Operating models are emerging as a crucial performance differentiator as upstream oil and gas operators seek to improve the resiliency of their businesses amid energy transition uncertainty.
To understand which types of operating models are delivering the highest near-term value from efficient operations, we evaluated the performance of different operating models across oil and gas organizations using our Energy Solutions operations benchmarking database. Analyzing the production and operation cost performance of more than 45 upstream business units—which operate more than 180 distinct assets—highlighted the trade-offs between the two approaches to managing assets: asset-centric and function-centric models.
In an asset-centric model, the asset teams are the “center of gravity.” All operational decisions are made by the asset or business unit leadership, and they are also accountable for profit and loss (P&L) results. Asset-centric models tend to embed technical and functional support within an asset team or business unit.
In contrast, a function-centric model is where functional teams are responsible for the outcomes in their respective domains. Decisions within a function’s remit require the approval of the functional team, and in some instances, P&L accountability may be shared between functional and asset or business unit leadership. In this model, functions are often centralized into global teams that support the company’s entire asset base.
The results of this analysis indicate that while asset-centric models tend to achieve better operational outcomes—measured as higher production efficiency and lower operating costs—they also experience a wide range of outcomes. The function-centric model tends to produce more consistent results, however, with lower operational performance.
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Asset-centric models tend to outperform on outcomes
On average, asset-centric models have the edge in terms of operational performance. Operating costs are generally 6 percent lower when normalized for asset scale and complexity and show two percentage points higher production efficiency than their function-centric counterparts (exhibit). This translates into tens of millions of dollars in cost savings and thousands of barrels a day of additional production. This outperformance means that the average function-centric business unit was on par with the third-quartile asset-centric business unit in terms of production efficiency.
However, there is a trade-off between higher average performance and greater variability. Asset-centric models have a wider range of outcomes on both operating cost and production efficiency than function-centric models. This occurs in both directions—the best outcomes for asset-centric models are better than the best outcomes that can be achieved when using function-centric models, but the opposite is also true. The worst outcomes when using an asset-centric model are far worse than the potentially bad outcomes of a function-centric model.
Enabling operational excellence: Five success factors
Based on our extensive work with operators, our experience indicates that asset-centric operating models can far outperform function-centric models because they streamline and boost performance through five crucial characteristics.
Simplicity. High-performance assets tend to have operating models underpinned by simplified processes and minimal reporting lines.
Control. Functional and technical support is carefully controlled, with integrated teams embedded in the asset creating an empowered frontline.
Expertise. Staffing is tailored to each asset’s needs, with the required expertise embedded into the asset team and expressly dedicated to that team. Asset team leadership tends to have extensive experience within a particular asset or region (often more than 20 years) while function-centric leadership often rotates in and out of postings every few years.
Efficiency. Workforces are streamlined with limited layers between asset leadership and the frontline. They tend to have an optimally sized workforce, with high levels of visibility into the corporate function’s costs, which helps drive efficiency.
Accountability. High asset performance is incentivized for the whole team, KPIs cascade down to the frontline, and performance is reviewed regularly to ensure transparency. Asset-centric leadership bears a high degree of ownership for performance outcomes because there is no tangential functional leadership to deflect blame; they are ultimately responsible for the results of their specific units.
Function-centric models hold their own advantages
However, function-centric models are not doomed to poor performance. In fact, they might have some distinct advantages that can support broader strategic goals. Function-centric operators typically have a deep talent pool of expertise they can pull from to take on extreme technical challenges, like establishing infrastructure in a new region, supporting large capacity expansion projects, or integrating different asset types in a merger or acquisition, as it can be optimized across assets and countries. An example of where this model would be very beneficial for these types of challenges is during major project procurement and rig sequencing. Because they tend to achieve more consistent results, this can be reassuring to investors and provide stability after market shocks.
With some targeted changes, function-centric models could get the best of both worlds by adopting the winning principles exhibited by asset-centric operators. For example, function-centric operators can adopt transparency in functions to help drive efficiency, challenging costs and support levels to ensure the right level of technical and functional support per dollar spent. Functional operators can further streamline their operations by optimizing organizational reporting layers and emphasizing more time in the seat for asset and business unit managers.
Evaluating the effectiveness of your operating model is a critical and often overlooked lever that operators can pull on to drive performance and cost efficiency. Identifying and implementing the right model can significantly improve performance, and our study indicates that asset-centricity may be the way forward for many oil and gas organizations.