Cost efficiency has been at the forefront of the agenda of oil and gas companies since the 2008 oil crash and the subsequent reduction in profit margins. Since then, many firms have opted to cut their manpower to avoid high operational costs and also reduce capital expenditure (Capex). At present, with the COVID-19 pandemic, low oil prices are having an adverse impact on oil companies’ expansion, growth and profit margins. Historically, oil and gas firms that can keep their production costs low have been the winners. Thus, enhancing operational efficiency is of paramount importance and is both a simple yet very effective way of improving cost efficiency throughout the sector.
This is an issue discussed in a paper titled: Determinants of operational efficiency in the oil and gas sector: A balanced scorecards perspective. The study, which is written by Mian Ajmal, an associate professor at the University of Vassa, and Salama Al-Qubaisi, a senior academic at the American University of Sharjah, seeks to give empirical evidence validating the relation between knowledge management practice (KMP), organizational culture (OC), and operational excellence (OE) by using balanced scorecards (BSC) in the oil and gas industry. There is limited research in this field and thus, the paper seeks to fill that void by providing a better understanding of that relationship and its importance with regard to business outcomes.
Optimizing Operational Excellence
Operational excellence (OE) is defined in this paper as an explicit business strategy that helps organizations become efficient and effective in their processes while offering products and services at competitive prices. Optimum OE includes a set of rules that will guide a company in its operations in order to achieve operational competence. This system is based on teamwork, leadership, and creative problem solving. This leads to a continual improvement cycle across the organization. The Process focuses on the shareholders’ needs as a customer, empowers employees, and optimizes existing activities in the process. OE refers to a system that establishes accountability across the organizational hierarchy and fosters continual improvement. As the organization becomes more productive and competitive, it uses operational practices that focus on eliminating waste and effective utilization of resources. Put simply, OE improves the organization’s capability to produce more at a lower cost.
The paper cites the following conditions required in order for OE to succeed: Superior capture and effective utilization of data and information; robust continual improvement culture; continual people development efforts; compelling the best KMP; advanced systems that capture improvement and finally top management commitment to create and sustain performance improvement.
BSC is used in this paper as a theoretical framework to determine the effects of KMPs on OE. It is a performance management tool that measures the alignment of small operational activities and large visions and strategy. BSC keeps the organization focused on its core business activities and their achievement and is made up of four performance indicators: financial, customer, internal process, and learning growth. Thus, it helps organizations convert strategic objectives into results.
The paper’s research methodology has been generated by quantitative surveys in order to study determinants of OE in oil and gas organization using BSC’s perspective. A number of 1,000 employees from one of the largest offshore oil and gas companies in the United Arab Emirates (UAE) took part in an online survey. The participants were taken from upstream, midstream and downstream operations and vary in levels of seniority within the company. A self-administered questionnaire containing measures of KMPs and OE measured by BSC’s four strategic perspectives were distributed by email. The questionnaire consisted of four parts: the first part consists of a checklist of general information questions; the second part consists of the rating scales of OC; the third part consists of the rating scales of KMPs; and the fourth part the rating scales of OE using the BSC perspective.
Empirical Results Applied to the Sector
The empirical analysis demonstrates several major findings. First, the result provides clear support for OC on KMP and KMP on OE. The result confirms that the success of a firm can provide a basis for future success and that confidence coupled with knowledge sharing is crucial. When employees are knowledgeable, they will be more willing to accept change, adapt to new terms, and collaborate with members in an organization. Within the oil and gas sector, firms that win the trust of its people see a higher rate of skills growth. Companies in the oil and gas industry should take the lead in applying KMPs without overly focusing on the organizational size as a goal.
The oil and gas industry has been taking advantage of knowledge management developments for more than a decade. During this period, the industry has experienced rapid changes both internally and externally. The advantages of knowledge management have played a key part in making operational processes more streamlined. Knowledge management teams provide support through the transfer of knowledge to oil and gas companies with new technology, contracting out, new administrative regulation as well as asset management. Despite knowledge management not being a new concept in the oil and gas industry, existing knowledge management infrastructure can be an economical means of addressing new or relevant functioning issues in the oil and gas industry.
Oil companies that have found success with knowledge management philosophies can now implement the lessons learnt to create a well-informed work force and form a coherent team to address different issues plaguing the industry. By viewing challenges as opportunities rather than hindrances, the energy sector, in particular the oil and gas industry, can attain higher levels of operational performance.