Malaysia’s oil and gas sector needs to commit to long-term thinking for meaningful cost-cutting, says DNV GL

Malaysia has less focus on standardization than the global average.

Cost management is the top priority for 60% of senior oil and gas professionals in Malaysia, compared to 41% globally, according to a new research report published today by DNV GL, the leading technical advisor to the oil and gas industry. One in three (34%) respondents in Malaysia is prioritizing headcount reductions to impose stricter cost controls (vs 31% globally).

According to A New Reality: the outlook for the oil and gas industry in 2016, a DNV GL report based on a survey of 921 senior professionals in the sector¹, increasing pressure on the supply chain will also be prioritized as a cost-management measure by 34% of respondents in Malaysia, compared to 27% globally.

The majority of Malaysian respondents felt that the industry is taking a short-term view on headcount (57%) and skills/career development (53%), compared to a global average of 51% and 43% respectively. Further, 58% believed the industry is repeating the mistakes made in prior downturns. Cutting back on manpower and thus competence (24% compared to 15% globally) and lack of discipline in cost control even in good times (18% compared to 12% globally) were stated as the key reasons for this view.

Raza Amin, country manager for Malaysia, DNV GL – Oil & Gas, says: “The low oil price is clearly having a major impact on the Malaysian market. The industry has taken painful short-term cost-cutting measures and will have to accelerate healthy cost-management changes to adjust to the new reality. That means cutting complexity and increasing collaboration and standardization, which will put the industry on a sustainable path for the long-term."

“This is a cyclical sector and during a downturn we should use the momentum to drive out inefficiencies. To avoid repeating past mistakes, the industry now needs to really commit and deliver on a long-term plan,” continues Amin.

Fewer respondents (55%) in Malaysia compared to the global average (61%) believe that operators will push to standardize their delivery globally. The percentage of Malaysian respondents who were positive about investment in R&D was also less than the global average - in Malaysia more than four in ten respondents (42%) will cut R&D spend in 2016 compared to 36% globally.

Elisabeth Tørstad, CEO of DNV GL – Oil & Gas, says: “While the industry is understandably preoccupied with generating shorter-term value, we must also keep an eye on where longer-term value and long-term efficiency gains can be achieved. Nearly one in five companies globally does not have a strategy in place to maintain innovation and R&D investments are expected to fall in Malaysia in 2016."

“Innovation and collaboration are even more important in this current price environment. It isn’t just about finding the breakthrough technologies – although that’s important too - it’s also about making things simpler and more efficient and ultimately helping the industry to safely cut costs. At DNV GL, we are continuing to invest 5% of our revenue in R&D as we see this as a key enabler for sustainable long-term competitiveness,” continues Tørstad.

Other key findings include:

• The major barriers to growth are the low oil price (83% of respondents compared to 63% globally), the weak global economy (47%) and uneconomic gas prices (25%).
• At the time of the survey, the oil price was USD 47. It has since fallen further², but the Malaysian respondents were more pessimistic than the global average at that time. The percentage of Malaysia’s senior oil and gas professionals who are confident about the future is well below the global average (21% compared to 30%) and 72% (compared to 50% globally) expect further cuts to CAPEX investment. The share of Malaysian respondents who were confident about hitting revenue targets was below the global average (36% compared to 40%).

1. A New Reality: the outlook for the oil and gas industry in 2016 is an industry benchmark study from DNV GL, the leading technical advisor to the industry. Now in its sixth year, the programme builds on the findings of five prior annual outlook reports, first launched in early 2011. During October and November 2015, we surveyed 921 senior professionals and executives across the global oil and gas industry. More than a third (35%) of respondents work for oil and gas operators, while 60% are employed by suppliers and service companies across the industry. The remaining respondents come from regulators and trade associations. The companies surveyed vary in size: 40% had annual revenue of USD 500m or less, while 14% had annual revenue in excess of USD 10bn. Respondents were drawn from publicly-listed companies and privately-held firms. They also represent a range of functions within the industry, from board-level executives to senior engineers.

2. There is a correlation of 0.975 between oil price and industry confidence.