Digital Feature: Enabling growth through strategic cost optimization for petrochemical and refining companies
CJ Renegar, EFESO Management Consultants, Fort Worth, Texas (U.S.)
Profits in the refining and petrochemical market are under siege. The impact of tariffs and rising costs – from raw materials to labor and logistics – are tightening margins while shrinking crack spreads only add to the pressure. In this environment, most organizations recognize the need to improve productivity and reduce costs. And in too many cases, the knee-jerk reaction of “cutting” is reactive, fragmented, unsustainable, and damaging growth potential in the short and long term.
A smarter and more effective cost takeout approach is essential and must be strategically aligned with long-term business goals and growth plans. It needs to be data-driven, as today’s infrastructures are based on proprietary benchmarks, activity-based cost models, and operational diagnostics. Furthermore, it must be sustainable and embedded into the work environment rather than limited to adjustments in budget lines. The true opportunity lies not in superficial savings, but in structurally reshaping the cost base to unlock long-term enterprise value.
Refining and petrochemical firms are leveraging a set of corporate capabilities that rigorously address both short-term cost-savings opportunities and long-term strategic growth. They need capabilities for systematically targeting common cost areas, pulling specific levers, and deploying tailored improvement methods. The right mixture of these capabilities can create an environment for overall cost reduction and sustainable growth.
Opportunities for value-driven cost reduction can range from quick hits that deliver much-needed near-term relief to strategic decisions that drive long-term savings and value. These savings are found in the cost of goods sold, labor and overhead, as well as in expenses that impact operating profitability and EBITDA, like administrative costs. Here are some of the most effective strategies organizations should be considering for smarter cost-takeout today, to put them in a position for growth tomorrow.
- Data-Backed Diagnostics: Analysis of financial, operational, and Solomon Benchmarks data uncovers inefficiencies at a granular level – like procurement patterns and labor productivity. Refineries and other asset-intensive organizations should map cost drivers across functions and link them to performance benchmarks. This enables them to rapidly identify where inefficiencies exist. With support from AI, they can even more quickly identify interventions that will have the greatest impact.
- Zero-Based Budgeting (ZBB): Refinery operators, LNG operations, and midstream logistics firms often base their budgets on prior years, which shape their current budgets, expenses, and overall costs. In contrast, ZBB erases that approach and instead encourages leaders to build their budgets from the ground up, aligning spending with purpose and eliminating legacy inertia. Budgets are reconstructed and justified line by line, item by item. This creates discipline in managers and leaders to question everything and the assumptions therein.
- Operational Transformation: Lean tools, OpEx best practices, integrated logistics redesign, and process redesign structurally reduce effort, unlock efficiency, reduce costs, and create sustainable operational discipline. The goal is not just fewer people or lower spend; instead, it is increased equipment availability and operational reliability and higher output. The application of standard work – meaning the current best, safest, most efficient way to work – sustains improvements and cost savings in the future. Simplifying, codifying, and where possible, digitizing standards can significantly boost productivity, improve cost predictability, and accelerate onboarding amid today’s critical skills shortage.
- Frontline Development: The retirement of seasoned refining and petrochemical operators has created a skills gap where newer and less experienced employees often lack the knowledge to identify opportunities for improvement and cost savings. Therefore, building a highly competitive workforce and supportive systems, such as daily and visual management, establishes ownership on the floor. Engaged frontline staff make real-time decisions throughout the day that improve operational reliability and control costs (less overtime, fewer repairs) while operations are underway.
- Smart Footprint Rationalization: Examining the shape of a company, including facility roles, cost-to-serve, labor economics, and asset ROI, is a complex undertaking, but a critical component for long-term value. It’s the only way to uncover proactive measures, such as idling underutilized assets, divesting non-core operations, or shuttering inefficient facilities, that will be essential to correcting market imbalances. Ultimately, this can restore pricing discipline and help design an optimized network that aligns with strategic goals.
- Sustainable Value Tracking: Every initiative undertaken should be measured by its tangible EBITDA impact, with operational KPIs clearly translated into financial terms. This requires robust financial models, performance dashboards, and incentive alignment that reinforce cost discipline and continuous improvement across functions. These models, dashboards, and incentives also provide the capability to govern, track, and sustain value capture well into the future.
Cost-saving targets, levers and methods. Refining and petrochemical companies share common cost structures and can leverage cost reduction strategies specific to each area, such as using shared services and consolidation to address SG&A costs. There are a wide range of improvement methods tailored to each cost category, such as overall equipment effectiveness (OEE) tracking and loss-tree analysis, to support preventive and predictive maintenance practices.
The largest and fastest savings are found in areas such as operations and maintenance, and supply chains. Other areas take longer to execute but can also deliver sizable savings, like capex optimization. Additionally, other sectors can offer substantial cuts based on current events and organizational structure. Combined together, these present significant overall savings.
The primary objective in targeting these areas is cost savings. However, this does not necessarily mean headcount reduction. In fact, true cost optimization involves preserving – or even expanding – staff to unlock and sustain value. For instance, enhancing procurement processes rarely leads to large layoffs, and boosting output typically requires maintaining current personnel to support higher volumes.
In dynamic business environments, workforce strategy must balance financial goals with company culture. Scenarios that might impact headcount can include:
- Rapid growth and new-market entry: Greenfield expansions or new business units demand aggressive hiring (e.g., new renewable fuels or LNG export facilities).
- M&A-driven organizations: Identifying and trimming redundant support functions usually requires workforce reductions to eliminate overlap.
- Performance-driven restructurings: When targets aren’t met, staffing levels are aligned with current financial realities to maintain core operations, shore up cash flow, and stabilize the business.
- Good-to-great transformations: Best-practices deployment, automation, and digitization investments enable and accelerate productivity gains, which may lower headcount.
Key takeaways for cost takeout. Cost optimization should be viewed not merely as a response to pressure but rather as a catalyst for transformation. Refinery and Petrochemical companies that routinely analyze and optimize cost structures and establish new operational strategies and programs to drive performance improvement, position themselves for growth.
They achieve quick wins such as immediate cost reductions and operational improvements. In addition, they enable longer-term benefits through transformed processes, systems, and footprints that ensure ongoing value-add and cost containment. Most importantly, they can routinely achieve cost savings of up to 20–25% of OpEx spending, which boosts the bottom line and puts them at a competitive advantage. By following these strategies, typical cost saving targets for different areas in refinery and petrochemical operations can include:
- Contractor optimization of 23–37%
- Procurement and material cost reductions of 20–40%
- SG&A cost reductions of 15–20%
- Logistics and supply-chain cost reductions of 20–25%
- Operational cost reductions of 20–40%
- Reliability related uptime and throughput improvements
- Working capital reductions of 20–40%
- Inventory management and material cost reductions of 15–20%
- Equipment rentals cost reductions of 25–30%
- Maintenance spend optimization of 15–20%
Even during tough times when the most obvious cost areas have already been targeted, opportunities remain to deliver needed savings without inhibiting growth enablers. A smarter cost strategy is a transformation that allows refining and petrochemical companies to enter the next upcycle stronger, faster, and more focused than competitors. The emphasis should be on building a leaner, more resilient organization that is fully prepared for what comes next in the volatile oil and gas industry.
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