In my last blog I looked at how the new reality on low oil prices has led companies to focus on sustainable profitability. I’d like to concentrate on another important trend in this blog.
There are a growing number of strategic alliances happening in all areas of the oil and gas sector. Today’s reality is that even the largest company cannot expect to do everything. Alliances of specialist companies bring cost and productivity benefits but only where they can establish open and collaborative work processes.
Without a crystal ball, it is difficult to predict the future price of oil except to say that the $50 per barrel it is today is likely to be close to future prices for some time to come. But the oil price is only one of the challenges facing oil and gas. Boston Consulting Group (BCG) has given a fairly gloomy prognosis of the upstream industry where resource has increasingly become much more difficult to identify and risky to recover. According to the firm, between 2004 and 2009, the average return on capital employed in the upstream sector was 29%. It fell to 18% between 2010 and 2013 – even when the oil price was rising by 60%. Little surprise that PWC notes – once the drop in oil price hit – the industry slashed capital spending by around 50% in 2015 and 2016.
The benefits of partnership
Partnerships allow companies to share the risk and reward of capital projects by letting each focus on the things that they do best. Oil and gas firms trust these alliances with tasks that they would have performed on their own in the past. An effective strategic alliance brings assets, skills, technologies and work processes together in a way that reduces cost and maximizes value for all involved.
In addition to sharing capabilities and resources, strategic alliances allow companies to increase the value proposition they offer. Recent alliances – such as Petrobras with Total and BG Group with KBR – demonstrate how companies can reduce the capital risk within projects while improving service to customers. However, creating a successful partnership is far from straightforward. It is impossible to overstate the change of culture that this can represent to some organizations.
The 3 P’s of successful strategic alliances
There are three P’s to any successful alliance: People, process and platform. Of course, the people element is the most important for a successful long-term partnership. Without high levels of commitment, willingness and trust the venture is likely to be doomed from the outset. The companies have to work out how best to exploit the resources at their disposal as well as capture and share the learning from each project so that no knowledge is lost.
One of the most challenging areas for companies is the move from internally-focused business processes to open, collaborative processes across partners. Each organization brings its own work style and integrating these separate approaches to enable smooth operations requires careful planning and coordination. Key to this is the implementation of a common information platform upon which business and operational content and data can be shared.
However, it is highly unlikely that any company will allow unregulated access to all information within its corporate network. The latest generation of Enterprise Information Management solutions provide a means to manage and share all common content and documentation as well as the functionality to securely interrogate and extract information from other systems within each partner’s organization where it’s required and appropriate. They provide the scalable platform needed to construct an open and transparent strategic alliance that can develop in the future.
Key elements of a successful strategic alliance
All partnerships are different but, in terms of the 3P’s, successful alliances have quite a few things in common. For me, the most important are:
- Aligning and sharing corporate goals between the organizations
- Ensuring senior management commitment and involvement
- Clearly defining and communicating roles and responsibilities between the partners
- Clearly defining and communicating contractual arrangements and obligations between the partners
- Clearly defining and establishing collaborative work processes that enable involvement of the right people – regardless of parent organization – at each stage of the process
- Defining and developing a common information management platform to enable the sharing of essential documentation such as shared standards, functional specifications, work orders, etc.
- Clearly defining and communicating governance and compliance roles and responsibilities between the partners
While strategic alliances are a good way to address immediate business challenges, their value for everyone involved grows in the longer term. That’s why it is worth taking time to identify common goals and establish a platform for collaboration that can deliver increased capabilities, improved project delivery and enhanced competitive positioning.
There are other initiatives that energy companies can follow to respond to new market conditions. In my next blog, I’ll look at the growth of Merger and Acquisition activity in oil and gas.
