Hydrocarbon Processing Copying and distributing are prohibited without permission of the publisher
Email a friend
  • Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Perspectives on the 2012 energy industry

04.01.2012  |  Doshi, V.,  Booz & Co., Paris, FranceClyde, A.,  Booz & Co., Paris, FranceClick, C.,  Booz & Co., Paris, France

Here are several thoughts on how companies can adapt to—and profit from—the uncertain environment

Keywords: [supply chain]

Never has the old adage that “the only certainty is uncertainty” been truer for the energy sector. In the past 12 months, we’ve seen a strong emphasis on green energy evaporate as country after country withdrew support for renewables. While the green imperative slipped, natural gas took center stage—particularly in the US. A raft of new shale gas production has put the US on course to be a net exporter, rather than an importer, of natural gas. If that transition takes place quickly, European and Asian gas distributors and users that had locked in long-term, oil-price-related contracts could be vulnerable.

More developments.

Japan’s Fukushima earthquake has tainted the prospects for nuclear energy, once considered to be the answer for abundant clean power. Germany has already banned nuclear utilities. We can expect a slowdown in nuclear plant development in virtually every country.

Oil will remain extremely sensitive to political turmoil in the Middle East, risks of potential environmental accidents, the (US) dollar’s value and the notion that it is a dwindling resource. All are contributing to ongoing price volatility and supply uncertainty. In North America, the debate over the Keystone XL pipeline project further highlights the uncertainties facing this industry, as political decision makers balance concerns over energy security, the environment, job growth and consumer prices. Another great unknown affecting oil price and availability is the extent of future production from producers outside the US, such as Brazil, Canada, Iraq, Russia and West Africa. Biofuel, improved gas mileage, and increased use of hybrid and electric vehicles will further nibble away demand.

All of these factors will contribute to the uncertainty with which energy companies will have to cope. Most energy companies will find that their current operating models, strategy and planning processes, and optimization practices are inadequate. They will need new capabilities to enable them to meet whatever the future holds. The four capabilities that are particularly important include:
• Strategy and long-term planning
• Managing inherent risks in joint ventures
• Capturing information and insight
• Supply-chain optimization.

Strategy and long-term planning.

Leading an energy company over the next few years will be like sailing. At any given moment, companies will need to look at the way the wind is blowing and execute an integrated plan to align the sails in the right direction, while remaining alert to any changes in the wind’s direction and then rapidly adjusting the strategy as required. We believe that energy companies will need to develop dynamic strategy capabilities. These involve betting on a set of integrated options, any one of which can be switched on or off depending on results and how the business environment evolves. This involves integrated-option planning.

Integrated-option planning is often overlooked because companies don’t usually think of it as a capability that they must develop. They believe that it is simply a part of normal business—something that they already do routinely and perhaps on an annual basis. These companies believe that coordinating disparate elements of the business to operate in sync is a natural byproduct of an organization. But, such a task requires a concerted investment of time and resources to create the structure that can coordinate a complex set of elements, behaviors and analysis at a very high strategic level. This is particularly true if a company may suddenly need to change course to a different direction on short notice. For example, there could be a shift in financial, supply chain and human capital resources to more liquids-rich gas basins and away from dry-gas fields, or a shift in capital deployment based on geopolitical changes.

A company with a strong integrated-option planning capability is accustomed to laying out multiple options and linking strategic choices, such as which projects to pursue, which markets to focus on and which regions to target. These choices are linked to the appropriate operating models, including supply chain, logistics, workforce planning and capital management. With a holistic integrated planning capability in place, a company can react quickly to uncertainties, responding dynamically to changing upstream and downstream conditions and redirecting resources, technology, talent and capital to areas of opportunity.

For many energy companies, this is an elusive capability. With so many different layers and business operations to manage, few organizations have systems that fuse the right processes, people and data to drive profitable outcomes on a consistent basis. But the lack of integrated-option planning can often lead to missed opportunities. For example, one oil company hoped to broaden its Middle East operations with a series of investments. Focusing solely on the financial angle, the company spent months developing a “can’t-miss” capital structure for this expansion, including an inexpensive approach to building the new plants. But management completely neglected the substantial costs of hiring and training skilled workers that would be needed. It did not put in place contingency plans for the potential spread of political disruptions in the Middle East. Already, it’s clear that this company will not get the return on investment projected by its initial one-dimensional plan. A more risk-mitigated plan would have built in a variety of options, including the ability to withdraw at various checkpoints if certain criteria were met, without fear of writing off sunk costs.

Managing inherent risks in joint ventures.

In periods of high uncertainty, delivering on multiyear capital projects requires unique risk-management capabilities. Energy projects are big, complicated, expensive and risky. And, for those reasons, they are often best pursued through joint ventures (JVs) and other multi-owner entities. Indeed, for some energy companies, minority stakes or JVs spread the project risks and are the only practical way to access resources and build portfolio diversification.

But the success rate of JVs is stunningly low. Often, the varied owners have different conceptions of—or outright misunderstandings about—their respective roles in the project. Sometimes, the partners’ agendas (what they each hope to gain from the project) work at cross-purposes, ultimately affecting the smooth running of the operation. Insufficient attention may be given to governance or assigning accountability. The decision-making processes are typically not designed to deal efficiently with complex, multi-stakeholder issues, let alone to flexibly redeploy or redirect investment in response to changing market conditions.

Moreover, the Macondo incident of 2010 brought attention back to operational risks for all offshore assets. The fracking debate continues to intensify for shale gas and oil. The public battles over environmental impact and highlights the need for well-honed operational capabilities and incident preparedness. Many of these companies, pursuing opportunities without a coherent view of their strengths and strategy, have built up project portfolios that have become overly broad and incoherent over time.

Dramatic improvements in JV management capabilities can be gained by any energy company. Those that have this capability have learned to invest the time to understand the strategic intent and objectives of partners and to ensure that these objectives are aligned. They identify in advance the capabilities that the projects will require and the roles played by each operating and non-operating partner. They then allocate assignments for each entity, based on the capabilities it has or can develop. They also develop the influencing and communication skills needed to guide operating partners to best practices. Finally, they have governance and decision-making model in place that lets each owner protect its strategic agenda and that maximizes the efficiency of joint decision making. This model also establishes processes for information sharing, performance review and flexible capital allocation.

Capturing information and insight.

This capability can make the difference between earnings and losses, especially where oil products and gas inventories are involved (as in the downstream) or where there is high dependency on third-party suppliers (as in the upstream). Companies that have been diligently pursuing the more traditional paths to prosperity—for example, by executing multiple rounds of cost cutting and restructuring—may well find that any gains in their earnings are dwarfed by the impact of price volatility. These companies need to invest in the capability of capturing information and insight, and putting them to use.

At the heart of this capability is an integrated information base that covers every aspect of the marketplace and operations, and that is available to every business and function within the company. Skilled people on the front line can now make split-second decisions about opportunity and risk. They have updated information about where the tanker ships are located, how much stock is available, what will be left after each shipment, whether demand is rising or falling, where customers are located, which are fixed- vs. variable-contract customers, how much profit they can make under different options, and much more.

For example, a “strategic pilot” working within this capability might say, “I won’t meet a customer’s suddenly increased demand today, because I can’t get enough product in time and still make a profit. However, tomorrow, if the price goes up, I’ll have shipments and a new contract ready.’’ The capability to leverage information and insight can create value and reduce risk across the value chain and across functions. A “control-tower operator” role for supply chain and logistics can improve coordination and avoid unnecessary expediting costs.

This capability is not just an IT tool. It also involves the shift in decision making that ensues, with all of the appropriate risk-managed processes, authorities, and commercial and technical abilities required to make it work in the front office. These abilities are equally required for managing third-party procurements.

Supply-chain optimization.

As much as 80% of the operational budgets at most oil and gas companies is earmarked for supply chains—primarily for materials and services provided by third-party suppliers. Because of the size of this percentage, many companies have, over the years, targeted supply chains for cost cutting and efficiency improvements. Although these campaigns have led to incremental, short-term successes, most oil and gas companies are poorly equipped to take the big-picture steps that would drive supply-chain management improvement.

A powerful way to address this shortcoming, particularly in companies with diverse business models, is a concept that we call natural supply chains. Under this approach, business operations are segmented into a few relatively similar groups, such as deepwater domestic offshore production, onshore unconventional development, onshore production, midstream and refining. The goal is to take advantage of economies of scale for those supply-chain activities that can deliver cost and value advantages to all of the groups, while customizing supply-chain capabilities for the specific requirements of disparate segments of the portfolio.

Human resources, information technology and contract support can probably be shared across the organization. But other supply-chain activities must be managed individually, in a way that empowers the front line to be agile.

For example, one part of an energy company’s portfolio might demand services such as maintenance logistics to support an overarching objective around production uptime. A pressure-pump truck may be needed every 30 days in each of several different locations. To manage this schedule, the company would establish an exclusive arrangement with its trucking suppliers, with incentives and penalties based on meeting deadlines and quality of work. For this part of the business, performance and safety imperatives outweigh all other considerations, including price.

Another business in the same company may center on major capital projects—for example, pipeline construction. As it buys 400 miles of pipe for half a dozen projects scattered across a continent, the company will negotiate low-priced bid contracts with a primary focus on delivered cost. There would not need to be as much emphasis on narrow delivery windows, because of access to warehouses and staging locations. The difference in priorities is explicit, and if people move from one part of the business to the other, they easily manage that shift because it is clear to everyone on the front line.

Putting it all together.

The subject of building capabilities to deal with uncertainty is particularly important in the oil and gas sector. Many independents are already running up against the limits of their scale, struggling with the clash between their small-company cultures and the process and bureaucracy inherent in large projects. They are scrambling to manage an increasing portfolio breadth that stretches the limits of their existing capabilities. For the large companies, continuous rounds of cost cutting and restructuring have failed to yield sufficient profits, in part because gains in earnings are often offset by price volatility. Also, they have not invested in building the essential capabilities and agility they need to grow in these uncertain times. HP

The authors 

Viren Doshi, senior vice president, is head of the Global Energy, Chemicals and Utilities Practice at Booz & Co. He has 30 years of experience in supporting oil and gas companies in developing and implementing new integrated operating models. Prior to joining Booz & Co., he worked at ExxonMobil. Mr. Doshi holds a BSc degree with honors from the University of Southampton and an MBA from Cranfield School of Management. 

Andrew Clyde is a vice president with Booz & Co., and is based in Dallas, Texas. Mr. Clyde has spent over 20 years in consulting to the oil & gas sector globally. He holds an MS degree in management from the Kellogg Graduate School of Management from Northwestern University and a BBA degree from Southern Methodist University. Mr. Clyde is a licensed CPA in the State of Texas. 

Christopher Click, vice president at Booz & Co., is focused on developing and implementing growth and organizational strategies for oil and gas companies in the US for the past 10 years. He specializes in the upstream and oilfield services sectors. 


Have your say
  • All comments are subject to editorial review.
    All fields are compulsory.

Tom Morgan

excellent and insightful article.

Related articles


Sign-up for the Free Daily HP Enewsletter!

Boxscore Database

A searchable database of project activity in the global hydrocarbon processing industry


Is 2016 the peak for US gasoline demand?




View previous results

Popular Searches

Please read our Term and Conditions and Privacy Policy before using the site. All material subject to strictly enforced copyright laws.
© 2016 Hydrocarbon Processing. © 2016 Gulf Publishing Company.