By Reid Morrison
The U.S. oil and gas industry has experienced a sea change as it navigates an unpleasant shift in commodity prices since the highs of 2014. And as the industry muscles through a slow recovery, exploration and production, oilfield services, and drilling companies are finding they have stressed balanced sheets, income statements, and organizations. As with the rest of the industry, these segments are engaged in cost cutting, asset sales, portfolio rationalization and strategic transactions in an effort to position themselves in a sustained low commodity price environment.
With $100 per barrel of oil a distant memory, and hope for a fast recovery all but gone, this has forced an evolution within the industry—an evolution that has the potential to create a new type of energy company, one that looks laser focused on its core areas compared to a conglomerate competing in numerous industries and geographies. The determining factor of the change: Where are we an average player versus where can we truly be best-in-class?
The creation of this new energy company will require a mindset that fosters a strategic nimbleness in which companies focus on where they are exceptional and have the honesty to acknowledge where they are average. This means companies must take a hard look at the individual parts of their enterprise to determine where they have the capabilities to win in an up and down market. An up market skews the capability and performance measures, and a down market reveals the unpleasant truth. With crude oil prices fluctuating between $40 and $50 per barrel, leaders oil and gas companies cannot afford to be anything but exceptional.
To adapt in this new environment, it’s going to take courage to take a fresh look at longstanding business practices. Some might not like what they find, but the industry can learn a valuable lesson and benefit from the recent downturn by getting operationally smarter. In the price run-up of 2012-14, companies allocated billions of dollars of capital, investing in areas, functions or assets where they were average performers. The rising commodity price covered up parts of their company that were average, and the conventional thinking was, “We have to do it all because that is how we have always done it.” The current moment offers the industry a chance to put itself on more sound strategic footing, albeit with a different mix of partners, capabilities, and business models.
Mutually beneficial results can occur when companies confine themselves to areas of excellence and partner with others who have exceptional capabilities that are complimentary. That’s what economists call the law of comparative advantage.
One example of this is Apple. Apple uses its ecosystem of first-tier suppliers to manage the technical design process, while Apple maintains control of the “user experience” and interface, integration of devices and applications, and design. Another example is Boeing, which controls aircraft design, component integration, sales order commitment and capital funding processes, while relying on its strategic partners in its supply chain network to source materials and design and build components.
Getting to excellence won’t be fast or easy, and as someone who works across all three segments of the oil and gas industry, I can say many companies have trouble disentangling “excellence” from the mindset of what is familiar. There is such a bias for in-sourcing work that it can override a more objective, fact-based assessment of who does what best, regardless of company affiliation. The industry should look to work with strategic partners to complement their existing capabilities, much like Boeing and Apple have done.
But despite all of the current uncertainty, there is one thing that still holds true: The industry is evolving. To keep up, companies should focus on where they’re exceptional. The days of being average, of being all things to all people, of being a Jack of all trades but a master of none, are disappearing in the rearview mirror.
The law of comparative advantage is moving the industry in a new direction, creating the New Energy Company. By forming strength-based strategic relationships with best-in-class oilfield services and drilling companies, exploration and production players can remove costs, get access to those little innovations that add up to make a big difference, have partners with deep digital capabilities, shorten cycle times and boost returns on invested capital. All in all, this puts energy companies on a better footing to operate profitably in a “leaner for longer” environment.