Aug 01 2017

Opportunity amidst chaos

Published by Angharad Lock, Digital Assistant Editor 
Energy Global, Tuesday, 01 August 2017 11:03

The pre-2014 model of oil and gas operations characterised by high OPEX, outdated technology and unsustainable work programmes is no longer sustainable. Process optimisation, cost efficiency and project controls are in place and technical G&A costs have been contained. Strategically controlled hybrid organisation models have replaced traditional ones epitomised by slower decision making processes and higher overheads.

Various reports estimate that roughly half a million workers have been laid off in the downturn and many of the retained employees have taken salary cuts. Companies have adopted judiciously optimistic approaches for new projects and capex; many projects were either canceled or postponed based on revised and more rigid NPV calculations. The services sector continued to be distraught by the downturn, resulting in protracted low prices for equipment and services.

Throughout this period, operators have pruned costs by deploying innovative methods and superior drilling techniques with the result that many upstream companies have adapted themselves to producing efficiently in the current market. The resilience that the industry exhibited and these positive results have enabled operators with liquid assets, to move projects put on back burners to the appraisal, development and construction stages.

While the industry witnessed major changes, the focus gradually shifted to the Asia and Middle East markets. OPEC estimates that there are around 1586 active rigs in these regions, which is comparable to the average rig count level of 1630 during the 2012-2014 period. It is also interesting to observe that the least lay-offs have occurred in drilling; just barely touching the double digit percentages. This is consistent with the information regarding the drilling programs in these regions.

The model of a single major service company with huge overheads and costs, supporting all upstream activities for exploration, development and operations is getting obsolete. Operators strive to achieve the same results by engaging smaller, technically sound and nimble but best-in-class, service providers. As an example, in the Middle East, small to medium sized acreages are being negotiated with smaller players that can beget strategic collaborations to meet financial and technical capabilities to execute work programs.

Whenever the upturn happens, oil companies may not enjoy the full benefits of the reduced prices for materials and services, because of various reasons. The service companies operating at discounted prices and longer credit terms will try to recover their losses. Enhanced manpower training, resultant of the massive lay-offs will drive costs up. Increase in expenditure in supply chain and logistics functions is also expected.

Despite a rapidly growing alternative energy sector, industry remains optimistic that fossil fuel will continue to be a major player in the energy mix for some more time. The companies that have survived the downturn should be adopting unconventional and creative methods to stay in business and remain competitive.

Strategic alliances: The enhanced opportunities and the need to combat competition from India and China have prompted many mid-sector US and Canadian companies to consider expansion to the Middle East. While independently they may lack resources and financial capability to sustain growth in the current market, strategic collaborations with eastern counterparts will allow them to bid blended but competitive prices without compromising on the technical merits; rather than positioning themselves to acquisitions or bankruptcy. This will be an emerging trend in the construction sector where competition is tougher.

New HR models: Buying back manpower lost to other industries or recruiting new workers and training them to the industry standards will drive up HR costs. Some companies are trying to retain their existing talent by programmes like cross-functional engagement, paid education and retention at reduced pay. The market uncertainty has prompted many operators to consider manpower outsourcing under short term, extendable contracts as against permanent recruitments.

It is important to overcome the damage that the industry has suffered as a reliable and rewarding career destination and to deploy innovative methods of recruiting, rewarding and retaining employees, and maintaining employee loyalty without technical G&As hitting the roof again. The traditional and time-tested HR management techniques may be inappropriate in managing the millennial workforce that expects flat hierarchy, open communication and latest technology aids.

Go digital: As was the case during the 1990 recession, companies will need to embrace innovative and technology-based digital models and supply chain management initiatives not only to sustain efficiency improvements achieved during this lean phase but also to offset any increased costs of operations during the upturn of oil prices. This time, it will be concepts like sensor-based big data and internet of things that will outshine other technological advancements. They will help in decision making on “whether, where and when” to drill to maximise productivity and performance from new or existing wells and when to stop producing from fields that are not economically viable with the changing prices. New technologies will also be designed to enhance production from deeper wells and in deeper waters using unconventional and conventional extraction methods.

Flexibility and scalability: Organisations will engage in shorter cycle projects using business models whose performance can be sustained at efficient levels by addition or deletion of resources. Such scalability and adaptability will extend to the organisation itself which should have capability to restructure and redefine its business based on how the market is expected to evolve and to be involved in such activities and core projects matching the organisation’s capabilities and resources. The traditional 5/10 year business plans and goals may still be relevant; but what is important is the flexibility and capability to adapt to the changing market and maintain profitability under different price regimes.

Written by Ajith Muralidharan, Managing Director, Vaangden Pte Ltd.
As published in Energy - Global on 01ST August 2017
Quoted from:  https://www.energyglobal.com/downstream/gas-processing/01082017/opportunity-amidst-chaos/
The following articles were reviewed while writing this piece.

1. OPEC. 2017. Annual Statistical Bulletin. [ONLINE] Available at: http://www.opec.org/opec_web/static_files_project/media/downloads/publications/ASB2017_13062017.pdf. [Accessed 24 July 2017].
2. 2017 Oil and Gas Trends. 2017. 2017 Oil and Gas Trends. [ONLINE] Available at: https://www.strategyand.pwc.com/trend/2017-oil-and-gas-trends. [Accessed 24 July 2017].
3. Rigzone. 2017. More Than 440,000 Global Oil, Gas Jobs Lost During Downturn | Rigzone. [ONLINE] Available at: http://www.rigzone.com/news/oil_gas/a/148548/more_than_440000_global_oil_gas_jobs_lost_during_downturn. [Accessed 24 July 2017].