LNG’s upward fortunes stand in stark contrast to Australia’s dwindling labour productivity, writes Deloitte’s Geoffrey Cann and Steve Giles.
However the booming sector will have to quickly learn to navigate the numerous challenges coming its way.That Australia’s national labour productivity has gone backwards over the past decade is now a well-established fact. According to the Australian Bureau of Statistics, our productivity performance grew strongly up until 2003–04, but has been beset with negative growth in many of the years since.
Conversely, LNG has been a boom industry. Just as the taps are set to turn on multiple Australian LNG export projects however, the sector is confronted by massive falls in oil prices and a whole new range of issues that will test the resolve of market participants, many of whose product is priced in US dollars and linked to the global price of oil.
Many analysts believe oil prices are highly unlikely to return to where they were, so LNG prices globally will likely remain well below the peaks that triggered the Australian LNG boom.
Amid this pricing volatility, our industry has a few constants that will propel it along regardless of today’s pricing:
- Gas contracts will hold firm for several years, giving some certainty to sales volumes and pricing;
- Export infrastructure has been built, and will continue to be built, because the gas has been sold on these long contracts;
- Wells will still be drilled to supply export and domestic markets; and,
- Gas infrastructure will be serviced and maintained to keep gas flowing and to meet regulatory commitments.
Cost and productivity imperatives – more important than ever
So, it’s certainly not the end of the line for high-cost LNG – far from it – as the macro forces at play when it comes to climate and energy security will see to it that LNG projects continue to receive serious treatment.
And with many of the sector’s costs denominated in Australian dollars – particularly labour, but also local services, electricity, etc. – the dollar drifting downwards is also providing a bit of much-needed breathing space when it comes to managing the squeeze in margins caused by the fall in prices.
But cost management and productivity will be increasingly important for operators themselves and, even more so, the sector that services them.
On the cost side, we know that the Australian gas sector’s unit labour costs are high when compared to global competitors. Several independent studies have confirmed this, placing Australian gas wages at 35 per cent higher than comparable roles in the US, and on par with the Norwegians, who are the highest paid in the world.
High labour costs and skill shortages during the resource project construction phase – when the demands of a booming mining sector and six parallel LNG projects led to significant labour and skills shortages – were not surprising. The sector has had to ramp up very quickly, and suppliers have been free to test the ceiling on rates, while avoiding any at-risk contracting or performance-based supply arrangements.
This has eased considerably as the construction phase shifts to production, but unit costs have not come down at pace with the construction slowdown or the fall in oil prices.
To put this in a regional competitive context, several analyst studies have projected that Canadian LNG will be able to land in Japan for around $2/gigajoules (GJ) less than equivalent cargoes from Queensland. Combined with Queensland’s $1/GJ shipping cost advantage over Canada based on shipping distance, Queensland LNG projects have to remove $3/GJ to achieve cost equivalence with Canadian LNG.
This equates to around $1.5 billion in excess cost per project per year in gas – or a total local industry prize of as much as $6 billion per year, or up to $120 billion over a 20-year project life. So, to attract any more expansion and gain a strategic advantage, projects need greater than $3/GJ savings.
In the same vein that costs are high relative to global benchmarks in oil and gas, productivity is too low.
Our workers achieve only 65–70 per cent of the productivity of equivalent workers on the US Gulf Coast, and our interactions with key suppliers in Queensland, for example, suggest that stand-around times waiting on delivery of kit, permission to work, or completion of previous work has been more than 40 per cent (that’s two days a week where the entire field workforce is the polar opposite of productive).
So what does impact productivity? Where should gas producers focus their attention? How should they structure and manage their cost and productivity initiatives, while safely meeting commitments? And perhaps most importantly of all, how will they know when they have been successful?
Costs drivers and productivity drivers must be considered holistically – across people, processes, systems, performance, supply chain, assets, and organisation. Additionally, cost curtailment must be pursued in the context of long-term sustainability, not simply as a short-term measure to reduce operating costs.
To achieve this, success will be based on four foundational elements:
1) Define the activities that add value
Value-creating activities can be defined in the traditional hierarchical value driver tree construct often used in extractive industries, but this is not sufficient in an unconventional gas world. It is critical that organisations also understand the processes that drive value across the organisation, sharpen the hand-offs between functions and work to reduce processing time. This also includes the integration of processes so bottlenecks and downtime are minimised.
2) Measure performance
Understand hierarchical and process performance criteria, define calculations and data elements to measure, and then measure them. With the volume and complexity of data being created today, data analytics is an essential enabler in terms of turning massive data sets into information that drives performance.
3) Make it transparent
Performance measurement without performance management is impotent. Performance management without transparency is an invitation for manipulation and blame transfer. Assign performance measures at the individual level and hold employees and suppliers accountable for delivering. Use visualisation to share joint performance targets and performance, and to demonstrate how individual output contributes to the performance of the organisation.
4) Share accountability
High performance at the individual level in a system that relies on performance through, and across, the organisation is not a desirable outcome. If a transparent and visualised system is in use, and individuals can identify how support for their colleagues will contribute to their own success, this will drive the behaviour of shared accountability and teaming. Long term, this will create a culture of sustained performance and continuous improvement.
Ultimately, accepting and winning the cost and productivity challenge has become both a hot topic and a serious pursuit for gas operators. Many have already taken some action, but it’s imperative that work continues to ensure that a real shift in the level of business performance is sustained.
Significant decisions will be required – not just on what to do, but on what not to do.
Case Study: Oil producer in Canada
Deloitte is supporting the turnaround of this client’s lagging performance in safety, production, cost, reliability and regulatory compliance with its work, including a sub-project to improve the efficiency of shift change activities to maintain more continuous bitumen flow from the oil field to the processing plant during the shift change period.
Importantly, this project was used as a lever for a culture change, with the aim of creating a continuous improvement culture by integrating best practices of Lean Sigma Six, project management, data analytics, visual management and supply chain management.
Leveraging lean principles of bottom-up improvement and a detailed ‘as is’ analysis of the shift change activities was completed through workshops (value stream mapping), individual stakeholder interviews, and process observations.
The identification of the need to achieve constant flow rates through the shift change period resulted in multiple process improvements including behavioural changes, reduced shift change time and longer bitumen transition time.
Complementary supporting tools and templates were developed to facilitate the implementation of the new processes and, in parallel, relevant KPIs were identified and developed, along with a measurement and reporting framework.
Intended benefits were sustained by reducing shift delay time by 10 minutes per shift, and increasing throughput by a significant tonnage.
Data analytics – show what you are measuring
Many industries today benefit from applying data analytics to their more vexing problems, and gas operations are certainly ripe for the right approach to using data for cost and productivity purposes. They generate plenty of information (the volume of which is also perpetually growing), there’s lots of variables at play, and operations will run for decades.
As an example, the basic business plan for one project we have come across included the need for 64,000 sensors. If each of these did a data read every 10 seconds, after 12 months, the project will have amassed over 201 billion discrete measures. Making sense of all this data via modern analytics, and relating it to time of day, weather events, work shifts etc. can provide real-time guidance to decision makers.
We project that analytics will deliver benefits as the below:
- Help flag likely equipment failures, such as with artificial lift, before they happen;
- Operators will be able to shift from reacting to failed wells to proactively managing kit;
- Maintenance staff will become more productive through scheduled or campaign maintenance; and,
- Costs will fall as maintenance becomes less ad hoc and urgent, and more routine.
The prize is attractive too, with huge costs associated with downtime or missing production, and the level of repetition meaning small benefits in productivity can scale quickly.
Original article posted in Gas Today.