Big Oil: Why Manufacturing Companies See Value in Capital Discipline
Posted: June 6, 2023
Big oil companies require significant investments to support equipment, facilities, and technology expenditures. With highly competitive and continuously changing markets, capital discipline is key for long-term success. By managing capital expenditures and investments, improving cost control, enhancing risk management, and optimizing equipment performance, oil companies can improve profitability and shareholder value, maximize return on capital investments, optimize operational efficiency, and mitigate risks associated with volatile market conditions.
In this guide, we’ll consider expert insights on the value of capital discipline for big oil and manufacturing companies. We also look at some best practices in these sectors for proven results.
What Does Capital Discipline Mean for Manufacturing and Big Oil Companies?
New strategic big oil spending plans mark the end of a global exploration era. With a re-focused aim of maximizing shareholder returns from proven reserves (rather than adding to said reserves through exploration), selectivity and capital discipline now prove critical.
This shift came a few years ago, when investors denounced the high investment rate in a tight oil sector. Concerns centered around the consequences of unchecked spend where there was too high an incentive for drilling, which would eventually result in high production volumes threatening oil prices. Consequently, shareholders and other financial supporters would lose out. Implementing capital discipline thus became a crucial strategy for big oil companies to succeed in a competitive marketplace.
At its core, capital discipline is a movement away from focusing on output volume and instead aligning towards financial value and maximizing return on investment. The strategy is more important than ever considering that energy producers have markedly smaller investment budgets.
Capital Discipline Best Practices for Big Oil Manufacturing
Let’s consider some strategic choices you can make to implement capital discipline for optimal gain and shareholder returns.
1. Optimize Your Business Portfolio
Portfolio optimization requires expert insights, strategic analysis, and forecasting, or operational planning. Advanced analytical technologies and machine learning capabilities are critical tools to help make informed decisions. These technologies can help capture time- and volume-based advantages, thus boosting value creation opportunities.
Business-Model Transformation
As an engineering and manufacturing technology partner for big oil companies, Gilmore’s capital discipline practices reflect the unique value creation that Gilmore’s products can offer their customers. Gilmore recently switched to an assemble-to-order operating model for specific high-volume standard products. Darren Johnson, VP of Operations, notes that the model provides a strategic advantage in a turbulent supply chain environment, ensuring that Gilmore customers get the products they need, when they need them.
“Gilmore Sales and Operations teams have been working arduously to shift out of the downturn cycle with a assemble-to-order operating model that better serves our customers’ needs. We work with our clients to forecast market demands and convey this information to our Operations team so that Gilmore products are available in the time frame customer projects require. Sales continues to monitor changes to these forecasted demands and communicate market cycles to the production team so that the correct volume of products is maintained.” Brett Robinson, VP of Sales
While this strategy helps optimize capital management, it is not without its challenges. There are cases where product turnaround does not necessarily match the forecast, and products turn faster than the predicted re-stocking timeline planned. Johnson acknowledges that you can’t always forecast all your sales. To address this Gilmore implements an economical batch size strategy based on customer order cadence.
Gilmore thus marries forecast, keeping on-demand items in stock, and economical batch production so that economical practices relate to better pricing and availability for Gilmore customers.
Getting the Transformation Right
In terms of business model transformation, CEO David Nemetz reiterates the value of accurate forecasting for any business:
“Planning through the course of the year not only translates into effective facility throughput, but also helps us advise our suppliers to plan their own business around our requirements. This means suppliers also get to work on their economical batch quantities, ensure availability, and optimize pricing.”
Both businesses benefit from economies of scale built into the process. By working towards supply and facility output optimization, Gilmore is setting the building blocks in place to scale every other aspect of operations. It all comes down to output—so getting the transformation right depends on building a proper foundation and continuing to manage market trends and supplier agreements.
2. Implement Cost Control Measures
In a time of declining oil and gas prices and projected flat usage over the next 30 years, companies must prioritize cost control. Utilizing cutting-edge technologies like blockchains, wearables, and advanced analytics in the supply chain can help keep costs down and ensure profitability.
Data collection is an integral part of the oil and gas industry; however, the focus has historically been primarily on improving health and safety and achieving marginal operational gains. Now, big oil and manufacturing require a new management approach. This will revolve around the full asset lifecycle, from design to operations—collecting and analyzing data at each stage. To make this happen, digital technologies and autonomous, remote operations are key.
Uncovering Big Oil Digital Opportunities Within the Supply Chain
Enhanced computing capacities and software flexibility enable faster, automated analytical models. Big oil and manufacturing companies can leverage this to quickly develop sophisticated models, optimizing processes while delivering accurate outcomes. This allows organizations to identify lucrative opportunities and take preemptive measures against potential risks with real-time feedback.
With exploration venturing into remote and hostile environments, equipment inspection and maintenance are difficult and costly. Predictive maintenance enhanced through IoT-connected devices and analytical software is a powerful tool to reduce costs and boost operational efficiency.
3D printers are revolutionizing the impact of supply chain challenges, enabling manufacturers to produce high-volume components in-house, and in turn, offsetting delays due to material shortages. Three-dimensional printing links design, engineering, and manufacturing, potentially allowing manufacturing to optimize supply chain operations by decreasing inventory costs and fast-tracking delivery lead times.
Cost Containment
To remain competitive and financially stable in the current climate, companies must link cost-reduction initiatives to important profit metrics. Oil and gas success requires effective management of a comprehensive combination of elements.
When market conditions shift, big oil operators and service companies need to adjust cost structures to avoid negative impacts on every other operational component. This often determines whether resource development can proceed or not.
It’s key for oil and gas companies to actively and continually pursue cost management practices to gain a competitive edge in low-cost operation while retaining high standards. This requires the ability to understand cost vs. price, and to understand the cost structure of the products or services you are buying. Without this, it is difficult to optimize cost through gain of efficiencies or elimination of waste.
As part of its capital discipline strategy, Gilmore implements right-to-buy agreements and requirements contracts to achieve price stability. Johnson explains:
“When you do not have your pricing nailed down, cost fluctuations affect your cost of goods, resulting in unpredictable margins. We strive for agreements with our raw material suppliers that have contract pricing fixed for a six-month duration; in so doing we give our suppliers the ability to go out and buy six months’ worth of material that meets our forecasted needs. That fixes the price for us for those forecasted volumes, and when it comes time to restock at the end of that period, we build in formulation models based on the grade into the contracts so pricing adjustments are based on industrial metal markets and are therefore straightforward and not subjective. This eliminates unstable costs due to spot buys and enables us to create economies of scale which, in turn, goes back to cost control improvements.”
Optimizing the Manufacturing Process
Process improvement techniques are vital for optimizing manufacturing activities. It is not enough to have a high output. You also need to organize tasks and activities to minimize required input. When executed well, optimized processes result in improved efficiency. Companies often refer to this as a “path to continuous improvement.”
“We have conducted make / buy exercises to determine the products we should manufacture internally and what should be sourced through the supply chain. This allows us to maximize our own capacity and focus on the things we do well and that are core to our product offerings. It also enables the business to flex up and down with the market demand and provide Gilmore the ability to keep a certain level of internal capacity available for delivering short lead-time needs of customers.” Darren Johnson, VP of Operations
3. Boost Risk Management Strategies
Big oil and gas companies face numerous complex risk factors that can lead to various safety hazards, economic losses, and environmental impacts. Thus, risk management is an essential part of capital discipline to ensure safe, efficient, and sustainable operations. Throughout the sector, market players need to strictly manage health, safety, environmental, political, regulatory, and financial risks. In addition, big oil companies now also face threats of cybercrime.
The implementation of effective risk management strategies can help the oil and gas industry mitigate and control risk while ensuring optimal business performance. Risk management strategies should include:
- The assessment and identification of risks
- Mitigation and control measures
- Transfer and allocation of risks
- Monitoring and reporting
As part of executive leadership, Johnson explains how Gilmore applies risk management strategies to protect itself and its customers. “Gilmore leadership regularly evaluates customer onboarding and maintenance processes, QHSE (Quality, Health, Safety, and Environment) performance, track objectives, promote a responsible work culture, and drive continuous improvement of QHSE management systems.
To ensure we produce products of the highest safety standards, Gilmore implements supplier scorecards and audits to measure supplier performance. Johnson states, “We only partner with suppliers who meet our audit standards and who can meet our quality requirements. While we value cost-effective solutions, Gilmore prioritizes quality and safety standards by ensuring the use of high-quality materials and production processes, as well as rigorous testing.”
4. Invest in Preventative Maintenance and Low-Maintenance Equipment
Optimizing capital discipline does not mean cutting budgets by investing in low-quality, high-maintenance equipment. You will pay more eventually—financially, in terms of safety, and with a tarnished reputation. Meanwhile, investing in quality, low-maintenance equipment will improve uptime—and potentially save you hundreds of thousands of dollars.
Gilmore’s Preventative Maintenance Strategy
At Gilmore, we know that energy market operations are labor and equipment intensive every hour of every day. Our solutions address these challenges with hydraulic and pneumatic flow control solutions that dramatically increase maintenance intervals, reduce labor, and improve efficiency. This allows you to achieve increased daily stages safely and efficiently with reduced downtime, maximizing value for your business and clients.
From drilling and production solutions for topside and subsea applications to servicing unconventional operations, our products and services are designed to help reduce operational costs. Our solutions minimize maintenance, keep productivity high, and maintain safety in drilling operations and processes.
Gilmore engages in a thorough process of research, design, and implementation to make the necessary improvements to legacy products. New product features address and eliminate weak points in previous designs—Gilmore’s GEN2 and Mark IV products solidify the commitment to exceed offshore industry requirements with an increase in cycle life. This is applicable in alignment with blowout preventer recertification cycles that occur on three-to-five-year service intervals.
Another example is Gilmore’s Agiliti™ Check Valve, providing an efficient flow control solution for well-stimulation pressure control systems with a service life of over 400 hours. This eliminates maintenance worries for pressure-pumping operators. Users can easily assess valve performance with available flow and dead band data, without needing to disassemble and inspect the valve. One standard four-well pad requires no maintenance for the valve’s entirety.
Gilmore takes preventative maintenance very seriously by offering a maintenance and re-certification program on their control valves with a certified extended warranty for qualifying assets. When certified repair is not required, Gilmore’s experienced technical authorities will collaborate with your team to define specifications for functional product repair.
“Gilmore’s Aftermarket team strives to assist customers with the best field support by upgrading and recertifying current assets to the latest Engineering design, extending asset life and promoting new and improved solutions to fit the customer’s specific application.” Karen Cestarte, Inside Sales and Aftermarket Business Manager
Capital Discipline Strategic Partnership With Gilmore
To succeed in the long term, big oil companies need to maintain a consistent focus on capital discipline, which means being strategic about where they invest their resources, keeping costs under control, and avoiding unnecessary expenditures. It is a complex task—but one that is essential for the future of the industry. Investing in high-quality, low-maintenance products reduces downtime and increases operational efficiency and financial value.
Backed by 60 years of experience and hands-on development of new adaptable and modular technologies, Gilmore is a leader in big oil flow control innovation for essential infrastructure. We have made significant adjustments to optimize capital discipline in our operations so you can benefit in yours. Our team of expert engineers always prioritize operational efficiency, safety, and reliability, while striving to offer the best pricing strategy without compromising quality.
Contact our team of experts today for information on how our solutions can support your capital discipline strategy on essential infrastructure for years to come.
