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TRANSCRIPT
Agenda
Introduction to Deloitte
Our View of the Oil & Gas and Oil Sands Market
Trends in the Oil Patch – Cost Reduction
Cost Reduction for Producers and what that means for Manufacturers (Cost Modeling)
Cost Reduction for Manufactures (Direct Materials)
Conclusion
Questions
Introductions
Ted Brennan
Senior Manager
Deloitte Consulting LLP
Martin Brotschul
Principal
Deloitte Consulting LLP
Grant Poeter
Specialist Leader
Deloitte Consulting LLP
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9Innovative
Alliance RelationshipsIncluding Singularity University,
3D Systems and XPRIZE
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54 OfficesE&R consulting
Global Consulting Gartner, Kennedy, Forrester
#1
Centers for
Energy Solutions276%
Consulting services to
E&R Companies
15
E&R
studies
and
published
articles
In 2014
Supply Chain1,3,
Finance1,3, HR3,
Customer Management1,
IT3 Transformation
#1Proprietary Tools and
MethodologiesExamples: Strategic Choice
Cascade, The Visual Decision
Accelerator (VDXTM)
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2020 Global Procurement Outlook
About Deloitte Consulting LLP
Collaborative
US/Bangalore Team
Unmatched Breadth and Depth
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The Market
Risk Profile of the Western Canadian Sedimentary Basin (WCSB) has Changed
• Structural shift away from natural gas drilling
• Full cycle dry gas has been uneconomic in Canada for
several years – no indication that this will change
• Liquids rich strategies can work but are challenged by
infrastructure constraints and depressed gas prices
• Remain cautious on gas due to LNG uncertainty and
mountain of gas in the Marcellus
• The average cost per well drilled in the WCSB has risen
dramatically as:
– new technologies are implemented (multi-stage fracturing)
– deeper, more technically difficult reservoirs are targeted
(i.e. Duvernay)
• Risk for new entities has shifted from exploration to
development
• Balance sheets need to adjust accordingly – hence larger
initial capital raises
• Undercapitalization remains a risk
Source: Spears
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The Market
West Texas Intermediate – The Challenging Market Continues
THEMES
• Recovery of WTI prices to US $70-80/bb
• Longer than 12 months
• Many also commented on factors that have softened the
impact of the price decline:
– The weakening of the CAD vs the USD
– Hedging positions for the remainder of 2015
USD WTI
CAD WTI
USD WTI prices (FX rates per Bank of Canada)S
*from May, 2015
Weakening FX rate resulting in favourable CAD WTI
WTI pricing per www.eia.gov
June 2013
CAD WTI – $96
USD WTI – $93
April 2015
CAD WTI – $72
USD WTI – $60
Interview
Period
Deloitte recently interviewed 20 CFOs to get a “pulse check” on the market. Their perspectives were
quite similar.
28%
72%
Which of the following describes your outlook of when
WTI prices will return to US $70 – 80/bbl?
>12 Months
<12 Months
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The Market
Global Crude Cost Breakeven Curve
Source: Spears
Even with low production costs, OPEC members rely on oil prices to be in the $80 - $100BBL range to
fund their governments.
Prices will be further tested with the possibility of Iran production coming back into the world market as a
result will likely stay soft for the foreseeable future.
Source: Reuters, “Oil prices below most OPEC producers' budget needs”, September 8, 2014;- IMF, “Statistical Appendix, Regional Economic Outlook - Middle East and Central Asia Update”, May 2014 and Deloitte MarketPoint Analysis
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The Response
Global Oil and Bitumen Production Will Reduce as a Result of Cancelled Projects
Canada has been the hardest hit with a double whammy of lower oil prices and a weak Canadian
Dollar. If sub $50 oil were to persist, this list would be pages long.
Source: Deloitte Canada Study
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The Response
Actions to sustain performance in the current environment
Proportion of participants (CFOs) considering or applying the following strategies to manage current and potential future
prices
Companies are looking at a number of ways to mitigate both the immediate deflationary pressures and
how to make structural changes to manage at a lower price per barrel range.
REDUCING
COSTS
DEFER SPEND
STRATEGIC
ACQUISITIONS
DIVESTITURES TO
MONETIZE ASSETS
CUT DIVIDEND
SHORT-TERM CASH
FLOW
ALTERED PLANS
TO ACCESS
FINANCING
DEBT
MANAGEMENT
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The Response
Cash Flow Management
67%
8%
17%
8%
Achieved 10% reduction
Achieved 15% reduction
Achieved 20% reduction
Achieved 40% reduction
Percentage cost reduction achieved by CFOs,
shown proportionally
• Reducing contractor and employee headcount.
• Seeking cost reductions from suppliers. Most indicated
that achieving approximately 10% reduction is a realistic
“first step”
• Improving management of receivables from JV partners
while being strategic in vendor payments and realizing
discounts for early payment.
Most companies have engaged in Cost Reduction programs in 2015. If there is a continued softening,
there will be further contractions and negotiations.
Source: Deloitte Canada CFO Study
The resounding feedback from CFOs is that there is
increased focus on “getting the most out of what
you’ve got”. In their view, relevant areas being
considered include:
• Field productivity
• Asset management
• Many highlighted recent or planned investments in
operations technology to do more with field data
available, as well.
Operational readiness was also highlighted as a priority by
those dealing with the transition of capital projects
to operations.
CFOs were asked what elements of operations excellence are
priorities in the next 3 to 12 months
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The combination of weak oil prices and a strong US dollar have driven a shift in oil price fundamentals.
With no end in sight for either oil demand increasing or the dollar weakening, low oil prices are likely
here to stay.
Summary
The Market and Our Thoughts
We see some examples of trends to be more competitive in this market environment for both
customers and manufacturers
• Consensus of analysts and data point to no real improvement for 12 Months or more
• Upside is in the $70BBL - $80BBL range. No one is predicting $100 anytime soon
• All operators have conducted cost out programs with mixed results – more will likely follow
• Companies with strong balance sheets are seeing this as an opportunity to gain market share and scale,
ultimately meaning fewer, larger customers in the market
• Marginal programs/projects will be mothballed or abandoned
• Added uncertainty with Iran’s potential move back in to the mainstream will keep prices lower
• It’s not all bad for other industries, it is estimated that low oil prices is a $1.1Trillion stimulus in to the world
economy*
Source: Citi Group
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Customer Response
Cost Model Example: Region A Seamless 7 in. 32# HCP110 Casing
There are two types of Cost models; one is used to estimate both the Total Cost of a Material or
Service to a company and the second estimates the cost for a supplier to produce a component/input
Total Cost of Ownership
Should Cost
$8.73 $0.98 $3.11
$9.90$2.58 $0.91
$26.21 $2.85 $29.06 $0.84 $1.16 $0.27 $31.33
$0$5
$10$15$20$25$30$35
$8.16
$24.50 $27.69 $29.07
-$5
$0
$5
$10
$15
$20
$25
$30
$35
Per
foo
tP
er
foo
t
With your customers driving to this level of information, it can enable you to have different
conversations on pricing, including indexing to some of your key cost drivers
Manufacturing Distribution and Freight Total
Manufacturing Distribution Fees and Freight Total
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Customer Response
Cost Model Example: Region B Welded 7 in. 23# J55 Casing
The example pipe accounts for 40% of Region B’s OCTG spend. As modeled, Region B is paying 7%
under the Should Cost.
Total Cost of Ownership
Should Cost
$7.30 $0.43 $0.68$1.49
$1.69 $0.81 $12.39$1.63 $14.02 $0.72 $0.56 $15.30
$0$2$4$6$8
$10$12$14$16$18
$7.85
$13.33 $15.34 $16.13
-$2$0$2$4$6$8
$10$12$14$16$18
Per
foo
tP
er
foo
t
This type of analysis can also help to ferret out pricing anomalies in the market, such as this case
where a foreign company that recently had a 15.89% countervailing duty levied against it.
Source: International Trade Commission
Manufacturing Distribution and Freight Total
Manufacturing Distribution Taxes and Freight Total
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A number of market trends in the manufacturing industry lead to increasing pressure on companies
Manufacturers Response
Overview
Globalization of
supply and
customer base
Appearance
of new competition
Typical company in the manufacturing
industry
Decreasing product
differentiation
Stronger end
customers
Increasingly sophisticated
procurement managers
Mature, slow-growing
markets
M&A among competitors
and customers
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We are in the second cycle in the past 15 years
Manufacturers Response
Volatility – here to stay
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Aluminum Raw Materials Index Petroleum Maize
• Increasing sophistication in commodity management
• Commodity management as a competitive advantage
12
Commodity Prices Since 2004
Note: Raw Materials Index includes Timber, Cotton, Wool, Rubber, and Hides Price Indices, Aluminum based on LME price, Petroleum based on simple average of
three spot prices: Brent, West Texas Intermediate, and the Dubai Fateh, Maize (corn) based on U.S. No.2 Yellow
Index = 1.0
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Purchase price timing and variation among suppliers indicates an opportunity for price reduction
Manufacturers Response
Supplier pricing – cat and mouse
75
80
85
90
95
100
105
2008 2009 2010 2011 2012
Pri
ce In
dex
All Hydraulic Cylinder
Cylinder Steel Index
1 Year Delay 1 Year Delay
6 Month
Delay
• Steel price increases are
met with more rapid
purchase price increases
than steel price reductions
• Decline in steel prices over
the past two years has not
seen a commensurate
purchase price reduction
• There is an opportunity for
purchase price reduction
due to steel price decline
over last 18 months
Timing
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Continuous cost reduction efforts are crucial for lasting success
Manufacturers Response
Another approach
Reacting to immediate
cost pressure
Improving product
competitiveness
Reaching strategic
targets
PRIMARY TARGET SECONDARY TARGET
Product
Cost
reduction
• Operational
effectiveness
– Reduction of
complexity
– Process efficiency
– Reduced cycle time
• Product optimization
– Increase of product
margin
– Increase of
competitiveness
– Improved product
qualityCOGS Old COGS New
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Margin focused cost take out focuses on value to the business
Manufacturers Response
Cost take out at the product level
Engi-
neering
Procure-
ment
Manu-
facturing
Quality Logis-
tics
Product 1
Product 2
Product 3
Functional
Engi-
neering
Procure-
ment
Manu-
factu-
ring
Quality Logis-
tics
Cost perspective Collaboration Value Chain
TR
AD
ITIO
NA
LP
RO
DU
CT
FO
CU
SE
D
AP
PR
OA
CH
1 2 3
Organization driven Isolated focus
Cross-functionalProduct driven Integration of suppliers/sub-suppliers
RAW
MATERIA
SUPPLIER
Tier 1 OEM Cus-
tomer
OEM
Procure-
ment
Manufac-
turingSales
Cost reduction
Personnel
costMaterial
Manufac-
turing
Sales &
Marketing
Finance/
Admin
…
…
…
…
1,3
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Manufacturers Response
Overall Methodology To Calculate Manufacturing Cost of Hydraulic Cylinders
Raw Material Operation Cost Finishing Cost Assembly & Testing
Purchased Parts
Manufactured Parts
Volumes (cm^3)
Material Type
- Density (Kg/ cm^3)
Weight (Kg)
Material Cost (€ / Kg)
Raw Material Cost (€)
Castings & Forgings
Tubes, Rods, Plates
Geometric Features
Define Operations
- Turn, Grind, et. al.
Setup Times (min)
Cycle Times (min)
Fully Loaded Labor
Rate (€ / hr)
X X
Operation Cost (€)
Chrome, Nitrite Plating
Surface Area (mm^2)
X
Cost (€ / mm^2)
=
Plating Cost (€ )
Painting
Surface Area (mm^2)
X
Cost (€ / mm^2)
=
Painting Cost (€ )
Welding
Setup, Pre-heat,
Handling, Cleaning
(min)
+
Weld [Length / Speed]
(min)
=
Welding Time (min)
X
Fully Loaded Labor
Rate (€ / hr)
=
Welding Cost (€)
Assembly
Consider:
Part Weight
Torque Need
Forced Fit Need
Total Time (min)
X
Fully Loaded Labor
Rate (€ / hr)
=
Assembly Cost (€)
Testing
Standard Testing Time
(min)
X
Fully Loaded Labor
Rate (€ / hr)
=
Testing Cost (€)
Fixed Cost (€) Cost(€) / Weight(Kg)
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Conclusion and Questions
• Dynamic market will continue for the foreseeable future
• Crude Supply – Demand Balance
• USD Strength
• Geopolitical uncertainty
• New entrants will further erode the balance
• Companies are struggling to get costs in line
• Different Thinking is Required
• Cost Modelling and Supply Chain Analytics will become more mainstream
• Restructured relationships with key suppliers to align incentives will continue
• Managing Risks and Relationships will become more important to Sourcing & Procurement
groups
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