(May 22): Oil and gas is facing an unprecedented crisis. For an industry already troubled with low total shareholder returns (TSR) and investor flight, a Covid-19-induced demand drop of over 20%, more than 20m barrels per day, has been a body blow.
The oil and gas industry has turned to short-term mitigation efforts in order to ride the waves of current market volatility. With balance sheets far weaker than at the outset of previous crises, the industry is focusing on time-honoured measures of cash preservation, cost-cutting, and enhanced operational efficiency. These measures alone will not be enough to ensure long-term resilience.
The supposed end-point to this crisis is a viable global vaccine, with no certainty about when this vital therapeutic outcome will be delivered. Oil and gas operators now face a pivotal period of structural reform if they wish to maintain the long-term sustainability of the industry.
Surviving the challenge
The oil and gas industry is no stranger to market volatility. The sector has experienced two serious crises on average every decade since the 1970s. It is the sheer scale and pace of volatility which sets this current crisis apart. US oil prices swung from US$61 per barrel at the turn of the year to a low of negative US$37, before rebounding to US$25, in a period of just four months.
In these extreme economic conditions, oil and gas companies have fallen back on classic market responses that have long guided their reaction to crises — cash preservation, liquidity management and cost-cutting. These measures are predicated on the belief that resilience is delivered by simply surviving a single period of crisis. Unfortunately for industry, Covid-19 is likely to produce overlapping ripples of volatility that linger for some time to come.
The global response to Covid-19 is represented in the Flatten-Fight-Future strategy. Countries seek to Flatten the curve and mitigate the peak of the outbreak. Resultant shutdowns come at huge economic cost, and offer no certainty as to when economic activity can restart.
The timing of any vaccine remains critical to the Fight stage, with a potential timescale of 18 to 24 months, if not longer. This necessitates operators to focus on immediate and medium-term action over uncertain future planning. Even then, a period of sustained vigilance will be required to contain individual local outbreaks. Industry forecasting in this environment is remarkably challenging, requiring detailed scenario planning that takes into account multiple potential outcomes.
As we await the Future stage of this strategy, industry should recognise that the post-Covid-19 world will be fundamentally changed from that which preceded it. More than 90% of countries will be in recession in 2020, with recovery progressing at different rates across different markets. Ways of working will be transformed, and consumer behaviour and preferences will evolve. The CEO of oil giant Shell, Ben van Beurden, admitted it would be “hard to say” whether oil demand would ever return to previous levels.
In this volatile landscape, operators must learn to become structurally agile to respond to rapid changes in a dynamic global environment.
Actioning sustainable structural reform
The companies which emerge successfully from this crisis will be those which not only embrace difficult near-term measures for survival, but recognise early the long-term need for structural measures to promote a strong rebound.
Boston Consulting Group (BCG) sees five key areas of structural reform which will be key in steering that success.
First, new ways of working must be embedded into industry practice going forward. Companies are already maintaining operations with minimal crews during this crisis — they should leverage this to develop structurally leaner operations for the future, with reduced on-site operational requirements and complemented by greater adoption of remote support. The workforce must be upskilled to be more versatile and multi-skilled to offer operational flexibility, and also trained and encouraged for commercial decision-making alongside technical capability.
Second, supply chain restructuring will be an essential element of structural reform. Covid-19 has highlighted the vulnerability of current global supply chains, with BCG estimating that about 50% of existing industry suppliers may not survive the impact of Covid-19 lockdowns and the low oil price shock. Operators should move to embrace continuous monitoring of supply-chain resilience to prepare for any future shocks. This will necessitate a period of difficult decisions, as industry players weigh up the trade-off between supporting external suppliers, potential in-sourcing, and extracting discounted prices from suppliers.
Third, zero-based budgeting and design must be implemented across industry. Oil and gas operators should transform their regular budgeting practice and ensure each spend is justified, using detailed analysis rather than simple comparison of increased spend against previous year’s budgeting. Separately, they should take a hard look at core operational processes, redesigning them from scratch rather than relying on incremental improvements, to ensure a true step change in efficiency, productivity, accountability and performance.
Fourth, renewal of portfolios should be used by oil and gas operators as a foundation of future competitive advantage. The current economic climate presents a significant opportunity for some operators to acquire valuable assets at a reduced price, filling key portfolio gaps. Beyond core oil and gas, operators could consider diversifying and future-proofing portfolios in light of the ongoing energy transition. The low-carbon energy industry offers an adjacent area of opportunity that aligns with the global climate agenda, a pressing concern for the coming decades.
Fifth, operators should fully embrace digital as a powerful enabler to be adopted across industry operations. Digital can substantially enhance efficiency and improve outcomes throughout the value chain. Remote monitoring can support a leaner workforce. Digitally-empowered logistics can embed supply chain resilience. Data analytics can enable enhanced budgeting oversight. Amid the challenging economic conditions that industry faces, such measures will become even more important.
A radically different leadership approach will be required to hold these measures together and implement this set of structural changes, representing a sea change for the industry. Leaders will need to live the change, championing digital and new ways of working as inspiration for their organisations. Above all, leading with empathy and trust will become even more important in a world where people will increasingly work remotely, and will be critical to ensure foresight, perseverance and unity in organisations as they march towards a new future.
Volatility will plague Southeast Asia’s oil and gas sector for some time to come. While cost-cutting and cash preservation offer vital near-term levers, the five structural actions outlined above, along with strong leadership, provide a true foundation for sustainable resilience. Industry should not look at this as a challenge simply to survive, but a pivotal opportunity to build a platform for sustainable success.
Asheesh Sastry is a Managing Director & Partner at Boston Consulting Group and Leader of the Energy Practice in Southeast Asia, while Aman Modi is a Partner at Boston Consulting Group.
