{"id":454,"date":"2016-04-05T09:22:24","date_gmt":"2016-04-05T15:22:24","guid":{"rendered":"http:\/\/www.textor.ca\/?p=454"},"modified":"2020-10-12T09:58:10","modified_gmt":"2020-10-12T15:58:10","slug":"oil-gas-cost-reduction-projects-with-50-irr-go-undone","status":"publish","type":"post","link":"https:\/\/www.textor.ca\/oil-gas-cost-reduction-projects-with-50-irr-go-undone\/","title":{"rendered":"Oil & Gas Cost Reduction Projects With 50% IRR Go Undone"},"content":{"rendered":"
Even in today\u2019s poor commodity climate \u2013 many cost savings projects with a 2-3 year payback (50% IRR) period go undone. If you don\u2019t recall what the payback period or IRR is, please see my post:<\/p>\n
\u201cWho likes making money? Payback, RoI, IRR explained\u2026\u201d https:\/\/www.textor.ca\/2016\/03\/who-likes-making-money-payback-roi-irr-explained\/<\/a><\/p>\n <\/a><\/p>\n There are two things to note about cost savings projects. They typically:<\/p>\n Based on this, a company should always<\/em> do periodic cost reduction projects \u2013 in a good or bad commodity environment since it increases the profit margin in good times and allows a company to survive longer than its competitors in bad times (and survivors always do the best in the long run).<\/p>\n <\/a>I have been in Oil & Gas for over 17 years. And during that time I\u2019ve been aware of more rural connectivity projects that have these characteristics than I could possibly handle\u2026 if only they would be approved and added to the queue. To add to the malaise, network costs are a top IT cost. See my article \u201cTop Ongoing IT Costs – Data Centres and… Networks\u201d https:\/\/www.linkedin.com\/pulse\/top-ongoing-costs-data-centres-networks-trevor-textor<\/a><\/p>\n Correct me if I\u2019m wrong\u2026 but from what I recall from what Oil and Gas executives have told me, any Oil & Gas project with over a 30% IRR is always<\/em> approved. However, it\u2019s been entirely up-hill trying to convince Oil & Gas to approve these projects.<\/p>\n I\u2019m going out on a limb here though\u2026. Maybe the reason why is that they are connectivity (telecommunications) projects for rural areas? Connectivity usually falls within the IT department and from my interviews with CIOs, there is little focus on connectivity costs. That is, they feel that connectivity is not really an IT role but it gets lumped into IT so they suffer through it. I agree with them \u2013 IT is getting dumped on due to poor understanding of connectivity at the leadership levels. After over a decade doing rural connectivity, I believe that connectivity should be an engineering role and connectivity commissioning<\/em> and operations should be in IT. This arrangement makes the basic procurement management build (engineering) vs rent (off the shelf) calculation possible. Let\u2019s face it, IT is not engineering. IT is\u00a0only going to rent. But most of the time, it is more effective to build in rural Oil & Gas locations.<\/p>\n The final nail in the coffin for this whole scenario is that connectivity is critical infrastructure<\/em> (like water, electricity). This basically means you can\u2019t do things that are expected of a company operating in the current economic environment without it. I have had to deliver the bad news to hundreds of promising Oil & Gas projects because the current network they have cannot support anything but the basics (e.g. kilobit per second SCADA \u2013 or what I call \u201ctin can on a string\u201d data). The cost of this one fact alone is colossal. I explain more about this in my presentation \u201cUnderstanding the Remote Field Data Communications Challenge\u201d<\/p>\n\n