A continuing trend in the oil and gas industry is starting to reshape the way these companies do business. Despite layoffs, cutting costs on exploratory projects, and tough budgeting decisions, profit margins at many companies in the oil industry are still falling. Cost cutting is no longer a sufficient means of maintaining margins. A new look at how the industry operates is needed in order to develop sustainable ways to do business in the oil industry. Companies could attempt to do this in any number of ways, but most are looking into doing away with customized project orders and are instead initializing more efficient, standardized solutions.
Demand for new types of products and services that optimize operations are growingly rapidly. “There’s a huge appetite for any technology or offering that can deliver clear efficiency gains,” stated Ethan Phillips, a partner at Bain & Co. The service and equipment companies that enable oil extraction will have to shift their offerings to become more standardized. The time for expensive, customized exploratory endeavors has passed. When the oil price was flying high around $100, companies frequently sought out the expensive, highly-customizable projects because the margins they were receiving warranted such spending. However, a new age is dawning where only the leanest companies will be able to maintain profitability and hold market share. This means identifying and eliminating the unnecessarily high costs associated with particular operations of the business.
More care must be taken when purchasing goods and services. Extravagant spending on equipment is a luxury that these companies can no longer enjoy. At every stage of the production process companies must constantly ask themselves “how can we save money?” Presently, many companies are fearful of these changes, as they should be, because it means they could lose business or go bankrupt. But it is important not to let the fear of failure outweigh the benefit of risk-taking and adapting to new circumstances. Only those companies who are open to change and search for innovative ways to profitably perform in this new market will be the ones who rise to the top. Those are the companies who will shape the future nature of the industry itself. It should prove very interesting to observe these businesses creative ways to deal with current issues.
Article written by HEI contributor Timothy McNally.