Cost Insights
by PowerAdvocate

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

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

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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.


[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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[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.  


[Interview] PowerAdvocate's O&G Team on Cutting-Edge Cost Reduction

December 9, 2016 at 2:26 PM / by James Wagstaff & Jayme Mendal posted in Cost Reduction, E&P, Midstream, Downstream

The Oil & Gas Supply Chain & Procurement Summit recently interviewed PowerAdvocate's Oil & Gas team on some of our favorite topics: cost reduction, fact-based negotiations, vendor efficiency gains, and market data. Read on for a discussion on the topics that keep us, and the O&G Supply Chain teams we work with, up at night.


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James Wagstaff, Vice President – Oil & Gas, PowerAdvocate
Jayme Mendal, Senior Director – Oil & Gas, PowerAdvocate

What trends in demand are you seeing from energy sector clients in terms of supply chain performance needs?

Jayme Mendal:

A key need we’re seeing from our clients is access to better data on which to base their decisions. For example, there are two broad categories of information that our clients are seeking.

The first would be much better and more accurate and reliable information on their own costs – so their internal data. It’s about answering questions at a very detailed level, what’s actually driving cost differences across their wells, across their suppliers, and across their areas of operation.

The second information need relates more to what’s happening in the market and how they’re performing relative to the market. This is more about answering questions like, “How is the market price for well stim or drilling fluids moving relative to our pricing?”

Our clients are trying to figure out how we can ensure that our pricing remains in line with what’s going on in the market – particularly as things begin to turn.


[Video] New Approaches to Sourcing Steel-Based Products in Oil & Gas

November 23, 2016 at 10:06 AM / by PowerAdvocate posted in Cost Reduction, E&P, Midstream, Downstream

We're excited to share a brief 10-minute video update on the steel market for Oil & Gas Supply Chain firms. In the video below, we cover:

  • How savvy Oil & Gas firms are shifting from importing finished steel products like line pipe to a hybrid approach of importing raw steel plate and taking advantage of rolling and coating services in the domestic U.S.
  • Which steel tariffs are still in play, which countries have the lowest rates, and how those tariffs impact future sourcing strategies for more specialized steel products
  • Why domestic coating may result in savings on freight costs and regulatory complications
  • Why U.S. production of steel plate has historically been lower relative to U.S. production of hot-rolled steel, and why this complicates a completely domestic approach


Interested in talking through your sourcing strategy for steel-based products? Send us a note at



What the GE Oil & Gas and Baker Hughes Merger Means for Supply Chain Teams

November 23, 2016 at 10:04 AM / by PowerAdvocate posted in Cost Reduction, E&P, Midstream

Earlier this week, news broke of the planned merger of GE’s Oil & Gas business with Baker Hughes. By combining GE’s machinery and equipment focus with Baker Hughes’s services focus, the merger will create one of the largest “fullstream” providers in the energy industry and will likely increase the competitive stance of Baker Hughes against the likes of OFS giants Schlumberger and Halliburton.


[Video] Oil & Gas Freight Update: Shipping in Crisis

November 23, 2016 at 10:03 AM / by PowerAdvocate posted in Cost Reduction, E&P, Midstream, Downstream

Years of shipping oversupply and declines in freight rates have created a shipping crisis that directly impacts Oil & Gas firms. In this market update, our Energy Intelligence Group shares:

  • Why slowing trade growth has caused a massive oversupply of containerships
  • How oversupply should translate into much lower freight rates for you and your suppliers
  • Why the shipping crisis is systemic and how initial bankruptcies in firms like Hanjin signal a larger wave of financial distress
  • How that introduces risk of delay and disruption into your Supply Chain (and specific, tactical methods for mitigating that risk)

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