The energy industry is a passion of mine and most of my career has been spent working in the industry, following in my father’s footsteps. I have experienced the highs and lows, and nothing can pull me away. Energy has fueled our global economy, provided our country with energy security, and it has provided my family opportunities beyond what we could have ever imagined. The perspectives in this article are meant to provide some insights but also provide inspiration and spark a discussion that we hope can help us see past the immediate industry crisis and pull together to re-create a vibrant sector again.
It’s Structural, Not Cyclical
This is a gut-wrenching time from the executive suite to the employees extending to their families and communities. It’s not yet clear when the COVID-19 smoke clears what exactly will happen to energy prices. But what is clear is the industry, even prior to COVID-19, needs to make radical changes in order to survive the chaos that often strikes commodities. Commodity prices, no matter what commodity, go through 15 to 20 year structural shifts. The over-supply often does not go away easily; it takes time for demand to again outstrip supply, and the process is messy. As an industry, we often use temporary strength in oil prices to rapidly ramp up investments. This is very similar to the phenomenon that occurred in the mid-80s. At the time, the industry went through a sudden supply side surge driven by Saudi Arabia which caused a collapse in oil prices. For several years, the industry responded by making significant cost improvements. However, in the early 90s, with higher energy prices during the Gulf War, the industry believed that oil would once again become permanently short. Capex spending was ramped up and organizations grew during the time. However, the war was short-lived, and oil supply came back with a vengeance coinciding with a recession. This structural over-supply would not improve for another ten years, leaving a broken industry that required several rounds of re-structuring and mergers. I was a reservoir engineer at the time, and I was told my job was likely to be eliminated by the end of the week. With only two years of experience in an industry flooded with people that were far more experienced, I felt a sense of hopelessness. I wasn’t the only one.
Be Bold and Different
Companies can succeed, even in a structurally challenged environment. People forget in times of stress that companies can emerge as leaders with different business models, and for people this success can be a source of pride and joy. Being different starts at the top. As a strategist and avid investor across many industries, I have seen many companies rise to the top in the most difficult conditions. In our industry, look at EOG which emerged from the ashes of Enron. My alma mater is Vastar Resources, whose leadership team made the structural changes necessary to emerge as one of the best returning energy companies in the 1990s despite declining oil prices during the same period. In times of stress, those companies that make profound changes and innovate their business models find that they can set themselves apart, even more so than they can during good times. In fact, Harvard Business Review, in analyzing those companies that emerged stronger out of the Great Recession than their peers’ states, “These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets.” (HBR, March 2010, Roaring Out of a Recession).
Emerge Stronger
People globally are adjusting to less travel, working at home, and climate change is top of mind. We don’t know what demand growth after COVID-19 looks like, and supply wars will likely continue. It takes a shift in mindset and courage to be bold and different. Do it for your shareholders, and also for your company and your people. Play offense to emerge stronger. Here are 14 ways I believe Energy Leaders can help their companies survive now and thrive later.
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Assess, streamline, and change your leadership teams as necessary. Performance and expertise need to be reviewed against the ability to make profound change. And publicly traded boards should consider eliminating protection for C-suite officers, where large payouts sometimes happen even upon severance or bankruptcies. This will go a long way to help bring investors back into our industry. We need to demonstrate credibility to investors once again so that they can believe sustainable returns are possible.
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Be clear, transparent and honest about the situation and challenges to your organization and investors.
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Don’t just make a lot of incremental changes. Rather, you need to clean sheet your business model and ask the question, “How can I deliver shareholder returns under a set of several different scenarios?”
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Maintain conservative cost and investment practices. We know our industry condition can change without warning and these changes are out of our control. However, we can be better prepared for adverse conditions if we exercise cost conservatism during the good times. When I joined an Oilfield Service Company from a large consulting firm, I moved from my downtown luxury office into a fabricated office building in front of a manufacturing plant. The CEO took me to lunch that day to a food trailer that would come to our parking lot. He told me he lived through the 80s and despite the company doing well right now, preserving cost consciousness was top of his mind. This is the mind set we need in our industry again.
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We need capital discipline. Utilize the diagnostics that are out there, invest in science, leverage the technical expertise of your people, and pinpoint those sweet parts in your field that can make good returns at low prices. The cost of science and understanding is far less than the cost of drilling and completing. This means embracing new technologies and setting up a dedicated budget, even during tough times. It also means engaging with suppliers to share what insights you need and challenging them to help deliver those insights to you.
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For each producing asset, look at the business streams for each part of the operation. Know the bare minimum required to keep the field producing. Use the latest technologies to surveil your wells. Determine what activities need to be done locally, and what can be centralized. Develop ways to maintain and grow production cheaply and minimize downtime. Figure out ways to conduct pro-active maintenance at a much lower cost. Look for opportunities to up your game on workovers, e.g. any workover that brings in new barrels for less than $10 per barrel lifting cost.
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Determine the necessary functions that can be centralized and leveraged across the organization. Eliminate unnecessary and low value processes. Automate the processes that are routine.
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Examine your cost structure to be mean and lean. Draw upon your experts, engage them, and challenge them to come up with cost reductions that get your organization to be fighting machines at low oil prices. Look for ways to continuously innovate and challenge your cost structure so you can achieve year-over-year efficiency improvements.
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Leverage digital technologies to lower the cost to operate and maintain. Digital includes drones, data transmission and processing, and artificial intelligence. This will reduce safety incidents and streamline operations. Digital technologies are not speedy to implement. It takes time to pilot, scale, de-bug, and move forward. You need to start now but make sure your team has a purpose and clear objectives which is critical given the vast digital landscape.
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Strengthen your competitive advantages. Look for ways to scale where you have differentiated capabilities.
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Rebalance your portfolio via swaps. If possible, don’t sell assets at distressed prices. Rather, use your assets for currency for swapping into something that is strategic for you. Build a low-cost, efficient position where you have a competitive advantage and leveraged knowledge of the subsurface. Drive consolidation and build local basin level scale where you have a distinct competitive advantage.
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Make your suppliers partners. Offer incentives that bring your suppliers into your game, not cost reductions that they can’t sustain. If you treat them right, firmly and fairly, they will thrive as well. Suppliers can bring new insights and solutions to your organization that will drive significant value; they need the encouragement and space to do so. This is a win-win scenario.
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Embrace start-ups. Make it easier for start-ups to help your organization understand the potential value of their technologies for your operations. While intentions are good, start-ups have to navigate the silos and long processes of energy companies.
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Emerge as a Leader in New Energy. We are best positioned to invest in the new fuels for a cleaner environment. It starts with natural gas, and natural gas today provides over a third of our nation’s energy. Natural gas is also an area of relative strength as the associated “free” gas from the oil shale plays are reduced.
Yes, It Can Be Done.
In the late nineties, there were times when oil was less than $10 per barrel, and yet some players emerged as leaders. There was a period of structural change with mergers and consolidation across plays. This will happen again. Put yourself on the winning side of the equation and make your organization and shareholders proud of you for being bold and different.
