By Younas Chaudhary
I diligently invest time every month in tracking our ongoing expenses, and I do this with agility, attentiveness, and consistency. I believe it is critical to evaluate all your daily expenses and review all your options for any expense—small or big—that can be reduced or controlled. You must regard such cost control practices as a core aspect of running your business.
Fortunately, I learned the principles of thrift and financial discipline, and cultivated a “never waste anything” attitude, during my childhood, from my parents. My mother played a formative role in building these habits by telling me when I was a kid not to waste a drop of milk even if I did not want to drink it! Today, my son teases me, as whenever I go to the northside of Houston, I always fill up my vehicle with gas because it is around 80 cents cheaper than where I live! Well, the little things you learn and practice early in life can save you a lot of money as established, lifelong cost saving habits!
Oil and gas projects undertaken by large producers are notoriously fraught with cost inefficiencies and overruns. In an analysis of 500 completed oil and gas capital projects of $1b or more from 2014-2019, Ernst & Young found that 60% of the projects experienced schedule delays, and 38% had cost overruns. But in truth, the situation is hardly different among small- and medium-sized oil and gas producers. A common thread throughout the energy industry is that producers too often fail to take cost control seriously enough.
Over the years, I have seen previously profitable small- and medium-size oil companies fail due to loss of cost controls, doing things like increasing operational expenses by 200% to increase their well production by 50%!
Wasting money, by building a paved road to a well instead of a dirt road or hiring two managers and five assistants without clearly knowing why, directly invites trouble for these businesses.
Team leaders lose control of such costs because of mismanagement and an unwillingness to take a hands-on approach to their business. Oftentimes, once money starts to flow in from a few successful operations, team leaders take a “too rich to fail attitude” and accordingly loosen their grip over their daily expenses. Thinking their businesses have reached a stage in their evolution when they can prosper on autopilot, without careful attention and diligent effort, they put cost control on the backburner, stop spending time onsite, and neglect the practice of reviewing and reducing the daily costs on their projects and tasks to do list. This complacency invariably spells doom for their businesses.
In my assessment, while it is true that luck plays an important role in the oil and gas business, the true key to long-term success lies in diligently watching and prudently controlling costs. Small- and medium-sized oil producers must watch, control, and reduce all their operational costs on a daily, weekly, and monthly basis.
They must keep a close eye on their best producing wells and most expensive wells, so they can give them the immediate attention and daily maintenance they require.
You cannot simply rely on your prayers or gut feelings and think everything will work out; if it were that simple, anyone could be doing your job. Rather, when you are in the driver’s seat, you have to take account of all your actions, especially during this pandemic. Investing time into your job, as a daily work habit, is one of the biggest investments you must make towards your business. I myself am semi-retired, but I still invest a substantial amount of my time every day analyzing the performance of my business to try and discern where I can increase operational efficiency by controlling and reducing costs.
Based on my personal experience, I believe that diligent, disciplined cost control is the key not only to consistent profitability but to long-term survival. And candidly, if done strategically, one can limit and even eliminate significant wasteful expenditures without too much difficulty. For example, we used to pay over $300 per hour to hire outside rigs to pull down wells in certain fields. To avoid these high needed costs, we purchased our own rigs to do the same work, and the cost savings have been phenomenal!
Here are a few tips on controlling costs:
- Begin with a clear, well laid out plan to watch and control all costs on a daily, weekly, and monthly basis. Create and maintain a budget.
- Review once a week and at least each month all your AP and AR reports.
- Keep track of costs at the granular level, and also maintain a big picture vision of where your costs are going.
- Use data and have flexibility to control costs as your projects move along.
- Establish a standard or baseline against which actual costs are compared—for instance, the profitability at a particular well. Then ask yourself: How do these costs compare against those of another field or location? What makes one more efficient and another less efficient?
- Always look for best practices in operational efficiencies that you can easily apply at a different locations and sites.
- Invest your own time and be consistent.
- Identifying and calculating variance is key, especially the variance between your actual results and the baseline you have established.
Here are ways to connect with me
You can read more by purchasing my best-selling memoir “From Dirt Roads to Black Gold.” Note that 100 percent of the proceeds from the sale of this book will help people in need through my foundation, the YBC Foundation.
The views, thoughts, and opinions expressed in this article are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. Further, I make no warranty regarding the accuracy or effectiveness of my recommendations, and readers are advised to consult other advisors as well as their own judgments in making business decisions.