It might seem like a non-sequitur, but commentary on why the campaign strategy of Jeb Bush failed has a lesson in it for the oil industry.
Times have changed.
As the oil industry’s top leaders gather in Houston this week for their most important annual event -CERA Week, the industry will evaluate what is running it aground.
In an age of big data, GPS, social media, and politically important millennials, “old think” is becoming increasingly problematical. Any teenager with a computer and an understanding of GPS can know where ExxonMobil’s oil tankers are. Any random team of millennials led by a scientist can capture images of methane leakage from a facility with a special, Go-pro size camera. Any random group of activist investors can hinder access to capital and credit lines. And most importantly, as was so remarkable to learn post-Macondo, an insensitive act, poorly designed lobby campaign, or even wrongly considered single comment on a pivotal topic (for instance, climate change) by one CEO has the potential to sink the share prices for the entire industry.
In this new political environment, to continue to attract investors and capital, the oil and gas industry as a whole must develop a value proposition that is consistent with new realities and market conditions. To balance cost challenges against the need for new reserves, a leaner and more efficient industry will be required both in execution and operation. Currently, there are uncertainties about the future path of oil demand. Even if demand growth remains challenged in the long run, companies most likely will still need to be prepared to deliver significant volumes of oil and gas at competitive returns, even if nominal commodity prices are low and carbon externalities are priced more accurately. The industry will need higher levels of artificial intelligence, automation and remote operation and management to achieve this and that means attracting more millennial workers.
More simply and directly put, to attract the workers it will need for its future, the industry needs a public profile that is radically different than the one it is currently putting forth.
To start, the industry needs to embrace strategies that society as a whole and millennials in particular find desirable. Some leading companies are already moving in this direction, by shifting to operational procedures that reduce community impact by shortening project cycle times, minimizing product losses, such as methane leakage, and increasing recycling and reuse of inputs such as water, heat, and steel.
The oil and gas industry should also take actions to prove it is a partner in future, global solutions, rather than allow itself to be type cast as a source of environmental damage or a driver to sectarian conflict. In this new world where millennials can and will challenge the establishment, the industry will need to address the serious trust challenges created by the failures of the worst of its ranks.
As the industry meets this week to discuss the increasingly challenging business environment for oil and gas investment, it needs to consider how its own record on environmental, social and governance issues contributes to the above ground risks that prevent or delay resource development.
It isn’t sufficient to address advocacy groups or poor communications. Oil and gas companies have correctly set expectations among their stakeholders that they can operate without negative environmental impacts. The industry needs to create a system to address actors within its own ranks when actual performance has fallen short. Many operators work to high standards and go beyond reasonable efforts to clean up spills and to reinstate the environment back to baselines, but highly visible lapses in environmental performance have negatively influenced millennial attitudes about the industry as a whole. The oil and gas industry is also plagued by a handful of widely-broadcasted incidents and accusations of corrupt practices such as the Petrobras scandal or foreign corrupt practices prosecutions for bribery in Africa and Iran. Lack of public trust impacts the industry’s operating environment by complicating project development time lines and jeopardizing the government approval process (for example for Shell in Alaska). A private Goldman Sachs study concluded that nearly half of the risks facing major projects were non-technical, with “stakeholder-related risks” being the single biggest issue.
The image of the oil and gas industry influences its ability to recruit the most talented candidates entering the workforce in some locations where mission-based corporations are considered the most desirable places to work. Consumers are also questioning whether oil and gas can continue to be a reliable fuel source. Increasingly, the public is expressing its desire for a transition to cleaner sources of energy, not only in the United States, but also in the developing world. Companies that ignore these trends run the risk that it will be their balance sheets and share values that are affected in the long run.
Other industries have created independent industry wide reporting standards and verification/auditing methods and have established successful transparent, voluntary systems for measuring and rewarding best in class standards. The airline industry is a case in point, as is the U.S. nuclear industry. Examples of pooling arrangements in oil and gas, such as the tanker pools and the Canadian oil sands innovation alliance are proving their worth. Partnering with institutions like the Extractive Industries Transparency Initiative (EITI) and SASB can enhance trust and assist companies in promoting standards industry wide. Pooling arrangements that improve cooperation in industry during times of supply emergencies can also reduce price volatility and given consumers improved service and performance.
As oil and gas leaders convene on Houston this week, they need to consider the following: failure to address above ground risks will present higher competitive risks on a going forward basis. Delays to resource development can be costly to an individual company in this more competitive environment. And the race for tech savvy millennial employees and future customers will be won by those who are best able to align with society’s underlying values.