International Journal of Scientific Research in _______________________________ Research Paper .

Multidisciplinary Studies E-ISSN: 2454-9312

Vol.5, Issue.12, pp.90-94, December (2019) P-ISSN: 2454-6143

Optimizing Upstream Costs through Improved Capital Expenditure and Operating

Expenditure Discipline
1
Muhammad Usman, 2*Aliyu Abba, 3Bishir Balarabe
1
Abban Gafai Education Resource Centre Katsina, Nigeria
2
Dept. of Accounting, Faculty of Management Science, Umaru Musa Yar’adua University Katsina, Nigeria
3
Dept. of Accounting, Faculty of Management Science, Alqalam University Katsina, Nigeria

*Corresponding Author: aliyuabbagafai3@gmail.com

Available online at: www.isroset.org

Received: 07/Dec/2019, Accepted: 20/Dec/2019, Online: 31/Dec/2019

Abstract- Oil and Gas industry is one of the vital industries in the world, largely because of its strategic role in every economy
and the world, at large. Some firms in the industry engage in exploration and production of crude oil which is called upstream
activity. The paper aims to review structured and effective cost management discipline; improving operational efficiency in
field development planning in an era of low oil prices; hydrocarbon management and accounting maturity; the impact of lower
oil prices on supply-demand balance and the resulting outlook for onshore and offshore rig and equipment rates globally and
regionally; enabling step change improvements in upstream efficiency, productivity, and effectiveness; cost efficiency through
extended supply chain at granular level to achieve long-term growth, profitability and competitive advantage; and summary
and conclusion were drawn.

Keywords: upstream, Hydrocarbon, Capital Expenditure, Operation Expenditure.

I. INTRODUCTION [4], numerous oil companies began shifting their focus to

Oil & Gas exploration is an industry in constant motion,
from technological breakthroughs to shifting supply and
demand. The high costs of finding and developing new Oil
& Gas fields that can be commercially developed has created
a challenging atmosphere, with explorers increasingly seeing
low returns, low value and slow progress. To avoid
disruptions, incidents and a general reduction in the quality
of oil and gas and price of oil and gas, a relevant resource
allocation process must be set up through various means of
optimization projects for oil and gas sector and other capital
expenditures and operation expenditures intensive sectors
[1].
[2], optimization of cost is definitely needed for the purpose
of investment decision of full field development in oil and
gas sector since it costs from hundreds million to several
billion dollars or more in many cases to invest in oil and gas
industry. They further opined that the objective of
optimization is not only maximizing the expected recovery
of hydrocarbons, but also maximizing financial profits from
production of their hydrocarbon accumulation. Optimization
also involves minimizing cost of exploration and production
of oil and gas [3].
capital discipline more than a year ago, putting into
cognizance that cost as one of the paramount challenge in oil
and gas industry and announcing lower spending budgets
than in their initial yearly plans. He further states that the
effect of lower oil prices on cost and activity further increase
these efforts, forcing operators to increase their focus on
reducing capital and operating costs (CAPEX and OPEX),
rationalizing investment budgets, and boosting operational
efficiency. With oil and gas companies no longer rely on
high oil prices to ensure profitability, many needs to hastily
adapt their strategies to reduce cost [4]. He also observed
that the most vital component of developing these strategies
is to improve the accuracy of cost estimation in the due
diligence process for field transactions, when developing
new wells and during strategy reviews, especially at the
early concept evaluation stage. Sophisticated analytical tools
enable companies to more accurately predict costs need to be
put in place. Understanding forward costs is also important
for cost reduction. In some cases, bespoke indices can be
beneficial during contract escalation and planning.
However, managing CAPEX in this lower-cost oil
environment will motivate companies to reduce their OPEX.
This indicates that oil companies should focus beyond the
decision of shutting down operations when production costs

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 Int. J. Sci. Res. in Multidisciplinary Studies
exceed oil revenues or cutting back on non-essential
maintenance operations. It requires a balanced understanding
of labor rates, actions and reactions by competitors, short
and long-term market trends, and greater efficiencies and
innovations in operations [5].
Supply chain managers main objective is to improve
efficiencies, which can be achieved by standardizing and
consolidating commodity purchasing, aggregating
purchases, and ordering higher volumes at more opportune
times in the market. Such practices typically yield lower unit
costs across business lines and projects as well in the oil
industry. Discerning the trajectory of labor cost, material
cost, and equipment costs will also boost productivity [5].
He further opined that strategically applying new technology
in oil and gas industry is the way oil and gas companies can
look to control costs. An example in the exploration and
production of unconventional shale oil plays is to drill longer
lateral lengths, which eliminates the cost of drilling a
vertical portion of a new well, while also improving
productivity of the existing well.
Cost management is important in reducing CAPEX and
OPEX in oil and gas industries. Cost has effects on the
overall production as the client and contractors will have a
different objective in cost-management. This will help oil
and gas industries to minimize cost which will lead to
reduction of capital expenditure and operating expenditure
(CAPEX and OPEX).
II. STRUCTURE AND EFFECTIVE COST
MANAGEMENT DISCIPLINE
Basically, there are three project management constraints
which are also called project management triangle; these
include cost management, time management, quality
management, and scope management [6]. Oil and gas
industry has the highest level of risk and uncertainty and is a
mega business that require colossal amount of money, report
showed that the oil and gas industry-wide performance over
the project development life cycle is poor. This is attributed
to lack of effective cost management. When effective cost
management is put in place by cutting cost through reducing
capital expenditure and operating expenditure this may give
rise to high financial performance. Most critically, the
current period of low oil prices has led to increased
sensitivity around increase in development costs and called
into question the commercial viability of many projects [7].
To achieve excellent financial performance in oil and gas
industries, there is need for the accountant to ensure that the
integrity of planned project cost are sustained within the
continuum of project delivery amidst several construction
risks that tends to steer projects towards cost overrun [8].
High cost of construction (CAPEX) and OPEX has remained
the most single factor that militates against massive
© 2019, IJSRMS All Rights Reserved
Vol. 5(12), Dec 2019
development and sound financial performance in Oil and
Gas Company.
III. IMPROVING OPERATIONAL EFFICIENCY IN
FIELD DEVELOPMENT PLANNING IN AN ERA OF
LOW OIL PRICES.
Capital expenditure is incurred in order to keep on with
exploration and production. These expenditures are incurred
even in the era of low oil prices in order to have efficiency in
field development. Despite this is going concern what matter
most to oil and gas companies. This can only be achieving,
through operational efficiency in field development
planning. Oil and companies need to engage in cost panning,
cost planning and effective management of their resources
by cutting cost (cost reduction) through reducing capital
expenditure and operating expenditure in such a way they
can maximize profit or achieve break even than having loss.
Similarly, Operating expenditure (OPEX) is incurred
throughout the life of the asset and is significant. OPEX is
not always charged or paid for on a uniform basis. Operating
Costs = Direct Production Costs + Fixed Charges + Asset
Overhead Costs. Total OPEX (or Total Production Cost) =
Operating Costs + General Expenses [9].
Oil field development planning is a positive appraisal; it
aims at selecting the most appropriate development plan
among many alternatives. This involves capital-intensive
investment and operations decisions that include facility
installations, drilling, sub-sea structures, etc [10].
Transnational oil-gas exploration and field development
personnel will wish to maximizing benefits and mitigating
investment risks, by obtaining the maximum benefits with
the minimum investment, so as to maximize the economic
benefits. It follows the principle of “low investment and high
production to increase economic benefits” on the whole [11].
These will eventually help in improving operational
efficiency in the field in the era of low oil prices. Much of
the oil and gas industry has survived especially in the tough
few years with weak demand and low prices. It has been
difficult to make strategic decisions and plan for the future
[12]. The most important is the strategy to put in place to
stay in the market even in this era of low oil prices. A vital
financial models need to be in place to avoid liquidation.
Table 1 Examples of Market-Driven and Activity/Efficiency-
Driven Cost Reduction
Market Rate-Driven Activity and Efficiency-Driven
Activity and Efficiency-
Driven
• Reduced rig rates • Increased drilling efficiency
• Reduced contract prices • Optimised well design and
construction
• Reduced employment costs • Collaborative rig contracts
• Reduced day rates for • Global/regional subsea
offshore vessels agreements operations
• Reduced unit costs for • Optimised maintenance regimes
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 Int. J. Sci. Res. in Multidisciplinary Studies
subsea equipment
• Reduced contract prices • Reduced contract and
within engineering, procurement costs
procurement, installation and
construction (EPIC)
contracts
• Foreign exchange effect • Optimised logistics operations
• Organisational restructuring
Source: Oil and Gas UK report (2018)
If the strategy on Table 1 is effectively apply in oil and gas
companies as a planning in oil field development in era of
low oil prices this will eventually lead to operational
efficiency.
IV. HYDROCARBON MANAGEMENT AND
ACCOUNTING MATURITY
Hydrocarbon management
Hydrocarbon Management is about handling the
hydrocarbon accounts and all the business related reporting
in accordance with government and regulatory requirements
and contractual agreements to protect and assure the owners
share of production from the field(s). Is the responsibility of
hydrocarbon Managers to ensure that all data and
information used in all types of official reports is uniform
and from a single verified source with a high level of quality
and integrity in a way that prevents possible financial and
reputational risks [13].
Accounting Maturity/Hydrocarbon accounting
Hydrocarbon accounting is the cash register of an operator’s
of oil and gas business. The accuracy and timeliness of
hydrocarbon accounting is essential in order to satisfy joint
venture partners, allow operators to make the best
commercial decisions, and to fulfill the requirements of the
industry regulators [9]. Similarly energy builder [9] states
that in the petroleum industry, Hydrocarbon Accounting
tracks the ownership and management of oil and gas from
the point of sale or discharge back to the point of extraction.
A user friendly, scalable and cost-effective hydrocarbon
accounting software is essential for the oil and gas industry
as it moves toward a more digital world [14].
Hydrocarbon accounting which is also knows as allocation
or accounting maturity is an important aspect of any refinery
in oil and gas industry. This helps to identify product losses
and it use to the actual result to compare against the plan. A
good accounting will ensure better performance monitoring,
yield accounting, loss identification. The process requires lot
of understanding of oil and gas accounting concepts [15].
The performance measures track (a) oil and gas resources,
reserves and production in order to monitor the volume and
sustainability of the resources, and (b) revenues, costs and
tax take in order to monitor rent generation and rent sharing.
According [15], hydrocarbon or accounting maturity is very
pertinent when it comes to issue of custody transfer/fiscal
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Vol. 5(12), Dec 2019
transfer operation. As money value is attached to these kinds
of transaction the transparency of the system is paramount to
the joint venture partners as well as the operators. [16]
established National Hydrocarbon Accounting (NHA) he
states that the approach can be useful for government,
industry and civil society. He states that the approach serves
as a foundation for monitoring and forecasting of four key
aspects of the upstream oil and gas sector:
• Physical production, resource depletion and reserve
replenishment
• Revenue generation, cost efficiency and sustainability of
upstream operations
• Pre-tax industry earnings, profitability and reinvestment
rates
• Industry returns on capital and the overall government take
projections for budgetary purposes. To achieve this goal [15]
suggests that a great effort should be taken to ensure best
possible reliable measuring instrument for accounting should
be put in place. Oil and gas companies should use latest
programming tools; accounting software’s and database
technologies, combined with a simple and highly effective
data model, to deliver truly impressive allocation processing
performance. These will result to efficient hydrocarbon
accounting solution that allows routine tasks to be carried
out quickly and easily with the absolute minimum of fuss
and in a short period of time.
V. THE IMPACT OF LOWER OIL PRICES ON
SUPPLY-DEMAND BALANCE AND THE
RESULTING OUTLOOK FOR ONSHORE AND
OFFSHORE RIG AND EQUIPMENT RATES
GLOBALLY AND REGIONALLY
In the near future, the recent oil price gains which are due to
a rebalancing of supply and demand fundamentals partly
accelerated by OPEC’s recent decision to cut production are
expected to remain in place. That expectation is behind a
number of positive industry forecasts. According to
Barclays’s latest E&P Spending Survey, oil and gas industry
capital expenditures are expected to increase by as much as
7 percent in 2019. In addition, global rig counts, particularly
in the U.S., have been on the rise since the middle of 2016
[12]. They further states that because of the hiatus of
investment in major projects since 2014, the industry finds it
difficult to meet increasing demand. The resulting
uncertainty would no doubt be welcomed by traders, who
have largely avoided the oil market during its price plunge.
An uptick in trading activity could in itself drive up oil
prices significantly in the three- to five-year time frame. Oil
and gas companies will need to ensure that their business
models are prepared to manage and benefit from this
volatility.
Lower price of oil and gas will affect supply-demand
balance, because when the price is low there will be
tendency of high demand whereas the suppliers will not wish
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to supply oil at such low price. This will lead to reduction in
oil and gas production. Similarly, this will result to change
in outlook of onshore and offshore rig and equipment rates
globally and regionally. When oil and gas companies reduce
production both productions on sea and off the sea will
reduce and there will be reduction on the rate of rig and
equipment for oil and gas production drastically. For oil
prices to recover, can international oil companies (IOCs)
hold on to the benefits of cost reduction? Some cost
escalation is inevitable. For example, oil-field services
(OFS) companies will likely start taking back price
concessions they gave IOCs when the market collapsed. This
could add as much as 15 percent to the price of producing a
barrel of oil, which in turn would allow OFS company
operations to get back to break-even levels [12].
But upstream companies will have to be diligent about
containing other expenditure increases, particularly in the
supply chain and resource development arenas. That may
prove difficult, because the wave of worker layoffs
eliminated significant experience, knowledge, and skills.
The loss of these capabilities could push development
project costs up substantially if they are not carefully
monitored. Smart IOCs will embrace new digital initiatives
as a means of offsetting expense escalation and furthering
the cost and efficiency improvements they have already
achieved [12].
VI. ENABLING STEP CHANGE IMPROVEMENTS IN
UPSTREAM EFFICIENCY, PRODUCTIVITY AND
EFFECTIVENESS
The enabling steps change improvement in upstream
efficiency, productivity and effectiveness is concern with the
process that need to be taken in order to have effective
production at a minimize cost. With supply and demand
mismatched and prices likely to remain low until that
imbalance starts to ease, the need for efficiencies,
productivity and effectiveness is urgent [17]. Oil and gas
industry is going through a wrenching period of change [17].
The name of the game is no longer big production but better
margins. Digitization the collection, analysis, and utilization
of huge amounts of data can bring substantial operational
improvements to the field through the use of sensors,
analytics, robotics, sophisticated equipments and control
system [17].
[9], provides the followings as step to achieve efficiency,
productivity and effectiveness in an organization it can also
serve the same purpose in oil and gas companies;
Identify areas for improvement; efficient usage of labour;
maintaining low overheads; minimizing waste; achieving
throughput targets; efficient usage of raw material; low
conversion cost of raw material to final product; purchasing
of equipment that is fit for purpose and ensuring that this
© 2019, IJSRMS All Rights Reserved
Vol. 5(12), Dec 2019
equipment runs at full capacity; maintaining low levels of
working capital which includes work in progress
Others steps may include the followings;
1. Seek to decrease downstream bottlenecks by increasing
productivity. Remain focus on process intensification,
optimization and expansion.
2. Upstream process intensification can be achieved with
higher tiers in smaller bioreactors volumes.
3. Upstream process optimization can be achieved with
higher tiers by optimizing gas sparing, low shear mixing
and higher cell viability and density.
4. Upstream process expansion can be achieved by
replicating, at a larger scale, exact micro environment
conditions and consolidating multiple manual steps in
an automated bioreactor with larger surface.
5. Seek to increase downstream efficiency through the use
of best in the class single-use technology
6. Maximize vessel integrity through the use of fully
assembled bags and manifolds that are 100% integrity
tested by pressure decay methods after assembly and
before irradiation.
7. Maximize vessel integrity by use of fully assembled
bags and manifolds through Helium Integrity Testing
(HIT) for pinholes as small as 10 microns after
assembly and before irradiation
8. Use mixers that do not shed particles or grind contents.
VII. COST EFFICIENCY THROUGH EXTENDED
SUPPLY CHAIN AT GRANULAR LEVEL TO
ACHIEVE LONG-TERM GROWTH,
PROFITABILITY AND COMPETITIVE
ADVANTAGE.
Extended Supply chain can be defined as the configuration,
coordination and continuous improvement of a sequentially
organized set of operations. The goal of supply- chain
management is to provide maximum customer service at the
lowest cost possible [18]. The customer’s are important to
any organization that is focused on customer service. In a
supply-chain, a company will link to its suppliers upstream
and to its distributors downstream in order to serve its
customers. Usually, materials, information, capital, labor,
technology, financial assets and other resources flow
through the supply-chain. Since the goal of the firm is to
maximize profits, the firm must maximize benefits and
minimize costs along the supply-chain. The firm must weigh
the benefits versus the costs of each decision it makes along
its supply-chain. Supply-chain management is therefore an
extension of the focus on customer service [18].
[19] Opined that oil and gas companies minimized cost and
time savings in their replication projects by standardizing
materials so they can take advantage of volume discounts,
and by optimizing process steps to speed delivery and reduce
human error. Oil and gas companies need to put in place cost
efficiency through a good extended supply chain
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 Int. J. Sci. Res. in Multidisciplinary Studies
management in order to achieve a long term growth,
profitability and competitive advantage over the competitors
in the oil and gas companies. Better knowledge of cost
efficiency helps through supply chain, it help firms to have
long term growth, profitability and gain profitability
advantage at every granular level.
Effective supply chain planning and management is one of
the critical ingredients for thorough supply chain to achieve
cost efficiency. Following a supply chain approach,
companies can use integrated planning processes to
proactively align the channel partners (internal and external)
towards common objectives [20]. Supply chain planning
processes support long-, medium- and short-term decision,
growth and competitive advantage in oil and gas making
across the different segments and stages in the supply chain.
It is expected of oil and gas companies to operate as
efficiently as possible consistent with sound commercial
practice. Oil companies should as well optimize the life
cycle costs of assets to strike the optimum balance between
CAPEX expenditure and long term OPEX expenditures as
well as retiring and disposing of redundant assets especially
those with high OPEX costs [21].
VIII. SUMMARY AND CONCLUSION
Optimizing Upstream Costs through Improved CAPEX and
OPEX Discipline will be the solution to oil and gas
industries to keep going concern, CAPEX and OPEX will
have a material impact on the potential profitability of a
project and therefore its dividend policy. So CAPEX and
OPEX discipline is the means of identifying an optimal
solution from a number of possibilities. Sensitivity analysis
on CAPEX and OPEX will be required to support decision
making. CAPEX and OPEX discipline will be required to
assess the parameters over which the project can operate and
still be sustainable. Structured and effective cost
management discipline if is in place oil and gas companies
can operate at their optimum capacity. In order to improve
operational efficiency in field development planning in an
era of low oil prices there is need to cut cost and have good
hydrocarbon management and accounting maturity in oil and
gas companies.
When oil and gas companies inculcate effective optimization
of cost through improved OPEX and OPEX discipline the
impact of lower oil prices on supply-demand balance and the
resulting outlook for onshore and offshore rig and equipment
rates globally and regionally will not be negative on a
company. Proper enabling step change for improvements
should be undertaking in upstream sector of oil and gas in
order to enhance efficiency, productivity, and effectiveness
In addition, the oil and gas industry needs to see significant
cultural change in how organizations interact with their
suppliers and competitors alike. There is enormous potential
for increased collaboration within the industry to reduce
© 2019, IJSRMS All Rights Reserved
Vol. 5(12), Dec 2019
inefficiency, but this can only happen when major suppliers,
co-joint ventures and operators overcome the long-standing
barrier of mistrust and put in place extended Supply chain at
granular Level. This will help to achieve cost efficiency
long-term growth, profitability and competitive advantage in
oil and gas companies.
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