Lower for Longer: Lean Forever
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Lean Thinking is a generic version of the Toyota Production System, which was cobbled together just after World War II. The system was how a resource-poor Toyota, staggering with broken processes and a low-skilled workforce, scrabbled through the harsh post-war economy to become one of the most successful and highly respected enterprises of the 20th century. The 1996 book, Lean Thinking, introduced lean to mainstream business. Since then, lean has propelled operational excellence in construction, software development, healthcare, financial services, state government, and more.
Lean Thinking is a philosophy that engages everyone in systematically solving problems. However, like “eat right, exercise regularly, get plenty of sleep,” lean is a simple concept difficult to live daily. Companies typically struggle through distinct levels of understanding and application of lean. Beginners dabble with lean tools in superficial ways that yield slim results. More developed users imbed lean more broadly across value streams and deeper into business systems to get greater returns. Advanced lean thinkers go much further and get dramatic results by building lean into their culture. Like safety, lean for them is not another project to be implemented; lean thinking is part of how they do everything.
Oil and gas companies have begun to use lean tools in isolated processes aiming to increase business efficiency. There have been measurable benefits in improved drilling times and reducing the cost of bringing a well into production. But what are the benefits beyond drilling and completions, and applying lean across the extended value stream?
Put another way, think about your corner McDonald’s: It fixes some glaring problems at their moneymaker, the drive-through window. But how competitive is it if the orders are incorrect, the assembly is sloppy, and it cannot get ingredients to the right place at the right time? Oil and gas is still in the lean tools era: Lean tools used in the business’ most manufacturing-like processes. A windfall of returns await those who can expand their scope of application and depth of understanding.
Lean Across the Value Stream and the Enterprise
There is clearly business benefit to drilling and completing a well faster. If a land well costs USD 10 million and if you can drill and complete 20% faster (without sacrificing safety or environmental performance), the company could complete five wells for the cost of four. But what about the rest of the value stream and the rest of the cycle? We recognize the many variables in prospect development time: The nature of the well, wildcat vs. infield drilling, onshore vs. deep water, unique company practices, and more. Nevertheless, we can point to the huge potential that makes this worth considering.
First, let’s define some lean terms. We call activities that advance the product or service in a way that the customer is willing to pay for value-added work (VA). Examples include development of a prospect, or drilling and completion. Nonvalue-added (NVA) activities are waste: They consume resources but produce no value. Examples are redundant approvals, or multiple identical quality checks. Some waste is necessary, meaning it is not immediately possible to remove it, but it still provides no value. Examples of this “necessary NVA” (NNVA) include acquiring permits, mobilization of assets, or building infrastructure such as roads, pipelines, or tanks.
As a lean rule of thumb, across all industries most processes are about 95% waste. If this holds even approximately true, then there are enormous opportunities to deliver product to the pipeline faster.
Let us assume it takes 365 days to identify a prospect, gather data, plan the well, mobilize, drill and complete, then bring product to market. If we shorten a 30-day time to drill and complete to 25 days, that is a 17% shorter drill-and-complete time, but only a 1.4% shorter total lead time. There is still an enormous opportunity to shorten the remaining cycle.
Some steps may not appear immediately improvable, such as permitting time. If it normally takes 5 days to file and receive a permit, that may not look like a big opportunity—unless it turns out that half the permit applications are delayed due to incomplete or inaccurate information. Lean mistake-proofing countermeasures could bring the permit application closer to 100% complete and accurate the first time.
Prospect development may take 2–3 months. Is this because the information available to the geological and geophysical group is incomplete, inaccurate, poorly organized, hidden in excessive information, or otherwise not fit for use? Recollecting, reorganizing, and cleaning up data are NVA slowdowns. Each step along the way, from bit selection, casing design, cement plan, rig selection, and completion design, contains NVA steps that extend the cycle, consume resources, and deliver no value.
Site preparation and mobilization are NNVA, but what are the steps here that delay the start and mean the bit starts turning a week later than it could? The question applies once the well is complete. Is it immediately bringing product to market, or does it take additional time to lay pipeline, set tanks, or build and install a facility? The selection of equipment or facilities for processing and production may also delay the project. An example of NVA may be found in the variability of designs rather than standardization of packages (Parshall 2016).
What advantages accrue to a company using lean across the entire value stream? Imagine the competitive advantage of a company reducing cycle time from 365 days to 180. Undrilled prospects represent inventory that is not generating cash; if a company could develop and drill prospects safely and efficiently faster than anyone else, they could drill more wells with fewer resources and capital per well. They would be quicker to respond to and evaluate projects, and pay less for acreage because they can process information faster than others.
Overall, a lean oil and gas company has lower costs of inventory, rework, and capital. Their bottom line can dramatically improve. Now imagine that advantage year after year. Better margins in the same market environment mean more profit directed to research and development, customer satisfaction, people development, equipment, capital reserves, and everything else that matters. Those investments translate into better products and services, happier customers, and better top-line growth. A lean company like this can weather storms that would capsize its competitors.
This was the scenario during the 2008–09 recession. While the Detroit Three automakers were shutting factories, laying off tens of thousands of workers, and taking government bailouts, Toyota did not. In San Antonio, it maintained its full-time workforce and focused on process improvement (Autonews 2008). It recovered faster, outpaced competitors, and capitalized on US market opportunities. The same can be true for oil and gas companies, now and in the future. Broadening lean thinking across value streams and across the enterprise, and deepening lean into business systems and the organization’s cultural DNA, can deliver unmatchable competitive advantage and the resilience to weather severe price fluctuations and market conditions.
Oil and gas companies that deeply embrace true lean thinking will be able to thrive in low-price environments and expand quicker when the market rebounds.
Chappell, L. 2008. Toyota Asks Truck Suppliers: No Layoffs. Automotive News. 15 September.
Parshall, J. 2016. Standardization May Hold Key to Future of Major Offshore Projects, J Pet Technol, 68 (11): 42–44.
Womack, J. and Jones, D. 1996. Lean Thinking. Banish Waste and Create Wealth in Your Corporation. Productivity Press.
Lower for Longer: Lean Forever
Tom Knode, Contek Solutions, and Jeff Fuchs, Maryland World Class Consortia
01 March 2017
24 March 2017
15 March 2017