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Labors, raw materials could push oil and gas costs up 10% this year

Oil and gas industry costs could increase 6-10% this year due to labor uncertainties and raw materials inflation, according to a new analysis from McKinsey & Company. It indicates that primary operational tasks, such as regular inspections and maintenance, are becoming more expensive as labor rates grow upwards of 9% per year and costs for steel casings and tubing also rise at 5% per year. This, coupled with spiraling marine and aviation logistics prices, is causing increases in operating expenditure (OPEX).

In its report, McKinsey 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. It also details how the supply chain risk caused by these factors is affecting field operations and project delivery, with traditional mitigation strategies proving inadequate.

“These issues mean supply chain security should be catapulting to the top of the CEO agenda as organizations must swiftly implement a nimble, comprehensive strategy to navigate this turbulent period,” said Johann Raunig, Partner at McKinsey. “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 labor and materials on time. It’s a vicious cycle: More work is carried out under emergency conditions, which is increasingly expensive.”

Organizations that are taking measures to secure their supply chain and avoid market volatility are seeing significantly less inflationary pressure, according to McKinsey. They are saving approximately 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 digitizing inspection data could make the workplace more appealing.

Additional details can be found here.

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