The KPI's of Utilities and Oil & Gas
- Forward Thinking
- May 10, 2019
- 6 min read
Updated: Oct 30, 2019
This coming summer, I will be joining Black & Veatch's Management Consulting practice as an analyst. The practice offers Business Technology & Architecture, Advisory & Planning, and Growth & Performance services for the power, water, and oil and gas industries, globally.
After meeting with a professor of mine (With the intent of thanking her for helping me get to where I am today,) I was advised to learn the ins-and-outs and, really, what matters to clients in the utilities and oil and gas industries; this will allow me to hit the ground running and really understand the perspectives of the clients. So that is what I decided to do: understand 1) the why, 2) the what, and 3) the where.
The Why:
Providing these services to the utilities and the oil and gas industries is becoming more important as the archaic industries are being forced to change.
The utilities industry is facing many different winds at once. "There is the overcapacity and low wholesale prices in mature markets. There is the rise of renewables, which have introduced stability challenges on existing networks. There are operational efficiency opportunities in transmission and distribution" (McKinsey & Co., Power plays: How utilities can face the future). At the same time, the functionality of the industry has changed with new business models due to DER providers and newer, greener regulations (Black & Veatch, 2018 STRATEGIC DIRECTIONS: Smart Cities & Utilities Report).
The oil and gas industry is also facing its own challenges: green demand and geopolitics (Forbes, Prices Are Up, But Challenges Remain For Oil And Gas Companies). In addition, the industry is facing headwinds from increased demand but declined supply coupled with decreasing new oil and gas discoveries (PwC, Oil and Gas Trends 2018-19).
The What:
I'd like to go about this by understanding five KPIs in both the utilities industry and in the oil and gas industries.
Utilities Industry:
1. Total Number of Customers: What is the absolute number of customers a firm has, and what is its growth and retention of said customers. In addition, another layer to add on is the diversity of said customers.
2. System Average Interruption Frequency Index (SAIFI): This is for the reliability of a firm by showing the average number of interruptions a customer experiences.
3. Operations & Maintenance Expense per Circuit Mile: On average, this is how much it costs to run a mile of circuit wires within a period of time.
4. First Time Fix Rate: This is the percentage of jobs that are resolved the first time a field technician visits a customer. This is all about effectiveness of the people in the firm. The effectiveness can make a difference because of costs, in two aspects, if a problem is not resolved the first time: 1) the actual costs of sending an employee into the field and 2) potentially lost future sales (We all know that we or someone we know was no longer a customer because their problem could not be resolved.)
5. Overall Customer Satisfaction (CSAT): How happy you keep your customers.
Oil & Gas:
1. Group Return on Average Capital Employed: This is a company’s capital efficiency, dividing the underlying RC profit after adding back net interest by average capital employed, excluding cash and goodwill. Basically, it is how well a company makes profits from its capital.
2. Tier 1 Process Safety Events (Or something similar, depending on firm): Losses of primary containment with greatest consequence – causing harm to a member of the workforce, costly damage to equipment or exceeding defined quantities. The key is to minimize this metric by creating a safer working environment.
3. Group Proved Reserves Replacement Ratio: Shows what percent of this year's production has been replaced by proved reserves added to the reserve base.
4. Underlying Replacement Cost Profit: Used to assess operational performance, this measure is the replacement costs of inventory sold. It is arrived at by excluding inventory holding gains and losses from profit or loss. Adjustments are also made for non-operating items and fair value accounting effects.
5. Major Project Delivery: This is the progress of major projects to gauge whether firms are delivering on core projects under construction, on time (Something interesting to add would be a factor or variable to show efficiency and if they are under or over budget.)
6. Leak Per Customer: In reality, oil and gas distribution networks are long and complex. As environmental regulations and public scrutiny rise, maintenance costs must include finding where and why leaks occur; this can be used to reduce reliance on the assets with the highest repair costs in relation to customer revenue.
The How:
Having constructed a better understanding of current condition of both the utilities and the oil and gas industries and a better understanding of measuring performance in those industries, it is important to understand how to use both of those to build a future within them.
Utilities:
The total number of customers, and thus the top-line revenue, of many utilities firms have had some trouble in the past few years. Because of more environmentally conscious consumers, demand for more efficient forms of appliances (Smart-home technology...) and eco-friendly energy sources (Home-installed solar power, improved battery storage performance,...) have increased. In addition, eco-friendly energy sources, with batteries, at home have allowed for an improved SAIFI because the base of customers on the grid has decreased: this has led to higher Operations and Maintenance Expense per Circuit Mile, as well. This will ultimately, as seen in Nevada, lead to utilities firms raising prices on retained customers to make up the revenue difference, thus leading more people to leave the grid and move to more energy efficient and eco-friendly services; in a sense a sort of death spiral.
To combat this, there must be a change in the business model of utilities firms. From a product-based business model, it must turn to that of service-based. This can come in two forms: 1) providing more eco-friendly energy sources direct to the customer as a service and potentially charging them for said services but also financing the sources to ensure that revenue grows (Alternative generation sources, energy storage, equipment replacement, sensor-based energy monitoring systems, software-based data analytics, facilities management services, and the infrastructure to back it all up) and 2) provide active, data-driven, expertise-driven energy management programs as more customers are becoming more conscious of energy consumption (This is already performed by industrial clients).
Oil and Gas:
Through an analysis of the Group Return on Average Capital Employed, Group Proved Reserves Replacement Ratio, and Major Project Delivery, an issue within the industry is supply. The supply issue stems from 1) easing supply growth, 2) the erosion of inventory, and 3) reduced production from current sources. Even though investment in major projects is expected to grow, there is a long-term decline in new oil and gas discoveries: the reality is that large, easily accessible prospects have already been discovered. It is not helped by the fact that production has been declining by four percent, on average, annually. Overall, this means in the long-run the industry is projected to have supply-related issues.
In regards to Tier 1 Process Safety Events, firms have been pushing off non-critical maintenance to reduce costs. This will not only endanger the safety of the firms' employees, which is a large hazard, but this will also increase the probability of leaks from pipelines, as well.
Moving forward, the oil and gas industries must adapt.
First, because of volatility in oil prices, firms must ensure that their portfolio of assets have a lower break-even price to ensure commercial viability. This means not only finding assets that follow this ideology but also getting rid of those that do not.
Second, the industry must continue its capital discipline. Cost reduction, standardization, and collaboration will prevent operational inefficiencies. A full-cycle project economics lens will allow firms to focus on their strategy and core competency, thus freeing up capital to bring better returns.
Third, the industry must push asset maintenance. Since assets tend to be older, firms need to ensure adequate funds are available to maintain supply infrastructure to a good condition. Rising activity on existing, aging assets will only worsen the supply issue with unplanned outages. Thus, more maintenance must occur.
Fourth, the each individual firm needs to specialize and focus on a certain part of the value chain. It seems that a large part of the industry tends to believe in owning the entire value chain. This, however, has been seen to decrease value, if not destroy value, for the shareholders. Instead, firms need to focus on what they do well and work with other companies, that know what they do well, to create a full value chain with experts. This will ultimately drive profitability.
Fifth, more digitization. The archaic industry must use more technology to drive efficiencies and to find new opportunities. This can range from running simulations of assets to using drones to inspect leaks. Big data analytics can be used to optimize production.
Sixth, firms must use more technology-based employees. Having those who can create and sustain digital operations is important. Data scientists and software engineers are ever more important, and attracting them into the industry is of utmost important.
Last, firms need to thing about evolving the overall business. This means, considering the environmental regulation and climate change, what long-term strategies of diversifying and possibly becoming completely green.
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