Should-Cost Modelling

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.