Taking the first step: Learning to thrive in a new O&G landscape
Originally published in oilweek October 2017, Volume 68, Number 10
After oil prices plummeted from $112 bbl (USD) in 2014 to $26 bbl (USD) in 2016, many O&G players went into survival mode—cutting costs wherever possible. Between 2014 and 2016, capital expenditures in the O&G sector dropped from $85 billion to $36.7 billion and upstream capital investment declined by 60%.[1]
But as we emerge from the darkest days of this crisis, it’s becoming clear that cost cutting alone won’t work in today’s new O&G environment. While it’s true that oil prices are slowly recovering, they are unlikely to reach their 2014 peak. Instead, they’re expected to remain much lower, for much longer, than they ever have before. To thrive in this new environment—rather than simply survive—both service and supply (S&S) and exploration and production (E&P) companies must rethink their business models, and start doing things a little differently.
Play well with others
Inter-industry collaboration is one of the most effective ways to do this—but, up until now, members of the industry have found it challenging to get on the same page. Faced with an uncertain future, many E&P companies have asked for major concessions from their suppliers in their quest to cut costs—compromising relationships and trust.
Similarly, a fear of the unknown—and a fear of failure—is forcing many organizations into risk-averse mindsets. In a recent Grant Thornton O&G roundtable, attendees revealed that many companies are delaying the payment of their invoices in an effort to free up cash flow—making it difficult for suppliers to forecast such things as hiring and capital expenditures. Other suppliers say they have attempted to introduce more experimental products and new technologies to help E&P companies in their quest to innovate—but these yet-unproven techniques cost money, and so far no one is ready or willing to take the risk and foot the bill, despite the potential for long-term cost savings for both parties.
Towards a common goal
The thing is, for industry collaboration to work—and effectively move the O&G industry into the future—someone will have to be forward-thinking and courageous enough to take the first step. S&S companies claim they’re ready and willing to change—in the Grant Thornton Service and Supply 2017 Outlook report, 74% of respondents said their company is willing to make fundamental changes to how the O&G industry operates—but many share the opinion that E&P companies simply aren’t on board. Furthermore, only 7% of S&S companies even think their sector of the industry is responsible for change—in their minds, they feel the change needs to happen at the E&P level and/or at the government level.
This is problematic because, while it’s true government and E&P companies have a role to play, S&S companies can’t afford to sit back and wait for someone else to make the first move. Both S&S companies and E&P companies alike must reimagine how they’re doing business—whether that means taking positive steps to exploit smart technology, find new talent or continue to refine their efficiencies and improve their balance sheets. If the industry stands a chance of adapting to this new normal, everyone will need to look at their respective markets, consider unconventional opportunities for diversification and innovate.
Suggestions on how the industry can continue to thrive going forward are explored in Beyond survival: Shifting the mindset to thrive in a new O&G landscape . To delve into these topics in more detail, download a copy of the report: http://bit.ly/2kaRmSI .
[1] Grant Thornton, Service and Supply 2017 Outlook report