Moving beyond traditional cost-cutting measures towards the harmonisation of procurement standards in the upstream segment is an essential part of securing a sustainable future for Malaysian oil and gas operators and service providers.
From traditional measures to harmonisation
Prior to the oil price downturn in 2014, oil and gas companies around the world were committed to highly ambitious profitability and growth targets. The reality post-2014 has resulted in these players downgrading their targets and induced them to follow a traditional cost-cutting path. This includes requesting suppliers to reduce their rates, including day rates paid to short-term contractors, as well as delaying and deferring projects, slowing commitments and decreasing R&D programmes.
While these traditional measures are relatively straightforward to implement, to ensure the long-term sustainability of all industry stakeholders, including service providers, it is necessary to pursue a more strategic approach to address cost and other resource-related inefficiencies.
In the context of Malaysia’s oil and gas sector, one such strategic approach is to harmonise upstream standards, including those related to procurement. At present, operators apply different standards to both hardware, such as equipment, and software, including safety standards and personnel training. This rigid perspective frequently results in the replication of different forms of undertaking what is, essentially, the same activity and is therefore not conducive to cost and efficiency savings.
Significantly, previous attempts to harmonise operator standards in Malaysia have proved challenging. For example, efforts to harmonise pipeline-welding qualification procedures failed due to the distinct requirements established by each operator, in line with their particular internal standards.
Nevertheless, redoubled and strategic steps are now being taken towards that end, with PETRONAS playing a key role in the process. For example, the national oil company is continuing to roll out its Cost Reduction Alliance (CORAL) 2.0 and it is also committed to rationalising its Standardised Work and Equipment Categories (SWEC) codes.
CORAL 2.0 is a long-term, industry-wide programme that aims to foster a cost-conscious mindset throughout the upstream segment. It is a five-year programme running from 2015 to 2019 and succeeds CORAL 1.0, which was implemented from 1994 to 2005. In an attempt to standardise working practices, the initiatives under CORAL 2.0 will become the benchmark against which other practices in the Malaysian oil and gas sector are measured following 2019.
CORAL 2.0 is expected to engender sustainability in the national oil and gas sector and help prepare the industry for future challenges by optimising cost, increasing efficiency and driving innovation across all operators.
As both national and international players continue to reevaluate traditional means of cost and industry optimisation, the synergy between PETRONAS and operators under the CORAL 2.0 programme is bringing a more sustainable approach to activities undertaken in Malaysia’s oil and gas sector, especially in the upstream segment.
The three main objectives under CORAL 2.0 are to foster a cost-conscious mindset, benchmark efficiency with best-in-class performance, and increase collaboration and innovation efforts while infusing global best practices. These three objectives are being pursued through 11 core initiatives driven by collaborative cross-operator and PETRONAS teams (see fig. 1). Since its inception in 2015, CORAL 2.0 has generated cost savings of approximately MYR5 billion.
Rationalising the SWEC codes
Beyond the CORAL 2.0 programme, PETRONAS is also attempting to harmonise procurement standards by rationalising its SWEC codes, which are a list of broad work categories concerning products and services across upstream and downstream operational activities.
The challenge in this regard is that certain service providers perceive the codes as fragmented, which can affect how contracts are drawn up. For example, one vendor may be categorised according to one specific area and, therefore, the services of multiple vendors from distinct categories cannot be linked together under a single contract. This can impact on efficiency and cost by resulting in the duplication of work in which parties have to enter into separate contracts to complete a project that would otherwise be more efficiently executed via, for example, an integrated services model.
In response to these perceptions, during 2017 PETRONAS will be consolidating the SWEC codes from the implementation and operation perspective in order to simplify the procurement process and bolster the system as a solution-based service.
Significantly, PETRONAS has received calls to involve the stakeholder community in the process of SWEC code consolidation, and the NOC has, in turn, declared its desire for additional input from industry players therein. This is important because stakeholder participation will help to refine the process and safeguard against a potential situation in which discrepancies and problems arise for operators and service providers in the future.
By means of its CORAL 2.0 programme and the rationalisation of its SWEC codes, PETRONAS is taking proactive steps towards the harmonisation and consolidation of industry standards in the upstream procurement process. These efforts are expected to reduce procedural rigidity, enhance delivery of services and generate possible cost efficiencies moving forward.