How to thrive in the transition
Weaker oil prices, new digital trends and the energy transition are redefining the business. State companies must be prepared
Crude prices below $50 a barrel are not a blip on the radar—but they continue to challenge oil and gas firms across the world. International oil companies (IOCs) and oil-field services (OFS) firms are busy restructuring to adapt to this new pricing reality. Companies like BP are aggressively changing their portfolios to favour smaller, brownfield endeavours that carry high margins, with lower risk.
With a focus on cost per barrel, the industry is exploring new digital opportunities and models of collaboration. The recent establishment of Baker Hughes and GE Oil & Gas into BHGE is an example of how major OFS firms are reshaping the industry to optimise oil and gas operations across the value chain, deploying big data and digital solutions.
These new digital solutions, coupled with the advance of cost-competitive sustainable energy technology, bring new opportunities to shape innovative business models and guarantee the future competitiveness of oil and gas companies.
Where are national oil companies (NOCs) in this industry transformation? So far, most seem to be taking a back-seat approach. Why? Other than Saudi Aramco's proposed IPO and a few others dabbling around the edges—reducing lifting costs, adjusting capital expenditure, and boosting volumes from mature fields—most NOCs are in wait-and-see mode, awaiting proof that plummeting oil prices, digital and energy transition are indeed triggering a transformation.
When asked why they ignore the inevitable, NOCs point to the complexities of their business and the ecosystem they operate in. Typically, governments (or regulators) set high expectations for their national champions, their contribution to the national economy and job creation. NOCs are expected to develop the sector, compete with IOCs, and, in their spare time, help develop local capabilities to support new operators, services firms, and other supply-chain partners.
$37bn/y—Cost of maintaining oil and gas pipelines
But low oil prices are here to stay and the pace of digitalisation and energy transition is only going to accelerate—so the very survival of NOCs may depend on them fundamentally changing their outlook and organisation. NOCs are faced with three key levers of transformation: reshaping the ecosystem, closing the digital gap and embracing energy transition.
IOC leaders are known for their adept management of industry trends. Having weathered a fair share of disruptions, IOCs are well versed in the softer skills needed to manage change: collaboration, flexibility, and discipline. Look at Shell. Its profits tripled over the past 12 months, with the upstream business rising by $1.7bn (in the second quarter) and its downstream earnings growing by 39% to $2.5bn. "Discipline", said chief executive Ben van Buerden, was a big reason for this success.
These softer skills can help NOCs, governments, and regulators navigate the latest industry trends. Reshaping the ecosystem of NOCs is a key lever to address the price pressure and broader consequences of lower oil prices. To thrive, not just survive, NOCs and their host nations must focus on three areas in the next 12 to 18 months.
Collaboration and costs
Ask an IOC executive what the most important attribute is during an industry transformation and you might hear one word: collaboration. IOC leaders are masters of this, whether working with governments, regulators, supply partners, or customers. By comparison, NOCs are often known for being bureaucratic. But in an era of lower oil prices NOCs urgently need to shed their bureaucratic ways and focus on reducing costs and building alliances.
When NOCs and IOCs, or NOCs and services firms, work together in business-focused partnerships (instead of compliance-focused ones), the results can be impressive. Petronas launched a five-year collaborative cost-cutting program with IOC operators and reduced costs by $1.1bn.
Leadership and governance
The first step for a country is to confirm its main objective—state control of assets—and take stock of its situation. The latter will depend on the country and the NOC. In some countries, for example Saudi Arabia, the NOC is the only operator. In others, the NOC depends heavily on IOCs. Indonesia's Pertamina, for example, invests about 20% of total capex with the rest coming from overseas and other non-NOC investors. The NOC can be established as the main vehicle supported by the government, as Norway did with Statoil, allowing it to pursue a long-term agenda of innovation and collaboration. Other countries assign the regulator as the primary vehicle or assign a combination of the regulator and the NOC.
Regulator focus: investment attractiveness
Increasing a country's investment attractiveness is typically the purview of the regulator, depending on that country's governance structure and openness to IOC investment. The general idea is to get capital flowing and find new reserves or prove-up reserves depleted in production. Prepare for fierce competition as more IOCs high-grade their portfolios and move capital from maturing to new areas.
The approach used depends on the characteristics of the reservoir being targeted and current industry pricing. And the government and the regulator will want to strike a balance regarding the government's take to meet investors' risk-versus-return calculations.
Shaping an industry transformation is a good way to connect to something deeper—to understand what NOCs must do to thrive in the future. The notion that an NOC is immune to changes, that it can be part of the system without worrying about improving the country's investment attractiveness, will be a weakness in a world where investors have other options for their money. A successful NOC finds the right balance of its objectives and the needs of collaboration partners such as IOCs for the benefit of the country.
Closing the digital gap
Digital applications are already changing the oil and gas industry—increasing the rate of recovery from reservoirs, refining 3-D imaging, and providing advanced analytics that bring crucial data from below ground (wells) to above ground.
Digital brings the power of data-driven insights. For example, the world has more than 4m km of oil and gas pipelines and the cost of maintaining and monitoring leaks and damages using older methods is upwards of $37bn per year, according to the International Energy Agency. Today, drones with thermal-imaging cameras identify pipeline hazards before they become dangerous or financially onerous, and do so at much lower cost.
The notion that an NOC is immune to changes will be a weakness in a world where investors have other options
The internet of things, cloud computing, artificial intelligence, machine learning, augmented reality, robotics, wearables, mobility: all these, and other new digital techniques, have a vital role to play in the future oil and gas industry. Emerging technologies like blockchain, a new way to collate and process data, is already gaining interest in the financial-services sector, and can soon find its way into oil and gas as well.
Adapting to—and adopting—these new digital technologies will be critical for oil and gas businesses, driving down their costs and enabling collaboration. Identifying ideas where digital technology can generate value is becoming relatively easy; it's in implementation and delivering the value that many organisations still struggle to achieve. So closing the digital gap—staying competitive—will demand much greater focus on capability building, adapting ways of working and having a clear roadmap for change.
Embracing energy transition
Energy transition is bringing a seismic shift across many industries, not just energy. The oil and gas industry will be affected by the acceleration of new technologies too—and the speed of this change is a clear strategic question for the sector. Many IOCs are redefining parts of their business and portfolio to better tap into the opportunities offered by gas as well as renewable energy, for example in solar and wind power. Many are also further developing and exploring carbon capture and storage.
The acceleration of energy transition adds strategic complexity to NOCs and their host nations. It requires them to align on the mandate of the NOC as an oil and gas company, an energy company or a downstream supplier.
It seems clear that lower oil prices are here to stay; peak oil demand is nearing; and that cost-competitive sustainable technologies and green consumer preferences will drive the speed of change well before regulation. NOCs and IOCs alike need to embrace this energy transition and prepare for the tectonic impact it will have on their value chain.
The future NOC
In short, cost pressure, digitalisation and the transition underway in energy will transform the oil and gas industry. NOCs must face the inevitable—and step up to meet the challenges head on. Their success will depend on their openness to re-examine their established ways of working and their ability to implement leading-edge practices. The NOC of the future will be more dynamic, and adopt collaboration within their ecosystem and with IOCs and OFSs. They will successfully take on national transformative roles such as those seen in Saudi Arabia and other GCC countries. Leading NOCs will shift to new business models, reaping the full benefits of new digital solutions and the advances in global energy transition technologies.
Richard Forrest, Hasan Shafi and Gabriel Rouilloux are from A.T. Kearney's energy and process industry practice
This article is part of an in-depth series on NOCs. Next article: Middle East NOCs under pressure