As the price of brent oil hovers around $50 per barrel and debate rages whether it is set to rise or fall, oil and gas companies are having to adjust their business to a new low price reality. Since 2014, companies have delayed capital expenditure, cancelled projects and rationalized their operations but no company can afford to maintain a business holding pattern forever. I’ve created a new series of blogs looking at future business directions for oil and gas companies. The first one here looks at the need to drive profitability.
The price of oil may rise or fall but one thing is clear: the idea of $100 per barrel seems like a distant dream. We still inhabit a world where over-production seems the order of the day. In July, OPEC reported that is was producing 32.9 million barrels per day. That represents 400,000 barrels a day more than its own output cap and 173,000 barrels more than in June. In those circumstances it is difficult to see a sustained price recovery.
Profit before production
Industry growth has traditionally been driven by production. Deloitte suggests that, in the past, 80% of the industry’s spending went on the replacement of proved reserves. The upstream industry has slashed capital investment by half and the threat of more rate hikes makes debt more expensive and new investment more risky. For many companies growth in sustainable profitability is likely to come before growth in production.
While some oil and gas companies have always had a keen focus on cost-efficiency and profitability, others have emphasized production volumes. Moving focus for these companies suggests a major shift in operations and corporate culture. However, it is something that most are aware they have to do. Research from industry consultants, DNV GL, found that only 34% of oil and gas companies were confident of meeting their 2017 profit targets. This places the focus on cost control with 84% saying it is either high or top priority.
Profitability and operational excellence
I recently wrote a series of blogs about the need for operational excellence in all areas of the energy sector. The DNV GL research found that driving operational excellence is a key element of cost-efficiency for oil and gas companies. Among the top five cost-cutting priorities for respondents were organizational restructure, improving the efficiency of existing assets and supply chain optimization. The goal is to create a lean, agile organization.
Business processes that have been created to support a continual growth in production are likely to be inefficient at improving asset and workforce performance. More importantly, the highly internalized and siloed processes that have developed within oil and gas companies over many years don’t easily extend to support the new level of industry collaboration and partnership that is currently developing across the industry (I’ll cover this in my next blog). Business Process Management has been around for many years. New developments in rapidly delivered digital BPM capabilities allow oil and gas companies to quickly and cost-effectively address and improve their business process. This will deliver a leaner organization more prepared to embrace future business directions.
Digital Transformation is the key
These processes, however, can’t remain paper-based. Driving profitability and cost-efficiency requires Digital Transformation. When asked by DNV GL, respondents selected digitization above 14 other emerging technologies. These companies looked to introduce digital process in all areas of their business – R&D, trials and full-scale implementations – as a means to reduce risk and increase profitability.
For me, there are two key streams to this digitization. First, there is the improvement management and accessibility of content. All information – especially in areas such as operations – has to be centrally managed and available to the right people at the right time wherever they are in the world. Increased collaboration within the supply chain and new partnerships will increase the onus on the security and the structure of the content. A scalable and secure Enterprise Content Management platform – like OpenText™ Content Suite or OpenText™ Documentum D2 – becomes an essential piece of infrastructure for companies focusing on profitability.
Secondly, Digital Transformation within oil and gas will mean a move to data-driven production. The industry produces more, richer information than many others but, like all Big Data projects, the challenge is to make the information meaningful and actionable. This really requires a revolution in analytics capabilities. Oil and gas companies can’t afford to wait for days or weeks while business analysts crunch the numbers – or worse still, ignore the data because they do not have the bandwidth to analyse the volumes of data. Business insight has to be available as quickly as possible. Predictive analytics is quickly maturing and cognitive analytics – such as OpenText™ Magellan – is beginning to make an impact. Now, end users can analyze the data relevant to them and build their own reports in near real time. The result is much faster, more comprehensive and better informed decision-making.
Digital Transformation should lie at the heart of the cost-efficiency and profitability initiatives employed by oil and gas companies. There are other initiatives that energy companies can follow to respond to new market conditions. In my next blog, I’ll look at the new partnerships springing up across the oil and gas sector.