4 Ways The Oil Industry Must Rapidly Evolve To Survive

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A common misreading of Darwinism is that only the strongest survive. Not quite. Charles Darwin argued that organisms that mutated to adapt to changing environments would, through a process of natural selection, lead to the evolution of new species. It had nothing to do with strength, but adaptability. And while the oil and gas industry has some of the world’s cleverest engineers and scientists, they don’t call it Big Oil because it’s especially good at change. We all know that if the energy sector’s cost structure does not evolve, the entire industry will end up like the prehistoric giants who provided the raw material for fossil fuels in the first place.

The good news is that there is a clear, four-step path to industry-wide cost restructuring, leading into a future where smart companies can thrive. There is between $500 billion and $1 trillion in trapped value from inefficiencies in global oil and gas upstream and downstream. Unlocking that value will put the industry on competitive footing with the future.

The bad news is that there is no option but to head down this path, and not everyone who does will make it. Right now, the oil and gas industry does not pencil out. The collapse of commodity prices in 2014 pushed the break-even points, on average, from $80/bbl to $60/bbl. It wasn’t enough, because prices never recovered fully, or for long. Market returns are in the single digits while ESG concerns are pushing investors to demand closer to 15% returns.

Meanwhile, other sources of energy such as solar and wind are becoming competitive faster than projected with solar, in particular, challenging gas in the power sector, and electric vehicles are on track to achieve cost parity with the internal combustion engine by 2030 – without subsidies. Accenture’s
ACN
work with the World Economic Forum suggests that these trends could push the breakeven point to below $30 a barrel, and that both oil and gas (LNG) will need improvement in economics upward of 35% to stay competitive even before accounting for a reasonable carbon price.

If you don’t want to end up like the dinosaurs, take these four essential steps:

1.   Get ruthless in restructuring your portfolio: remove assets that will never be competitive.

The world will never run out of oil. What it will run out of is profitable oil. Depending on asset class and geography, some oil can be tapped at $10, some for $60, and some for $100. Companies need to make the hard rationalization decisions right away on those assets that will stay stranded or drain cash. For larger companies these choices will be in the tens of billions of dollars. 

2.   Adopt a zero-based mindset: ask what you absolutely must have, not what you can do without.

Until recently, the oil and gas industry has had a cost-plus mindset driven by the cost of the marginal barrel of oil. Reducing costs means cutting from an old paradigm – in effect, tinkering with the status quo. Instead of asking what can be done without, ask what must be had to do the job in capital expenditure, operational spend and organization. Over the past 10 years, oil and gas companies have saved 10-20% through top down-targets or achieving a pre-determined benchmark. If that were sufficient it would be working. It’s not. Surviving into the next decades requires challenging your must-have assumptions. Start from zero.

3.   Collaborate with your nominal competitors and service providers: release trapped inefficiencies.

Next, collaborate openly and holistically—with those you think of as your competitors, with service companies where the relationships have often been fractious, and with emerging technology ecosystem partners. A fully collaborative mindset would be a radical shift from the current collaboration paradigm that has been focused on planning and execution, operator to operator, on a local scale or asset by asset basis where cost sits – and value is trapped – in customized, gold-plated design. It would include standardizing design and equipment, eliminating duplication of business activities, integrating planning and harmonizing practices to reduce downtown due to maintenance and demand fluctuations, and sharing data and resources.

The Joint Industry Programme 33 (JIP 33) and the Open Subsurface Data Universe (ODSU) are signs that the industry is headed in a more collaborative direction. JIP 33’s standard procurement specifications can reduce cost and cycle time and overruns, and OSDU can eliminate the cost burden of independently designing and validating subsurface data.

The good news is that we’ve seen this work already in the auto industry, where standardizing data practices have improved management of supply chains, and the airlines, where collaboration with aircraft manufacturers has led to a 30% reduction in unit cost between 1980 and 2015. And Accenture’s work with the World Economic Forum confirms that full collaboration can unlock a lot of trapped value. How much? Operating independently, oil and gas companies can unlock only half of the trapped value. But working together, the industry can realize an additional $250-$500 billion—or the equivalent of the net income of the entire global upstream industry in a good year.

4.   Evolve into intelligent enterprises: supercharge and sustain the new level of competitiveness.

This path is not a migration away from danger but a Darwinian evolution into a new organism able to adapt in a new environment. In this case, that means becoming intelligent enterprises that use digital technology to rethink how everything works within the organization and outside of it. An intelligent enterprise converges process, technology, data and analytics to change the way work is done and uses freed capacity to generate business insights and positive outcomes.

An intelligent enterprise reimagines services around the needs of the stakeholders being served — rather than being tied to traditionally disconnected silos of process excellence. Processes are continuously improved and adapted to advanced technology and analytics available through best-in-class benchmarks, tools and capabilities.

The first two steps in this Darwinian transformation require simply making very hard decisions. Collaboration requires a radical change in perspective that while competition between companies will always exist, the existential threats come from new forms of energy. But if oil and gas companies can become intelligent enterprises that use data and analytics to make smarter business decisions, then this time, dinosaurs can evolve.

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