies

In the upstream oil and gas industry, cutting costs is a well-worn practice—often a survival skill, given the sector’s exposure to volatile market forces. While companies have long focused on removing costs during lean times, these reductions often creep back as priorities shift toward maximizing production or maintaining assets. Today, with inflationary pressures and supply chain disruptions in play, upstream energy companies are again revisiting cost structures to remain competitive.

This renewed cost-cutting cycle has raised a crucial question: how can upstream energy companies make these reductions sustainable? Here, we explore some of the approaches companies are taking to make permanent, transformative changes that go beyond traditional belt-tightening.

Identifying Key Cost Drivers in Upstream Operations

Upstream operating expenses (opex) primarily depend on workforce management, engineering, supplies, and logistics. While these elements are relatively stable, their costs can fluctuate due to changes in external factors like commodity prices and labor costs. Upstream companies need to address these core elements through innovative strategies that balance cost efficiency with the necessity of maintaining safety, asset integrity, and environmental standards.

Upstream companies typically approach cost reduction through three levels of increasing complexity:

1. Implementing “No-Regret” Moves for Immediate Savings

“No-regret” moves are straightforward efficiency improvements that fit within a company’s current structure, typically yielding savings of 10% to 15% of opex. These actions focus on enhancing the productivity of existing resources without significant disruption to operations.

Common “no-regret” strategies include:

• Streamlining Logistics: Rationalizing vessel or helicopter schedules can lower transportation costs while still meeting operational needs.

• Reducing Consumables: Limiting the use of chemicals and other consumables can reduce expenses without affecting production.

• Optimizing Workflows: Simplifying the permit-to-work process allows crews more productive time on-site, as shown by a 20% increase in productivity for one offshore operator.

• Contractor Spending: Revisiting long-term contracts and moving towards incentive-based agreements with contractors can ensure better value for materials and services.

By improving efficiency without structural changes, these strategies provide quick, risk-free wins that deliver immediate savings while maintaining continuity.

2. Making Structural Changes to Operating Models

Structural changes demand a deeper rethinking of how work is organized and executed, often involving digitization and outsourcing. These changes allow for a more agile and cost-effective operating environment by reconfiguring workflows and establishing value-based metrics that prioritize cost-effectiveness.

Examples of structural improvements include:

• Campaign-Based Maintenance: Instead of keeping maintenance crews on-site continuously, a campaign-based approach schedules targeted work, reducing workload and costs by up to 15%.

• Zero-Based Site Manning: Adjusting staffing levels based on essential operational needs rather than historical norms can reduce labor expenses by 30% or more.

• Outsourcing and Digitization: Some companies have outsourced support functions to lower-cost locations or digitized workflows to streamline processes and reduce manual intervention.

These changes require a shift in operating philosophy, but they help companies embed efficiency into their operational DNA, aligning resources with actual production demands.

3. Implementing Disruptive Changes and New Business Models

Disruptive changes involve transformative shifts in business models or organizational structures, such as establishing independent business units or streamlining engineering processes. For example, companies like bpx energy and Equinor FLX have carved out separate entities within their portfolios to promote asset focus and cost efficiency. Such entities can operate with leaner overhead and more focused management, often yielding significant cost savings.

Additional disruptive strategies include:

• Engineering Simplification: Reducing asset equipment to essential components can lower maintenance needs and cut costs without compromising operational efficiency.

• Outsourced Operations: Contracting third-party providers to operate and maintain assets can create cost-effective structures while still meeting safety and performance standards.

• Joint Ventures: Some companies use joint ventures to manage support costs, such as outsourcing tech support and leveraging cloud-based solutions for ERP, allowing for substantial savings.

However, companies must be cautious with these changes to ensure they don’t simply shift costs rather than eliminate them. For example, outsourcing tech support might save costs initially but could lead to additional costs if integration challenges arise.

Ensuring Lasting Impact: Keys to Sustainable Cost Reductions

While these strategies can help cut costs significantly, sustaining those reductions requires a more holistic approach. Companies need to focus not just on the immediate gains but on implementing a culture of cost consciousness and efficiency that endures. Here are the crucial steps to making cost savings permanent:

1. Rethink Work at the Front Line

A sustainable approach to cost management begins by understanding the realities of work on the ground. Companies need to gain insights into actual site processes to design meaningful changes that resonate with front-line staff and address real operational needs.

2. Challenge Established Standards

Many practices in upstream operations have been “gold-plated” over time, leading to unnecessary spending. Management should critically evaluate standards and practices to ensure they align with the asset’s remaining economic life and aren’t over-extended in the name of risk mitigation.

3. Foster Cross-Functional Collaboration

Sustainable cost management requires a coordinated, cross-functional approach. Teams must share goals, utilize agile methodologies, and work from aligned KPIs to maintain cost control across departments.

4. Cultivate a Value-Driven Culture

Every team within the organization should have a “bias for value,” where cost efficiency becomes part of everyday decision-making. By encouraging each level of the organization to prioritize cost-effective operations, companies can foster a culture of continuous improvement without sacrificing quality or safety.

5. Enforce Disciplined Change Management

Managing change is essential for embedding cost-saving measures effectively. Companies must maintain rigorous oversight of change initiatives, ensuring that interdependencies are addressed and transformations remain on track.

6. Use Leading Indicators to Track Progress

Continual monitoring of leading indicators allows management to assess the effectiveness of cost-reduction measures. Tracking progress through these indicators provides a structured path for ongoing cost savings and helps maintain momentum across initiatives.

Looking Forward: Sustaining Efficiency and Value in a Competitive Market

Achieving sustainable cost reductions in upstream operations is not about implementing temporary fixes but rather cultivating a culture of efficiency that permeates every layer of the organization. This approach goes beyond reducing expenses—it aligns operations with broader organizational goals, ensuring that cost efficiency contributes to long-term stability and profitability.

As companies face a challenging market with fluctuating prices and rising operational costs, maintaining a focus on value-based metrics, disciplined change management, and collaborative practices will be crucial. By applying these strategies with consistency and rigor, upstream energy companies can not only cut costs but also position themselves for sustained success in an evolving energy landscape.