Seeking A Guiding Light Amidst The Chaos
Amidst the chaos enveloping the oil and gas business, two principles about the future are becoming clear – one financial and the other operational. Financial leverage (debt) is now understood to be toxic in a highly cyclical business. Balance sheet strength and free cash flow generation are critical. Operationally, companies need to become the lowest-cost operator, which must be achieved organically, and not on the back of vendors and service companies. Embracing these principles will enable companies to survive the current chaos and thrive in the future.
With oil and gas prices severely depressed and little confidence about when they will rise to levels that would provide producers with profits based on current balance sheets and cost-profiles, managements are focused on how to restructure their businesses for the future. Lower for longer was the mantra driving industry actions early in the 2014-2016 downturn. Increased organizational efficiency was achieved with the aid of technology, not uncommon during periods of industry disruption. The industry’s digital revolution arrived courtesy of the downturn.
The 2020 downturn has taken the industry to lower, unsustainable oil prices. However, waiting for better times is not an option, therefore, increased attention will be directed toward how current operations can be redesigned, repurposed or eliminated. Digitalization will become even more important. Achieving the next order of efficiency improvements will also rely on new technologies, but these may need to be conducted on a broader scale. Involving vendors and service companies in rethinking about how to work together to achieve the goal of extracting more oil and gas from reservoirs at a significantly lower cost will be imperative. Increased collaboration, greater standardization, reducing the labor content of every process will drive future operational strategies and reduce costs.
In today’s energy world, every new way of conducting business will have to be scrutinized through the lens of environmental, social and governance (ESG) mandates. This will open opportunities for new technologies. The notoriously capital-intensive energy industry will become even more capital-intensive as eliminating human content wherever possible will become a key driver. This will force greater attention to be paid to improving capital allocation and return on invested capital. New technologies will play an important role in this evolution.