1. The document provides 10 strategic actions that major energy companies can take to navigate low oil prices and emerge stronger from the downturn. These include reducing above-field costs, improving asset utilization, prioritizing maintenance, resetting supplier partnerships, and equipping fields with digital technology.
2. It recommends that companies reassess capital projects, get smarter about workforce management including contractors, shrink their corporate centers, and better communicate their value stories to investors.
3. Taking decisive action through focused investments and planning ahead with a multi-year horizon will help companies position themselves for high performance, according to the document.
2. With how-low-can-you-go oil prices, energy companies are facing strong
headwinds. Investors are looking for higher capital efficiency and incentives
to continue placing their cash and trust in Energy companies, where equity
values dropped precipitously in late 2014, wiping out billions of dollars of
value.
Navigating the Crude Cycle
10 Strategic Actions for Major Energy Companies
No one really knows where oil prices are going and how they will recover. Scenarios range from OPEC led to Non-OPEC led
supply setting the price. Recovery scenarios range from short term (Q2 2015) to medium term (12-18 months) as well as
to more structural volatility, whereby both V-shaped and W-shaped returns are being debated.
Learning from the energy-related crisis of 2008-‘09, and recalling 1986-’87 as well, industry observers understand that
companies can win by taking strategic action and making targeted investments in times of crisis. By adjusting portfolios,
operating models, productivity levels and market positioning, companies can emerge from times of uncertainty stronger
and more competitive.
Many Energy companies have decided to cut capital spending and freeze the hiring of talented people. Others are
considering delaying maintenance and turnarounds. To emerge stronger from the global oil-price shock, however,
Accenture suggests 10 practical ideas for large Energy companies to do now, whilst still keeping a long term outlook.
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3. Despite being a small percentage of unit costs, above field overhead has a tendency to drive complexity and
reduce productivity at the assets. Actions to consider cost above field reduction include:
a) Consolidate functions to bring together similar capabilities, eliminating multiple locations that provide similar
services to reduce inconsistencies and duplicative services.
b) Relocate consolidated functions to cost-advantaged locations.
c) Transfer management of back- and middle-office activities to a third party to run as a service. Offer incentives
to improve productivity and to reduce costs over time even further.
Equally now there’s even more relevance to review operating models for other support functions including
Planning and Commercial, Drilling, Production Projects, Safety Health and the Environment. By re-aligning these
support functions to the Energy company’s core activities, true productivity gains and further efficiencies can be
achieved.
Many international energy companies have taken steps in this direction. Now would be the time to catch up
with and potentially leapfrog competitors. Since the operating models have been tested, the transition can
be accomplished relatively quickly without business disruption. Service providers typically bear the cost of
transferring the service and internally time can be freed up and re-allocated to achieve further productivity/
efficiency gains.
1. Reduce cost above field and subsequent
complexity
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Operating models for finance, human resources, procurement and
(information) technology can be operated at structurally lower cost profiles.
4. Asset utilisation is pivotal in focusing on safely improving production
performance, whilst reducing operating costs.
Proactive identification and assessment of key integrity and reliability risks not only safeguards safety, but also
reduces the amount of corrective maintenance and therefore costs. Using an approach of structured facility risk
reviews enables strict prioritization of (non-)discretionary activities, whilst taking asset maturity into account.
While the industry will continue to focus on increasing overall production and field cost reduction, there is an
opportunity to significantly impact the bottom line by moving the focus from ‘field profitability’ to individual ‘well
profitability.’ Digital oilfield programs are increasing front office surveillance capability, necessary to monitor wells
and streamline overall production decision making and costs.
2. Improve asset utilisation in order to
maximise revenues
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$$$$
5. When prices are relatively low, the opportunity cost of downtime of producing assets
is less. To the extent possible, schedules for planned maintenance and turnarounds
should be brought forward.
Executing necessary tasks during bear markets, brings the added benefits of increased availability and decreased
costs of equipment, service providers and contract labour. Market leaders are likely to use the downtime to
reinforce a clear asset hierarchy, and refocus strategies for management of most critical assets and equipment so
they are prepared as prices recover.
3. Prioritize turnaround and preventive
maintenance
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6. In the 2008-’09 crisis, many suppliers to the oil patch were pressured
to reduce prices across the board. This time around, many suppliers
are prepared for this simplistic tactic and moreover, they should be
differentiated between core and non-core suppliers.
It will take a more sophisticated approach for energy companies to take greater advantage of a slackening of
the supplier market. The first step is to identify strategic suppliers in key categories. With these core suppliers—
likely in categories such as drilling and completions, engineering, construction, maintenance, camps, materials
management and logistics—longer-term agreements should be renegotiated to seek and achieve immediate
benefits in return for continuing and possibly expanding business. Revised agreements could include risk sharing,
innovation and investment, and joint-performance targets and incentives. These renewed or newly established
strategic partnerships can enable energy companies and core suppliers to increase their resiliency during a crisis
and emerge with long-term advantages.
For non-core suppliers, short-term tactics can be applied to reduce costs and search for more favourable terms
(like e.g. increasing spot buying, extending payment terms, and moving repair and operations (MRO) inventories off
the balance sheet etc.).
4. Reset partnerships with core suppliers and
apply pressure to non-core suppliers to
drive down prices
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7. It is tempting during downturns to decrease investment in innovative tools
and solutions. Instead, companies should take the opportunity to seek to
accelerate the uptake of digital technology in the field.
Examples include remote operating centres, a mobile-enhanced workforce, and digital materials, contractor and
equipment tracking. These technologies can transform the way people work. Tangible benefits can be realized in
terms of increased productivity amongst contractors, stronger safety performance, and gaining clearer visibility
through analytics into asset effectiveness and actual costs. Those who invest now are likely to better manage their
assets and reduce their cost base for future operations as well as realizing the benefits earlier than competitors.
5. Equip the field with digital technology to
boost productivity
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8. Major projects in major energy companies routinely exceed their cost
and timeline estimates. Performance can vastly improve, judging from
Accenture’s experience, when projects are critically evaluated in search of
additional value throughout the lifecycle, from concept selection through
construction and commissioning.
Amid low prices for crude, companies are scrambling to reevaluate projects, but the use of traditional methods is
likely to result in suboptimal decisions. Even in a $100/bbl environment, many oil companies have been struggling.
Although much can be explained due to poor project execution, research also shown that over 40% of the
capital project failures can be attributed to poor investment valuation pre-FID. A comprehensive reassessment
should enlist an independent (third) party to review areas such as engineering, financing, project-management
capabilities and tools, key performance metrics, and procurement and contracting strategies for materials and
services. Emerging leading practices expand the review approach to identify and quantify operational risk and the
impact projects will have on company portfolios. When the quantitative assessment is done correctly, it can be
easier to make fact-based decisions on which projects should be continued, delayed or cancelled.
6. Reassess capital projects—planned and
inflight—to help increase value
8Navigating the Crude Cycle
9. Word of layoffs and unconditional hiring freezes has spread through the
oil patch. Taking aside energy companies reaching distressed situations,
Accenture recommends a more targeted approach in times of crisis.
When necessary, make cuts to the bottom-performing 10 percent of the workforce. Correspondingly, companies
should allow room to backfill a portion of these cuts with top talent. For a long time, the market has forced
companies to “make do” with what they can get in terms of people. At times like these, however, some of the best
talent may be available or open to a change.
Contract labour is another area of opportunity. Representing up to 50 percent of many energy companies’
workforces1
, expensive contingent labour increases costs of operations and of capital projects. A stronger
bottom line can be gained through tighter management of contingent labour, including better role definition
and standardization, using analytics for increased visibility into spend, capability and implementing tactics for
improved safety and quality.
7. Get smarter about people management
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1
Lucia Bosworth. Advanced Contingent Labor Management: Is the Workforce With You? Accenture. 2013.
http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Advanced-Contingent-Labor-Management.pdf
10. When oil ranged between $80 and $100 a barrel, corporate centre costs
seemed reasonable. Numerous corporate initiatives were approved, finance
and planning departments were able to add positions and other corporate
departments grew as well.
At $45 to $60 a barrel and with many energy companies reducing capital investment and making divestments, it
is time to trim the fat. In the past, this process has often been done via across-the-board cuts. Ideally, corporate
functions are evaluated in terms of value and contribution to the enterprise as a whole. Work that clearly
contributes to achievement of corporate goals of safety, profitability, and asset integrity and reliability is justified;
activity that does not should be curtailed and the roles shed. Accenture experience suggests that reductions of 10
percent to 15 percent in corporate costs could be well attainable by simplifying and refocusing work. This can be
done relatively quickly and without major operating model restructuring.
8. Shrink the corporate centre
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11. Today, energy companies’ brightest minds are scrambling to rework the
numbers on their annual plans. The re-planning rush, however, can lead to
rash decisions with negative long-term consequences.
Here are two ideas that could upgrade an Energy company’s planning process:
a) Consider multiple scenarios at several price points, and build in leading indicators that enable identification of
emerging scenarios to prompt decision-making and action.
b) Replace the traditional and arduous annual planning process with a rolling, eight-quarter outlook. In this
model, planning is refreshed quarterly and remains up-to-date, which could lead to better decisions for the short,
medium and long term.
9. Upgrade your planning processes
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12. With high prices, it was relatively easy to sell the future value story, which is
not as convincing today.
For many companies—especially those with significant exposure in unconventionals—a large portion of value
is attributed to future expectations. Stock prices, in other words, have been bolstered by the market’s belief in
companies’ ability to deliver on announced plans for profitable growth.
In times of uncertainty, however, the faith in this rationale weakens. Company leaders should articulate how their
decisions in response to low energy prices could: (a) benefit the organization today and (b) contribute to enhanced
value in the future.
It is vital for executives to communicate effectively amid the doom and gloom in recent reports about the industry.
This does not only apply to communication short term on choices being made, but equally to the industry’s vision
on energy transition and each company’s long term positioning in it.
10. Better articulate your ‘value story’ for
investors
12Navigating the Crude Cycle
13. No one knows where oil prices are headed or when they will recover. But
the winners are likely to be those who respond with measured and focused
investments, and plan ahead with a multiyear horizon.
The industry leaders will use this time of crisis to refocus their company’s vision, making vital changes that would
take years to accomplish amid organizational inertia when times are flush. In other words, seize the opportunity
that a crisis hands you and take decisive action to position your company for high performance.
Conclusion
13Navigating the Crude Cycle