As the “new normal” of hydrocarbon abundance and lower prices has set in, management teams have completed their 2016 planning and budgeting processes. As oil and gas companies enter into 2016, a new strategy must be dialed in for the business drivers of this environment.
Top Oil & Gas industry business drivers for 2016
#1 Lower-priced environment. Outside of a major supply-shock or geo-political risk, prices will stay low. Today’s technologies and stimulation techniques allow for increased resource recovery. Shale producer’s ability to “turn on the spigot” as prices rise ensures that supply will respond to demand quickly. Welcome to the new “hydrocarbon abundant world”.
#2. Increased cost of capital. Interest rates are going to go up in 2016. Access to capital will be difficult for over-leveraged firms. Capital projects will be scrutinized with more conservative lens. Short-term returns will be prioritized over long-term projects.
#3. Operational Excellence. Oil and gas companies must improve efficiencies to thrive in a lower-priced environment. This requires a culture change to optimize Operational Efficiency while balancing Reliability and Safety. Operational Excellence is an imperative.
#4. Talent. Attracting and retaining top-tier talent will be even more challenging through the downturn. Shortage of skilled labor will continue to be a challenge impacting business decisions.
#5. Changing map of trade flows. For many decades, the oil and gas trade routes have not changed between exporter and importer. These historical trade routes are being disrupted by the N. American shale revolution, abundance of natural gas, LNG, new refinery capacity, new pipeline infrastructure, and repeal of the US oil export ban. OPEC is competing w/ Russia for European market. Russia is trying to find new customers in Asia Pacific. OPEC & China are planning to develop their own refining capacity. The dust has not settled, but expect forward-looking moves by key players to establish key pivot points for the new trade routes.
#6. Technology. Oil and gas still leads other industries with a voracious appetite to adopt new technology solutions. Analytics, BIG Data, digital oilfield, and cyber security will play a significant role in enabling more efficient operations.
#7. M&A. Most expected this to occur in 2015, but many stressed companies were able to punt with refinanced debt. A lot of private capital is still sitting on the sidelines looking for bargain opportunities. As the market bottoms out and starts to rebound, there will be a wave of consolidation as stronger players scoop up weaker ones.
The Strategic Playbook – Survive or Thrive?
Switching from a growth strategy to survival strategy is quite a pendulum swing. Financial ‘survival’ moves impact company culture and momentum. It’s not “back to business as usual”. Thriving in today’s market requires a financial resilience that will only be achieved with a disciplined approach to building and improving business capabilities. Rationalize your 2016 playbook with these two areas for starters:
Focus on Core. As non-core assets are shed, wise leadership is turning the microscope back on Operational Efficiency. Leverage available resources to: drive process optimization and standardization; evaluate and incorporate technology enablers and automation. It’s a competitive necessity to develop and operate core assets more efficiently than the competition. Reinforcing the foundation of Operational Efficiency affords opportunities to scale effectively.
Develop Agility. With the sharp volatility swings of today’s market dynamics, agility will be key to realizing value opportunities. Cross-training staff can provide capability to “right-size” resource utilization. Developing robust, integrated economic modeling and planning/forecasting capabilities is a must-have for managing the Oil and Gas asset portfolio of today.
Financial moves are necessary but not sufficient. Financial resilience is key to survival. But fundamental and lasting business capability improvements today are paramount to thriving. #OperationalEfficiency sustains.