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Australian Energy Producers Journal Australian Energy Producers Journal Society
Journal of Australian Energy Producers
RESEARCH ARTICLE (Non peer reviewed)

Cost recovery: when reducing costs for an asset can increase costs for an operator

Robin Ludwig
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KPMG Australia, 235 St George’s Terrace, Perth, WA 6000, Australia. Email: rludwig1@kpmg.com.au

The APPEA Journal 58(2) 571-573 https://doi.org/10.1071/AJ17129
Accepted: 27 February 2018   Published: 28 May 2018

Abstract

In an unpredictable environment, oil and gas companies within Australia need to reduce their cost of production in order to protect the company’s margins. Many large companies are doing this by adapting a traditional asset-based operating model to be a central functionally aligned model, and creating synergies through offshoring, outsourcing, combining corporate capabilities across global assets, and/or creating centres of excellence.

A functionally aligned centralised operating model, however, has the potential to increase the complexity for companies when recovering costs from their joint venture partners. In order to be recoverable, an operator must prove that the costs incurred are still directly related to the asset and by moving functions away from the front line, attribution to assets can be complex. If not allocated, documented and communicated in line with the joint venture agreements, the recoverability of these costs is put at risk. It could, therefore, eventuate that the reduction of costs for an asset results in an increase of costs for the operator.

When assessing the recoverability of costs, operators should consider: (i) documenting the end to end cost allocation process and communicate this with joint venture partners; (ii) embedding robust governance and tools to aid cost transparency; and (iii) reviewing their contractual obligations as operations evolve. If the appropriate steps are taken, an operator can reduce costs without increasing their own costs by putting recoverability at risk.

Keywords: contracts, cost allocation, cost allocation methodology, cost reduction, joint venture operating agreements (JVOA), joint venture partner, outsourcing.

Robin Ludwig is the Director, Financial Transformation for KPMG Australia. Robin’s focus is on finance transformation, cost-to-serve methodologies, cost consciousness, cost accountability, operational cost restructuring and M&A cost synergies. Robin has performed engagements for many clients in a range of industries including utilities, manufacturing and oil & gas. Robin has led Finance Operating Model redesign engagements in the Oil & Gas industry which included business partners, offshoring and new cost accountabilities. Robin has worked on multiple post-merger integration engagements which comprised the redesign and integration of back office functions, including finance and HR.


References

IBIS World (2018). Industry Market Research, Australia Industry Research, Oil and Gas Extraction, s.l.: IBIS World. Available at: http://clients1.ibisworld.com.au/reports/au/industry/currentperformance.aspx?entid=5529.