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The latest analysis from McKinsey & Company (McKinsey) reveals that oil and gas industry costs could increase between 6-10% in 2023 due to labour uncertainties and raw materials inflation

Onshore oil jack reduced AdobeStock 181961238Global inflation, geopolitical factors and economic headwinds are creating supply chain difficulties. (Image source: Adobe Stock)

The analysis uncovers that primary operation tasks, such as regular inspections and maintenance, are becoming more expensive as labour rates grow upwards of 9% per annum and costs for steel casings and tubing also rising at 5% per annum. This, coupled with spiraling marine and aviation logistics prices, is causing increasing operating expenditure (OPEX) rises.

The article examines how oil and gas companies are grappling with the business fallout of sustained global inflation, geopolitical developments in Europe and Asia and increasing economic headwinds. McKinsey details how the supply chain risk caused by these factors is affecting field operations and project delivery, with traditional mitigation strategies proving inadequate.

Johann Raunig, partner at McKinsey said, “These issues mean supply chain security should be catapulting to the top of the CEO agenda as organisations must swiftly implement a nimble, comprehensive strategy to navigate this turbulent period. We’re already seeing that production efficiency is dropping while operating expenditure is rising, project budgets and schedule milestones are being missed, and key suppliers are struggling to provide labour and materials on time. It’s a vicious cycle: more work is carried out under emergency conditions, which is increasingly expensive.”

McKinsey notes organisations that are taking measures to secure their supply chain and avoid market volatility are seeing significantly less inflationary pressure, saving around 15% on costs. The insight details key high impact levers that can mitigate supply chain reliability risks that could be used to pivot away from the typical cost reduction mindset including:

•       Early procurement in strategic projects to accelerate long purchase times by adjusting the sanctioning period

•       Revising the approval gating process or enabling earlier budget approvals

•       Improving the risk-reward ratio in major contracts to incentivize performance and consolidate contract volumes

•       When it comes to staffing, enhancing offshore execution efficiency and digitising inspection data could make the workplace more appealing.

You can read the report here