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COVID-19

How oil and gas companies can build resilience in uncertain times

March 20, 2020

State of the oil and gas (O&G) industry

COVID-19 is a global crisis, evolving at unprecedented speed and scale. Business leaders must make rapid decisions, and take immediate actions, to protect and support their workers while ensuring that critical business operations continue.

For the oil and gas industry, part of Accenture's Energy industry practice, COVID-19 is causing a demand-side shock that’s still rippling through the global economy. Alongside, the industry faces an even more significant supply side shock from OPEC+. A dual shock like this is unprecedented for the industry.

The near-term impact on the industry can be devastating – many companies faces an existential risk. We expect the industry to be reshaped in a structural way.

The immediate response of most oil and gas companies is to ensure the safety of its workforce and continuity of operations. Beyond that, many are announcing broad capital and discretionary spending cuts. Those are needed in the near term. However, the industry needs to recognize that both this cycle and the post-cycle will be different, and that requires taking measures that enable survival in the near term and positioning to thrive in the medium term.

6 actions oil and gas companies can take now to build resilience

We see six critical steps companies can take now to build resilience:

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Setup a 24x7 virtual command center to keep a pulse on the market, dynamically stress test the business, and ensure business continuity

  • Generate or assess potential market balance/price scenarios, and identify leading indicators associated with each scenario to trigger actions ahead of time.
  • Put business continuity plans and cash flow to a rigorous stress test under various scenarios focused on identifying key gaps and shortfalls over a three, six and 12-month period.

Protect your employees by creating a digital workplace to enable safe and productive ways of working

  • Adopt a culture for the changing work environment.
  • Deploy and scale collaboration tools including virtual environments.
  • Enable reliable, secure and ubiquitous remote network connectivity.
  • Enhance business continuity plans.

Zero-base everything rapidly

  • Launch a data and advanced analytics-driven program, leveraging a battle-tested AI tool to quickly scan and assess spend and generate insights from efforts within and across the industry.
  • Challenge every cost, spend item (third party or internal), investment decision and supply arrangement.
  • Ask "why is this needed" rather than "how can we reduce it." This will create a clean sheet with no "sacred cows," sustainable over time without impairing the business’s ability to grow when the cycle turns.

Rebalance Capital Spend and Portfolio

  • Reevaluate all decisions about growing the core business and scaling new businesses—what makes absolute sense to pursue or keep unchanged through this cycle versus deferring without affecting long-term prospects and objectives.
  • Surgically assess every asset, capital spend and new business decision to reflect the new reality—namely, lower and more volatile commodity prices.
  • Evaluate all options—stress test marginal assets and evaluate all new investment decisions with a higher bar for risk. Update all CapEx and OpEx plans for the next 6,12 and 24 months.
  • Prepare to make changes dynamically as there will be considerable volatility over the next several months, and portfolio decisions will need to change accordingly.

Manage Customer and Commercial Risks

  • Maintain intimacy with customers with a view to partnering with them through “thick and thin”. Reinforce partnership and commitments to key customers through concessions and flexible arrangements.
  • Review offtake and supply/service agreements and hedges to identify optimal monetization options and favorable contracts to carefully manage through the cycle.

Unlock inefficiencies and value in support infrastructure

  • Consolidate and outsource back office operations to realize a variablized and flexible cost structure.
  • Rationalize applications and optimize IT maintenance cost.
  • Enable pay-per-use models.

How oil and gas companies can emerge stronger

Some of the current disruption trends were already in motion before the current supply and demand shock. Today’s O&G players will need to fundamentally rethink and reduce their structural costs in non-traditional ways:

  1. Create cost variability and eradicate complexity while freeing up capital
    Evaluate and identify opportunities to shift cost and business/organizational complexity inherent in delivering or driving non-core technology, support functions and partner platforms. Focus the organization on the core business and maintain flexibility to dial up and down based on resulting market outcomes.
  2. Team with peers and competitors
    Consolidate activity or assets through a formal or loose joint venture particularly in high-volume geographies like North America. This can be in the form of joint development programs particularly for contiguous upstream positions, sharing equipment and workforce, partnering on service agreements and other infrastructure while idling less favorable or sub-scale positions and assets.
  3. Bring the ecosystem creatively into play
    Identify collaborative opportunities with operational and technology partners and/or service providers that require integrated planning and execution. Take a long view toward releasing trapped value that can benefit all partners while serving as an offset to direct price concessions.

 

Once the global economy stabilizes there’s no indication that growth won’t return as the world still needs oil and gas to sustain development and drive prosperity in the developing world, not to mention meeting the needs of an estimated 2+ billion people who’ll join the global population. Also, while the economics of O&G extraction have improved considerably since the last supply shock in 2014—by up to $10-$20 per barrel—ultimately the full-cycle breakeven economics of the marginal barrel will set the equilibrium price. And that breakeven price will be higher than the prices we are seeing through this dual shock though with a lower ceiling than in the past. That’s why this cycle, while being a challenge, is also an opportunity for companies to fundamentally reshape their investments, priorities, and ways of working.

Contact us

Muqsit Ashraf

Lead – Strategy
LinkedIn

Manas Satapathy

Managing Director – Strategy & Consulting, Energy
LinkedIn

Vivek Chidambaram

Managing Director – Accenture Strategy
LinkedIn
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