May 2009 Vol. 236 No. 5

Features

Operational Excellence Delivers Higher Profit Margins To Midstream Companies

Midstream energy companies operate in a highly regulated environment and – regardless of marketplace conditions – face razor-thin profit margins from three revenue sources – transportation, trading and storage. A small mistake, oversight or bad judgment in any of these areas can cause significant revenue loss.

Midstream executives must balance creating more efficient energy solutions with fostering a profitable environment that encourages investment. They face dramatic fluctuations in their business: seasons, price swings and other market factors that determine the quantity of crude oil, natural gas, and oil and gas derivatives needed and the fluctuating demand for these different hydrocarbon commodities. Added to this is the pressure to control prices while delivering superior products and doing more with less.

To be successful, midstream companies must strive for operational excellence in each process, department and organization. This is not an easy task. It requires individual dedication, evolving knowledge, a shared vision and a fierce commitment to being the best at what is necessary to achieve industry leadership.

The midstream business faces four key operational issues: 1) numerous threats to margins, 2) challenges of cost control, 3) the effects of mergers and acquisitions, and 4) implications of a changing workforce. Facing such an array of issues, midstream operators may wonder where to begin.

Here are five suggestions on what midstream companies can focus to remain successful during the current market downturn:

1. Understand where you are today. Midstream companies are constantly striving for operational excellence. But without proper measurement against industry benchmarks, it’s difficult to determine whether the initiatives on which you are focused are generating the desired results. Benchmarking sets the stage for directing effort and resources to areas that will most influence the business through quality improvement and better information management.
2. Sharpen your preventive maintenance and asset management focus. Today’s volatile energy market amplifies the potential damage of equipment failures. A strong predictive-maintenance program can help prevent this margin drain. Having reliable equipment available where and when it’s needed helps avoid the added expense of rush maintenance or equipment replacement. Achieving such performance levels will require accurate and timely operational data to monitor asset utilization.
3. Strengthen your workforce capabilities and knowledge. In the past, midstream operators have relied on the capabilities of select individuals to keep operations up and running. Going forward, companies will need new approaches. Comprehensive human capital solutions can help address recruitment, retention, and skills development and management. Such programs may include incentives for employees to develop skills across a variety of disciplines.
4. Focusing on corporate, or institutional, knowledge also can help a company prepare for future challenges and reduce the risk of knowledge “retiring” along with personnel. Operators will need processes to institutionalize information as corporate knowledge, rather than relying on individual experience. Companies can retain and expand critical knowledge by developing a readily available repository of vital information and using accelerated training programs to impart knowledge and experience to new staff. Establishing corporate knowledge in this manner also helps prevent numerous versions of information evolving, which can lead to poor decision making and improper reporting.
5. Take better advantage of technology. Many midstream operators are saddled with diverse and outdated legacy systems, including those acquired through mergers and acquisitions. Without an effective plan for developing a comprehensive enterprise resource planning capability, technology may stand as one of the biggest obstacles to successful integration. New approaches that employ a growing array of leading technologies can help improve business processes. By effectively deploying such solutions, operators can achieve better fleet and facility use, more agile response to changes and delays, fewer errors, and, ultimately, better margin preservation.
6. Preparing for tomorrow’s midstream market. As recent events have shown, energy markets are likely to remain volatile. But whichever way they move, midstream operators must deal with an ongoing reality: their ability to make money will depend on how well they address operational requirements, important decisions and potential problems.

Through operational excellence, midstream companies can take an important step toward achieving their business goals in today’s increasingly challenging midstream business environment. By taking steps to improve quality, reduce waste, and increase yield and throughput, companies will more likely thrive – not just survive.

Author
Andrea C. Gallien is managing director, U.S. Oil & Gas, Global Energy & Chemicals Practice, BearingPoint, Inc., one of the world’s largest providers of management and technology consulting services. Based in Houston, she has been with BearingPoint for more than 14 years, specializing in strategy, business process improvement, technology implementation and account management.