As the supermajors shift away from the
world's maturing oil basins, a group of smaller, upstream independents are moving in. With their value-creating strategies, growth-oriented cultures and focus on operational excellence, a handful of these entrepreneurial companies are posting outstanding performance.
By John Downie, Curt J. Howes and Julie Adams Outlook Journal, February 2005
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It’s not exactly like Las Vegas—but there are similarities. Consider this: A major oil find can double
a small energy company’s market cap overnight—while one poor decision can wipe out another company. Similarly, an oil price shock—like the price crashes in 1986 and 1998—can slash the industry market cap in a matter of months. And these shocks, whether collapses or spikes, are not rare. In the past two decades, there have been at least half a dozen major events that had a dramatic impact on oil and gas prices.
Energy is obviously a high-stakes game, especially in the oil sector, and not a business for the fainthearted.
The industry’s reaction to the most recent oil price collapse, in 1998, was consolidation—on a massive scale—and today, the market is led by a handful of so-called super majors—companies like BP, ChevronTexaco, ConocoPhillips, ExxonMobil, Shell and Total. These giants have the critical mass and financial resources to drive new opportunities in the frontier regions of the world, such as West Africa, while continuing to serve their rapidly maturing home markets in Europe and the United States.
 Does this mean you need to be big
if you want to hit the jackpot in oil? Not necessarily.
In an ever-evolving industry, the supermajors’ strategic focus is shifting away from the maturing basins in the North Sea and North America, which are no longer as economically attractive for such huge companies. Replacing reserves is the name of the game in oil and gas. A company the size of BP requires a really big find to replenish its reserves, and these areas rarely yield them. As
a result, the supermajors are taking their quest for assets into emerging markets, leaving the mature fields
to a different set of players: the so-called independent oil companies.
 The independents comprise a distinct group within the oil and gas industry. Mostly North American, the majority tend to focus on the upstream part of the business—exploration and production. Unlike the supermajors, which run refining and marketing operations as well,
the independents are small, lean and have more focused operations, which gives them a cost advantage when
it comes to making older assets pay.
As part of Accenture’s High Performance Business initiative, we looked at the independent energy companies and tried to understand what set the high performers apart. To do this, we looked at a number of key elements of high performance for each company in our international peer set (see “About the Research” A, B, C, D, E, F, G, H and I). This allowed
us to identify four high performers that had consistently delivered superior returns to shareholders during the past three, five and seven years, in addition to superior growth, profitability, positioning
for the future and consistency of earnings. But what we really wanted to know was what these organizations do differently that enables them to outperform their peers.
 Six Key Attributes We discovered that there were six key attributes, the unique combination of which, we believe, set these high-performing independents apart. Many of the other companies in their peer group could boast one or more of these attributes, but only the four high performers seemed able to combine all six to consistently
deliver high performance year after year.
 Surprisingly, perhaps, these high performers do not always boast the lowest global exploration, development
or acquisition costs. All, however, manage to achieve very good returns on their investments. The secret to their success: the development of
distinctive business models that allow them to excel. These business models are different, but what distinguishes all of them is a coordinated balance
of the following six key attributes.
 A Growth-focused Strategy
Their growth strategies vary, but
all four high performers have been growing aggressively. They’ve
done so by steadily replacing
their reserves, either organically, through M&A or by leveraging
the undeveloped acreages of their international operations.
When they go the M&A route, these companies are adept at deriving value from the combination. High performers buy assets that offer the best strategic fit, not necessarily
the cheapest one.
These companies have achieved growth without sacrificing capital efficiency—a tribute to their financial acumen and flexibility. In fact, one of the high performers has the lowest debt/market-capitalization ratio in the business. By maintaining good credit ratings, the high performers have ensured continued access to cheaper capital. As a result, they can take advantage of growth opportunities as they arise, and retain the financial capacity to fund future acquisitions. (For more on financial mastery as a key element of high-performance business across industries, see “A Seat at the Table,” Outlook, June 2004.)
 Mastery of Niche Technologies
Research has shown that since 1980, advances in technology have cut offshore oil exploration and development costs by 80 percent and halved these costs onshore. The independents are well placed to
take advantage of these changes.
Technological advances have been greatest upstream, where the independents are primarily focused.
And the high performers have been especially swift to recognize that technology is key to optimizing exploration and production. Simply pursuing technology is not enough, however. What distinguishes the high performers is the way they focus their technology strategies—whether by carving a leadership niche in a key basin play like oil sands, or by delivering gas that is technically difficult to extract. The technologies they use may well be generic, but by focusing on a particular technological strategy, the high performers become expert in its use and thus are able to differentiate themselves from their competitors.
 Operational Excellence
High performers in this industry do not appear to be emotionally attached to their assets. They examine the contents of their portfolios continually, assessing the strategic value of their assets to ensure the best allocation of capital. They are also biased toward “operatorship.” For example, a high-performing independent might aim
to take a large equity stake in a key asset to hold the most decision-making power (in exchange for assuming more of the risk).
This approach not only builds a company’s core technical skills but also improves cost control. And although high performers don’t allow cost considerations to get in the way of essential strategic investments—some will spend more on technically difficult exploration to exploit a niche and reap the rewards of higher reserves—they also know their limitations.
 Strong, Involved Leadership
The CEOs of high-performance companies in this sector provide hands-on leadership and exceptional clarity of vision. Because the ultimate goal of high-performing independents
is to grow into larger, more international companies, where decision-making powers must be delegated, these CEOs also recognize the importance of building effective leadership teams, imbued with common values. A team-based ethos, in which power is successfully delegated while CEOs remain at the core—very often physically located among their employees— motivates staff at all levels.
Because speed of decision making and swiftness of execution are essential elements of competitive advantage for companies of this
size, this sense of motivation plainly plays a critical role in the high
performers’ success.
 Organization Effectiveness
The organizational structures of high performers are flat and lean, fast
and efficient. These companies seem capable of managing both the global and local aspects of their business better than their peers. Thanks to their minimal bureaucracies, they enter new markets with a highly disciplined approach to risk, and they empower local management with a sense of involvement and control.
They also make shrewd and efficient use of their external partnerships and alliances. CEOs of top performers in this industry are very good
at managing relationships with all stakeholders—not only their employees and shareholders but also the governments and alliance partners with which they must do business. And because they bring access to new skills, effective alliances can improve business operations.
- A Culture Geared to Growth and
High Performance
The independents are no longer wildcatters, but the free-spirited, entrepreneurial mentality that brought them into existence still prevails. High performers are
companies on the go.
There’s rarely any downtime at a high-performing independent oil company; a clear sense of individual accountability means that people don’t wait for orders. Transparency of decision making, teamwork and a policy of aligning individual performance with corporate growth make for exceptionally effective knowledge-sharing networks and thus a committed workforce.
Doomsday demographic?
The future will be challenging for these high-performing independents. They run tight, lean operations from small bases where every individual counts. They are not immune,
however, to the “doomsday demographic”—an aging workforce.
The average age of oil industry workers in OECD countries is climbing steadily (the median age of nearly half the professionals in today’s oil industry is 47). And there just aren’t enough young professionals to replace them. That’s partly because the business has lost some of its attraction as a secure career. Twenty years ago, graduate geologists could look forward to starting work in Houston or Aberdeen; these days, it’s more likely to be somewhere considerably less comfortable. Traditionally reliant on the majors for their source of talent, the independents look especially vulnerable to this problem.
  Not surprisingly, however, the
companies we’ve identified as high performers have been swifter and more energetic than their competitors in actively developing recruitment programs designed to address this issue. A specific aim of one company’s recent acquisition was
to bring on board staff with strong technical expertise.
As the energy industry continues
to mature, no high-performing independent oil company can afford to become complacent. Existing business models must evolve to accommodate the requirements of larger and more global organizations in
an increasingly competitive environment. Thus far, the high-performing independents are responding to change with positive and value-
creating strategies. Flexible and highly adaptable, they show every sign of continuing to do so.  About the Authors John Downie, the partner in charge of the Accenture Energy Industry group in Europe, also heads Accenture’s UK Energy Strategy practice. Based in London, Mr. Downie has extensive experience in the oil and gas industry throughout Europe, the United States and Russia. His focus areas include mergers, acquisitions and divestments, upstream and downstream strategy, and organization and process design.
Curt J. Howes, a Houston-based associate partner, is the global lead in the Accenture Resources/Organization and Change Strategy group. Before joining Accenture, Mr. Howes worked for
18 years for Exxon in its Upstream, Downstream Chemicals and Research organizations, where he consulted management on strategic change, leadership development and organization transformation. At Accenture, he has consulted globally in the energy industry in areas including organization architecture, business models, high-performance organizations and teams, post-merger integration, business transformation, leadership, culture change, human capital development, and governance- and performance-management systems.
Julie Adams is a senior manager in the Accenture Research group, where she provides original research support for the global Accenture Energy industry group. Her extensive oil and gas experience, gained in the industry and through consulting, includes strategic projects with national oil companies, the supermajors, mid-tier oil companies, and independents in Europe, the United States, Russia, Africa and Trinidad.
Ms. Adams is based in London.
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