Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

Risks of President Trump's Steel Memorandum to O&G Firms

April 7, 2017 at 9:28 AM / by PowerAdvocate posted in Midstream, Cost Reduction, E&P, Downstream

On January 24th, President Trump issued a memorandum mandating the use of domestic steel for American pipelines. For Oil & Gas firms, this could drastically alter the viability of existing capital and maintenance programs and pose a threat to procuring critical materials.

On March 8th, we were joined by 30+ Oil & Gas firms to discuss what risks the memorandum could pose, including questions like:

  • How will the memorandum affect steel plate prices?
  • What supply constraints will O&G firms face?
  • Which items are most at risk of price escalation and short supply?
  • What can we do to prepare?
  • And much more...

Click here to view our recording of the event



US Shale Production May Lead to OPEC’s Failure: Oil Markets at a Precipice

March 17, 2017 at 5:19 PM / by Toby Kearn posted in E&P, Midstream, Downstream, Cost Reduction

Last fall, renewed optimism resounded across oil markets. The North American rig count had fallen by almost 50% since January of 2016 and was a tiny fraction of where it stood prior to the oil price decline that began in mid-2014, foreshadowing weak supply growth. Moreover, the Organization of the Petroleum Exporting Countries (OPEC) appeared to finally be ready to take advantage of these lower levels of shale activity by cutting output and paving the way to a recovery in oil prices. North American oil prices jumped jubilantly when this action came to fruition and OPEC signed a major deal in which members agreed to curtail production.


Figure 1: A Brief Oil Market Deficit and the OPEC Deal

Image 1.jpg

Sources: US Energy Information Administration (EIA); PowerAdvocate Energy Intelligence Group


Methanol Prices Skyrocket by 180% Over Last Year

March 15, 2017 at 12:56 PM / by Garima Painuly posted in E&P, Midstream, Downstream, Cost Reduction

It's no secret that many of the input costs to Oil & Gas firms have started to rise in the last year. Chemicals such as ethylene, propylene, and many others are no stranger to that trend. But there's no culprit more extreme than methanol, whose prices have risen by >180% in the span of just one year.

In this article, we share:

  • Why methanol prices have been surging
  • What underlying market fundamentals are contributing to the increase
  • Which constraints and opportunities are coming up in the future

Methanol Pricing Trends

Methanol prices are seeing drastic increases across the board: in the last month, the ICIS US Gulf Coast Methanol benchmark reached a 2-year high, 180% higher than the year before. Methanex contract reference prices have seen similar increases, and are currently at $500 per metric ton ($1.50 per gallon). These domestic price increases are broadly in line with global methanol price trends.Final Graph.png


3 Common Justifications Suppliers Might Use to Raise Prices

March 9, 2017 at 9:32 AM / by PowerAdvocate posted in Cost Reduction, E&P, Midstream, Downstream

As suppliers enter 2017 looking to recover lost margin with double-digit price increases, we’ve found that the operators with the most successful responses are the ones who most effectively use data.

In this post, we share how Oil & Gas Supply Chain teams can respond to the 5 most common arguments suppliers use to raise prices.

1. “My costs for X are up”

We often hear suppliers come to the negotiating table with arguments like “our overhead is up by 3% this year” or “our labor costs are up by 5%, which means that our costs are rising by 7%”. So what are some effective ways to respond to a supplier who necessarily has better visibility into their own cost structure? We suggest starting with 3 key questions:

  • Have the costs really gone up that much?
  • What are the other cost drivers doing?
  • Are factors like supply/demand offsetting the cost structure?

Developing a standard negotiation packet filled with market data on the particular item or service can be an effective way to respond. In this case, we suggest starting with a cost model that breaks down the cost of the item into its individual cost inputs, and then tracking how those inputs have moved with the market over time.

For example, if a joints supplier came to you saying “the price of labor for steel mills services is rising,” you could instead point to the other commodities that are exerting downward pressure on joints. In the graph below, we can see that steel has a much stronger impact on the price of joints than iron and steel mills services does, suggesting that the overall outcome should be a price decrease.


5 of the Top Chemical Savings Opportunities for Oil & Gas

March 3, 2017 at 9:30 AM / by PowerAdvocate posted in Cost Reduction, Downstream

Everyone knows that commodity markets are volatile – but volatility can also translate into opportunities to capture market declines and turn them into savings. So how can downstream procurement teams ensure that suppliers pass on savings from market declines in chemicals, which are critical to operations?

Last year, we shared the top chemicals that Oil & Gas firms should be saving on based on actual market data that tracked changes in input commodities, margin, and overhead from 2014 to 2015. Before prices start going back up, it’s time to assess whether you’ve taken advantage of the declines that have occurred since the peak of the market. Read on to see an updated list of top chemical savings opportunities for downstream firms.


The Top 5 Chemicals You Should Be Saving On:

1. Ammonia: 43.6% Decline Over Last Two Years



[Video] How the Macroeconomic Context is Impacting Oil & Gas this Quarter

February 27, 2017 at 2:05 PM / by PowerAdvocate posted in Cost Reduction, E&P, Midstream, Downstream

Current global currency behavior has created a climate of inflation that will likely mean increased materials prices and tighter cost constraints on Oil & Gas firms. In this market update, our Energy Intelligence Group shares:

  • The growing possibility of a "Hard Brexit" and why there is fear over the UK suddenly losing access to the EU’s markets
  • Why the Peso’s current decline represents a pre-tariff buying opportunity for supply chain
  • How inflation is impacting US post-election interest rates
  • What Saudi Arabia's recent pumping cuts could mean for oil prices

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[Video] A Closer Look at the Proppant Market

February 27, 2017 at 2:02 PM / by PowerAdvocate posted in Cost Reduction, E&P

In this closer look at proppant, we discuss correlations between upstream activity and proppant sales, and explore how we can forecast proppant prices going forward. Our Energy Intelligence Group zooms in and shares:

  • The effect of recent operational changes on the price of proppant 
  • How O&G firms could use the number of drilled-but-uncompleted (DUC) wells to forecast proppant prices
  • Why E&P operators’ experiments with proppant intensive wells are contributing to increased sand demandand the effect this has on prices
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[Insights Beyond Oil & Gas] Baseball, Data, and E&P Supply Chain Performance

February 14, 2017 at 3:00 PM / by PowerAdvocate posted in E&P, Cost Reduction

In our latest installment of the Beyond Oil & Gas series, we turn to America’s favorite pastime and a man by the name of Billy Beane, who helped transform the world of baseball by popularizing a robust new form of empirical data analysis. Then, we’ll share how E&P firms might use similar new data approaches to elevate Supply Chain performance.

In his popular book, Moneyball, Michael Lewis tells the story of the Oakland A’s general manager Billy Beane and how he challenged the baseball industry status quo. Before Beane, the industry relied heavily on highly paid scouts to recruit new players based on ‘gut feelings’ and traditional statistics like stolen bases and batting average, which had low accuracy rates at predicting which players would actually perform best.

This meant it was difficult for low-budget teams like the Oakland A’s to compete with teams like the New York Yankees, who had mammoth salary budgets more than twice as large. With only a fraction of the salary, Beane knew that he had to leverage better data and statistical analyses to recruit quality, yet undervalued and low-budget, players to form a team that could hope to compete.  


[O&G Insights Beyond Oil & Gas] SRM Insights That O&G Can Learn from Volkswagen and Zappos

January 16, 2017 at 7:41 PM / by PowerAdvocate posted in E&P, Midstream, Downstream, Cost Reduction

In our 'Beyond Oil & Gas' Series, we're excited to bring you the most valuable insights that O&G Supply Chain folks can take away from industries outside the world of Oil & Gas. In our latest installment, we share how a large online retailer and a car company can offer SRM insights and lessons for O&G firms.


In our work with Oil & Gas Supply Chain teams, we consistently hear a tension between two competing goals for supplier relationships:

  1. The need for a tough stance on price and productivity
  2. The desire to build trust over time, identify shared solutions, and secure supply when the market rises once more

We recently came across two stories from outside the world of Oil & Gas that demonstrate two competing approaches to these goals.

In today’s post, we share these instructive case studies as thought pieces on how Oil & Gas teams can successfully navigate the waters of supplier relationships (and where things can go dangerously wrong!). And at the end, we’ll share a few strategies we’ve seen other O&G Supply Chain teams use to resolve similar tensions.


Hedging to Mitigate Steel Cost Exposure at Energy Companies

January 12, 2017 at 11:17 AM / by Toby Kearn posted in Cost Reduction, E&P, Midstream, Downstream

Steel is the largest metallic cost driver in energy supply chains.  As such, its volatility over 2016 has led supply chain teams to look for ways to manage this cost and mitigate the potential impact of further large increases in the price of steel.

In contrast to base metals like copper, aluminum, and nickel, which have deep and liquid financial derivatives markets, steel production and consumption is fragmented amongst differing grades.  This has inhibited the development of a robust hedging market for steel.

Indeed, volume and open interest in exchange-listed steel contracts looks miniscule relative to major base metals benchmarks.  While steel is admittedly a relatively expensive and difficult commodity to hedge, this post examines the cost and efficacy of options available to American firms wishing to mitigate their steel exposures.  


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