McKinsey & Company: oil and gas costs will rise by 10% amidst supply chain risks

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

The analysis uncovers that primary operation tasks, such as regular inspections and maintenance, are becoming more expensive as labor rates grow upwards of 9 percent 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 organizations 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 labor and materials on time. It’s a vicious cycle: more work is carried out under emergency conditions, which is increasingly expensive.”

McKinsey notes organizations that are taking measures to secure their supply chain and avoid market volatility are seeing significantly less inflationary pressure, saving roughly 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.

In addition, revising the approval gating process or enabling earlier budget approvals and improving the risk-reward ratio in major contracts to incentivize performance and consolidate contract volumes may mitigate oil and gas supply chain risks. When it comes to staffing, enhancing offshore execution efficiency and digitizing inspection data could make the workplace more appealing