EY - Oil Refinery

Canadian energy survey

A new energy world

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Why costs matter in an era of resource abundance

After more than three years of US$100 per barrel, oil prices collapsed by nearly 50% in late 2014. The precipitous drop was a result of a supply-demand imbalance, brought on by a combination of factors, including OPEC’s (mostly Saudi Arabia’s) decision to maintain production levels, modest oil demand growth since 2010, restored production in countries like Libya and Iraq and the significant increase of light tight oil production in the US.

The oil and gas sector has experienced periods of uncertainty before, but this time is different. The industry is undergoing a structural shift, from an era when businesses were built around a “resource scarcity” model to a new era where businesses will have to thrive in the face of “resource abundance.”

In a resource abundance world, future commodity prices will not preserve or rescue high-cost projects or unconventional plays with higher operating costs. Capital-intensive unconventional resource development, increasing regulatory and environmental costs and the growing technology and service costs of unlocking abundant yet complex plays will drive new business models and a renewed focus on operational excellence and innovation. The likely result will be a bifurcation of winners and losers — those able to adapt and those who fail to adjust.

To succeed, companies must take a more strategic, longer-term view of cost management. It’s not just about surviving — it’s about thriving. Simply put, companies that are waiting and wishing for oil price recovery while only making short-term and tactical cost reductions during this period of uncertainty may be the real losers.

To thrive in this new era, companies must seize opportunities to develop strategies that produce real value and sustainable cost management over the long term.