Should-Cost Modelling

In Summary

SERVICE:
REGION:
INDUSTRY:

Petroleum Development Oman (PDO) is the foremost exploration and production company in the Sultanate. PDO accounts for more than 70% of the country's crude oil production and nearly all of its natural gas supply. PDO engaged Charles Kendall Australia (CKA) to develop several should-cost models for complex areas of spend. Should-cost models are tools that provide a clear understanding of the specific economics behind manufacturing a particular product or service. Benefits range from improving efficiencies and delivering substantial costs savings (without cutting back on scope, quality, capabilities or suppliers’ profits), to improved supplier relationships.

The Challenge

  • Developing accurate should-cost models with restrictions such as limited data availability and no direct interaction with PDO’s contractors.
  • Developing should-cost models for complex areas of spend across several contractors.
  • Developing models for multiple layers and interactions of the supply chain.
  • Delivering the models in a short time frame.
  • Preparing the ground for fact-based negotiations with contractors.

Our Approach

  • Reviewed and analysed PDO’s expenditure, existing pricing schedules, contractor’s financial data, asset and vehicle lists, responses to a request for information, etc.
  • Leveraged Charles Kendall Group and CKA’s market knowledge and understanding of the oil & gas industry and supply base in Oman.
  • Mapped out the supply chain for each service and identified all cost drivers.
  • Determined target prices and compared them against PDO’s current pricing.
  • Estimated potential cost reduction opportunities.

Outcome

The deliverables included:

  • producing the should-cost models in an Excel format that could be updated by PDO;
  • a presentation of the should-cost models to PDO; and
  • a report including an overview of the potential savings, general findings and recommendations, assumptions, the should-cost models results and the methodology followed.

The models provided PDO with in-depth insights into the cost structure of the services in scope and target pricing for those services which allowed PDO to enter into fact-based contractor negotiations.