Breakthrough Reduction in Sustaining Capital Costs Assures the Future of a Flagship Oil & Gas Development

An energy major was seeing deteriorating economics in one of their upstream oil & gas developments. The cost of their sustaining well pad program, which was required to bring new reserves online as current reserves were depleted, was steadily rising, threatening the development of future growth phases. The increase appeared to be somewhat linked to market prices. However, it had also become clear that healthily challenging the legacy pad design, performance requirements, and technical standards to produce a better, simpler, and cheaper design was much harder that the organization had first thought.

The company’s joint venture partner in the development had begun to apply substantial pressure - pad costs needed to come down or they would be unwilling to continue funding the operation’s growth. Historical attempts at value engineering had barely slowed the rate of cost increase. Several external contractors were engaged to “re-imagine” the pads’ design by “producing the absolute ‘bare-bones’ version with no bells and whistles - just the bare essentials.”

At face value, the results appeared promising: on the order of a 10%-20% cost reduction. However, by mercilessly cutting scope, too many of the company’s technical safety and operational standards had been violated. They had a “good” design that was too expensive, and a “cheap” design that wasn’t good enough, but they were no closer to solving their challenge. Based on a recommendation from the JV partner, Stroud was called in to help them make a breakthrough.

Employing a Zero-Based Approach, the team rigorously broke down the cost of a sustaining pad into its mutually exclusive, comprehensively exhaustive value drivers. They then systematically challenged each one and identified all the potential opportunities to reduce cost. Previous efforts had relied on brainstorming and benchmarking to highlight savings and, due to inherent flaws associated with these approaches, had failed to achieve the required results.

They discovered, and revitalized, a number of large opportunities to save cost that had previously been obscured by:

  • Sweeping design philosophies that inadvertently produced an over-engineering of assets

  • Competing priorities across functional groups that prevented known opportunities from progressing

  • Lacking a rigorous and systematic process to bring opportunities to resolution with a rapid cadence

Drastically Lowering Sustaining Costs VA Tree.png

The project value improvement team:

  • Identified 300+ distinct opportunities to reduce the cost of a pad

  • Determined a perfect-world, theoretical-minimum pad cost that was 87% less than the base case

  • Evaluated and incorporated a subset of the opportunities to produce a 40% reduction in pad cost.

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Armed with a new, high-performing, low-cost design the organization immediately applied it to the next sustaining pad, which is currently being built. All anticipated cost savings are materializing. The organization is confident that with time in hand, future pad costs may be even lower.

 

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