With its third price collapse in 12 years, the oil and gas market is set for a period of difficult trading conditions. This time, the collapse in prices has come in the wake of a global pandemic which has caused an unprecedented reduction in demand. In some cases, this has pushed even the most resourceful businesses to the brink of bankruptcy.
The sector is also undergoing increasing pressure from governments and NGOs to reduce its carbon footprint and invest in new, cleaner technology. In addition, the majority of oil and gas assets around the world are outdated and inefficient.
The oil and gas sector is renowned for struggling with change and a reluctance to do new processes and procedures implementation. Technology that incorporates advanced artificial intelligence and machine learning capabilities is readily available; the oil and gas sector needs to overcome its resistance to change and embrace the future.
Although the economic climate looks bleak for the sector, we believe that with every crisis there are hidden opportunities with unexpected benefits.
The crisis that is plaguing the oil and gas sector is no exception to the rule. We have seen the industry rise to the challenge in the past and adapt to overcome major issues. For example, the fast response and technology deployed during the Deepwater Horizon incident to successfully contain the spill. In this case a “Capping Stack” is now incorporated as a contingency measure in all deep-water drilling operations.
As an industry, we need to ensure that although we look to the measures deployed during the last price crash in 2014, which was ultimately a fast and harsh slash of costs.
However, many in the industry believe that the solution requires more thought to the standard cost reduction, CAPEX postponement and supply chain overhaul. The present situation provides the industry with a political, economic, social and technological perfect storm. Oil and gas majors need to take bold and radical steps and completely rethink their strategy to maintain viable and sustainable businesses for the future.
Through our work in the sector we are seeing the following implications throughout the industry:
- Upstream: Short term impact will focus on wide-ranging restructuring of production basins encouraged by the opportunity created by weak balance sheets, especially in marginal basins. In the long-term, companies will focus on shifting to “cleaner” energy options such as LNG, offshore wind and hydrogen.
- Midstream: Will continue to be a value-added component of the OG industry, we will see some OPEX realignments, consolidation of projects, and towards the end of the decade a broader review of the infrastructure incorporating potentially an increase in digitalization and predictive maintenance.
- Oil Field Services (OFS) – Most of the oil field service companies were already in a weak balance sheet position following the 2014 crisis. To survive, a radical approach is required including consolidations, capacity reduction and capability upgrades. This is the time to restructure and look at options such as asset liquidation, supply chain reconfiguration, partnerships and rapid technological acceleration.
- Energy transition – New business will continue to emerge in the energy transition space, but at present it’s unclear what form the return for some of these less mature enterprises such as Hydrogen and Carbon Capture will take. The oil and gas majors, as we have seen with recent announcements from Shell and BP, will look to invest in this sector to reduce their carbon footprint.
Through analysis of the sector in its entirety, taking into account the issues we have identified across four key areas, Proudfoot believes that the common thread that will support the sector moving forward is the continuing and progressive implementation of digitalization, which will drive efficiency and deliver a greater positive impact to the bottom line.
At present we are unsure of the full impact of COVID 19 on the implementation of digitalization in the sector, though we have seen a few mixed messages. In some cases, the pandemic has accelerated the implementation of digitalization as organizations adopt home working and remote operation technologies.
This notion has been strengthened by both Schlumberger and Halliburton in their recent earnings calls. However, Daniel Holmedal of Rystad Energy points out that as a result of the pandemic, CAPEX and OPEX expenditure will be cut to save cash.
This will have a detrimental effect on the adoption of digitalization projects in the near term as cash is used to bolster the balance sheet. What is clear is that digitalization and the benefits it brings to the oil and gas sector are vast; it can be deployed in every area of the sector to support and improve operations as well as deliver cost benefits.
The industry needs to fully embrace digital technology and in accompaniment they must ensure there is a comprehensive behavioral package to support employees in its use. That is the only way digital implementation in the oil and gas sector will be successful.
A crisis has a way of knocking down barriers and changing people’s perceptions on the status quo. At Proudfoot we build that ecosystem that marries people, digital transformation and operations, not just during a crisis, but during normal business operations.
This ensures your team has the freedom to ‘think outside the box’ and develop bright new ideas. As a leader it allows you to harness the power of your people. We build an engaging culture; we turbocharge leadership behaviors and we implement operating models to drive efficiency.
Through collaboration with front-line supervisors, middle management, and senior executives, we fully do digital solutions implementation that transform your operations – the way you and your people do business.
Proudfoot knows how to maximize the return on your systems investment. The secret to unlocking the potential is never the system you have chosen; it is always your people. And that is what we do. We focus on your team, whether they are in the office, on the shop floor or in the field. We understand what they do, what their processes are and how they need to change.
We build that new process, educate the people and then focus on the system so that you get the return you are looking for. Allow us to support your business during these difficult trading conditions and prepare for the new normal.