Every oil & gas company with a well-run transportation fleet today regularly reviews its operational and systematic data to identify key trends and opportunities to improve its overall efficiencies and the bottom line. However, with so much change taking place affecting transportation and equipment finance industries, how can oil & gas companies be sure they are evolving and adapting in the right direction?
Changing regulations, new emissions standards, and the economy in flux influencing procurement philosophies are just a few of the issues reshaping the oil & gas industry. These organizations that continue to rely on historical practices and those that are hesitant to adopt new technologies may feel they’re making the right move by sitting on the sidelines and not disrupting legacy tactics. However, inaction is a significant cost in the current economic landscape and demand. It’s important to truly understand why this approach can negatively impact your customer base, employee morale, and ultimately the bottom line.
Operating Costs Rising
According to ATRI’s (American Transportation Research Institute) recent report, the cost of operating a truck in 2022 for transportation and for-hire fleets was $2.251 per mile, surpassing two dollars per mile for the first time in the history of ATRI’s studies. While a lot of this increase was due to high fuel costs, other cost centers saw jumps by double-digit percentages as well, including repair and maintenance, truck and trailer lease or purchase costs due to the increase in equipment costs, and driver wages1.
The report also indicates that the cost of trucking, with fuel included, increased by 21.3% in 2022 compared to the previous year. Truck and trailer payments, repair and maintenance, liability insurance premiums, tires, and driver wages all set record high marginal costs in 20221.
On the private fleets side, the overall cost of trucking was listed as the third most prominent challenge in this year’s NPTC (National Private Truck Council) 2023 Benchmarking Report2, compared with the fourth overall challenge the previous year.
Furthermore, the latest Truck Life Cycle Data Index (TLDI), calculating the cost savings associated with replacing older-model units with the latest truck equipment, shows that oil & gas fleets can realize a first-year per-truck savings of $15,386 when upgrading from a 2019 model year daycab truck to a 2024 model (3). Across a fleet of 100 class-8 trucks, this equates to $1,538,600! This also represents a 12% decrease in emissions.
With these operational costs on the rise and little relief in sight regarding truck order slots, and upcoming mandates such as the CARB mandate, how will this affect oil & gas companies with transportation fleets that fail to adopt new philosophical strategies for running their business? Oil & gas fleets must get on the order board and start somewhere to secure new equipment. The cost of inaction can quickly grow if the strategy is to wait until new equipment is readily available. You could also potentially lock in equipment costs, which would provide further savings, but holding on to and extending equipment life cycles is detrimental to oil & gas fleet’s TCO.
Economic Pressures Continue To Squeeze Companies
It’s not only operational costs that are affecting oil & gas companies.
The Federal Reserve recently raised interest rates by a quarter of a percentage point, marking the 11th hike in the U.S. central bank’s past 12 policy meetings as it continues to battle inflation and overall prices4. The increase raised the benchmark interest rate to the 5.25%-5.50% range, bringing it to the highest level since the 2007-2009 financial crisis and recession.
Because of the still-uncertain economic climate with high interest rates and the potential of how that may impact a so-far-unscathed labor market that highly dictates the overall health of the broader economy, forward-looking oil & gas companies must understand the importance of flexibility and agility.
The need for greater flexibility and operating cash position can significantly impact an oil & gas company’s ability to grow in the current climate, which is why it’s important to adapt innovative asset management programs that include flexible financing solutions.
Oil & gas companies must make strategic decisions that affect their bottom lines when determining the right procurement strategies to manage their equipment as well as the financial flexibility needed to maintain a healthy bottom line. The costs involved can be significant depending on the type of investment structure (lease versus purchase, for example). Working with asset management partners can help companies determine the right path to take for their business. However, oil & gas businesses that are unwilling to course correct into a proper investment structure will also have significant adverse effects and place them closer to the back of the pack against more progressively-nimble competitors – another severe cost of inaction. Successful oil & gas companies are working closely with their asset management partners to perform various financial analysis, such as a lease versus purchase, and/or reviewing their current lease structures considering current market conditions.
Shifting Environmental Mandates
Continuously evolving environmental regulations and emissions mandates are placing heavier pressures on oil & gas companies to migrate toward alternate fuel technologies. Unlike the sentiment felt by reading through the headlines, it’s not a move oil & gas companies must make immediately. However, the companies that fail to build a plan today will face significant consequences even within the next few years. What’s worse, oil & gas companies that build a plan based on unscientific guestimates will also fall into this category. This is where the cost of inaction for alternate fuel adoption will be felt severely.
Today’s oil & gas companies know sustainability is at the forefront of their operational strategies, but a significant industry challenge revolves around answering the question of how and when to efficiently progress toward a carbon-free future in a viable way. Data analytics continue to have a positive impact for oil & gas companies and society at large, and leading companies are turning to their partners for the use of Alternative Fuel Life Cycle cost analysis tools to help further identify and optimize their Total Cost of Ownership (TCO) to determine the efficacy of utilizing tech such as electric or hydrogen fuel vehicles. These analytic tools can compare diesel versus an electric class 8 vehicle TCO, with modeling that evaluates fuel and mileage data versus kWh comparisons from the first year through a six-year life cycle.
It’s no secret that the cost of doing business continues to escalate here in 2023. The real question oil & gas executives should be asking themselves right now, is what is the cost of inaction?