Never has the old adage that the only certainty is
uncertainty been truer for the energy sector. In the past
12 months, weve 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 stageparticularly 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.
Japans 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)
dollars 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
Strategy and long-term planning
Managing inherent risks in joint ventures
Capturing information and insight
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 winds 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 is often overlooked because
companies dont usually think of it as a capability that
they must develop. They believe that it is simply a part of
normal businesssomething 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
cant-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, its 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 ofor outright
misunderstandings abouttheir 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
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 prosperityfor example, by executing
multiple rounds of cost cutting and restructuringmay 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 wont meet a
customers suddenly increased demand today, because I
cant get enough product in time and still make a profit.
However, tomorrow, if the price goes up, Ill 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
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
As much as 80% of the operational budgets at most oil and
gas companies is earmarked for supply chainsprimarily 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
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 companys 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
Another business in the same company may center on
major capital projectsfor 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.
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.