Research points way to oil and gas productivity gains

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Monday 7 April 2014 — New research released today points the way to productivity gains in the Australian oil and gas sector, particularly in $1b-plus megaprojects.

Adapt to win is the second report by EY and the University of Queensland Business School  examining productivity in the sector and is based on a survey of more than 100 companies across the Australian oil and gas supply chain.

EY Oil & Gas Advisory Leader Bradley Farrell says the new report confirms that innovation, competitive capabilities and collaboration are the three key drivers for improved organisational productivity within the sector.

“Importantly, the new research digs deeper and shows that organisational mindset and flexibility are key ingredients for improving an organisation’s productivity. These traits play out across a number of areas, including how companies respond to barriers, the way contracts are structured, risk sharing and so on,” says Farrell.

“This has significant implications for megaprojects which by nature have a high degree of control built in. If firms involved in megaprojects can improve their flexibility, problem-solving, risk management and use of lessons-learned, then they can expect real improvements in productivity.”

“This latest research shows that there are some companies in the Australian oil and gas sector that are delivering better productivity gains and others can learn from this.”

Overall the key drivers for productivity improvements within an organisation were again found to be innovation, competitive capabilities and collaboration.

Innovation

The latest research profiled ‘innovators’ and found that they do not cite external factors as barriers to their success. Farrell says: “This is very interesting – innovators are impacted by the same constraints as others such as red tape and access to skilled labour, but innovators do not see these issues as impediments to success”.

University of Queensland Business School Associate Professor John Steen says the innovators identified in the research consistently pointed to mindset and leadership as key ingredients.

“Finding innovative solutions to challenges is possible for all organisations but a big part of it is company leaders challenging their people to find better ways of doing things, freeing up the capacity of people to do new things, and rewarding people who do find new and better ways of doing things,” says Steen.

Competitive capabilities – comparative advantage and adaptive advantage

The research found two distinct strands within competitive capabilities. Firstly, comparative advantage, a measure of how well an organisation rates on features such as range of goods and services offered, depth of expertise in each area, supply chain management and integration, and network positioning.

Secondly, adaptive advantage, a measure of how well an organisation responds to changes in business conditions, reflecting traits such as flexibility, problem solving and risk management capability.

The research found that firms with stronger adaptive capabilities are significantly more likely (8:1) to achieve improvements in capital productivity and labour productivity (16:1).

Farrell says: “There are tangible initiatives that companies can take to improve their adaptive capabilities. For example, LeanSigma process improvement methodology is a proven approach for problem-solving”.

Collaboration and contract breadth

The research again found that greater use of formal collaboration is strongly linked with increased productivity, and organisations that collaborate with a wider variety of other organisations across the supply chain were more likely again to improve productivity.

Perhaps not surprisingly, a key factor shown to impact collaboration is contracts, with contract breadth shown to be a benefit. Organisations using a broader range of contract types (e.g. lump sum, fixed price, cost plus and reimbursable) are six times more likely to achieve productivity improvements than those who use a more limited range of contract types.

“Having a wider range of contract types may impose additional costs on firms, but these are clearly outweighed by the productivity benefits enjoyed when the right contract is aligned to the task at hand,” says Farrell.

While formal collaboration is important, collaborations need to be genuine, says Steen.

“It is about building enduring partnerships to work on problems together. If you are talking to each other through lawyers then there is no way you are going to pull out an innovative solution in that environment,” he says.

Productivity measurement remains low

Farrell says a surprising and disappointing finding from the research was that just under half of the organisations surveyed have any form of productivity measurement in place.

“Measuring productivity is a critical first step on the way to improving productivity. If you are not measuring productivity, you have got to ask, are you really serious about improving it?” says Farrell.

“Interestingly 55% of contractors surveyed have some sort of productivity measurement in place compared to 40% of the operators.”

“Ultimately this underlines the enormous opportunity there is for individual organisations to improve their productivity.”

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Contact details:

Megan Ball
Ernst & Young Australia
Tel: +61 2 8295 6427