Four Things Upstream Firms Can Change in 2019
During the past year, the upstream oil and gas industry has largely been in a recovery mode following a major multi-year slump. According to Boston Consulting Group (BCG), 2019 will be an opportune time for upstream CEOs to rethink how their businesses operate in an environment that will inevitably change – and at a more basic level.
“The wave of short-term transformations driven purely by low prices and cost pressure is over,” Eric Oudenot, partner and managing director in BCG’s Paris office, told Rigzone. “We now face a more fundamental change, driven by both a longer-term appetite to be resilient to volatility and to embrace the opportunities presented by technology and digitalization.”
In a recent report, Oudenot and colleagues Nikolay Belkov, Philip Whittaker and Jean Christophe Bernardini identified four domains in which upstream companies can seize opportunities to transform themselves. Keep reading to learn about each domain.
Ways of Working
During the most recent downturn, upstream companies dramatically cut their headcounts in technical and non-technical/support functions. According to BCG, few upstream companies fundamentally changed how their organizations approached day-to-day work and workflows amid the workforce reductions. Three specific transformative actions that companies can take to change ways of working include:
- Adopting agile work practices that accelerate project delivery and yield other gains
- Establishing a performance-centric culture
- Personalizing employee financial incentives.
“These aren’t enablers – they are the transformation,” Oudenot told Rigzone. “It’s all about increasing pace on delivery.”
An upstream company, whether it operates onshore or offshore, needs to select an operating model that optimizes day-to-day processes to deliver on the organization’s strategic objectives, Oudenot and his colleagues argue. They contend that a “finely tuned operating model” could yield benefits such as better coordination between HSE and maintenance and construction teams, greater production efficiency and achieving and sustaining major operating cost reductions.
“This will be about two things: an increase in information flows and an increase in the use of those flows to make better decisions,” Oudenot said of finding the right operating model. “Practically speaking it will include increased instrumentation, more real-time operations and improved decision quality.”
The report’s authors note that “abundant” opportunities remain in regard to mergers, acquisitions and divestitures in the upstream over the next 12 to 18 months. However, citing BCG’s experience with upstream cost-optimization programs in 2016 and 2017, Oudenot observed that companies need to exhibit the following traits for deals to succeed:
- Absolute commitment from senior management
- A commitment to hard, measurable targets
- A setup that dispassionately tracks and measures progress
“The impact on portfolios will be that participation alone will not enough – companies will have to demonstrate real value add,” said Oudenot. “Those who can benefit will be those who add distinctive value to assets that they own or acquire.”
Relationships with Ecosystem Partners
Upstream companies may find this domain the most challenging in which to capture opportunities because they will need to align their objectives with parties whose priorities are “substantially different,” the authors assert. Although achieving alignment will not be easy, they maintain that it is “often possible” and can yield significant rewards. Three opportunities for upstream companies to work with ecosystem partners include:
- Developing shared cost and quality goals with suppliers, who were pressured to reduce rates dramatically during the most recent downturn
- Making new, mutually beneficial long-term deals with host governments – running the gamut from exploration to abandonment and including clear financial commitments from both parties – could build trust and reduce risk
- Redoubling efforts to clarify how non-operated partners should manage externally operated assets and collaborate, particularly when working in relatively close proximity.
You can read the full report, “Are You Ready for the Next Wave of Upstream Transformations?," on BCG’s website.
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