Professional services organisation, PricewaterhouseCoopers (PwC), published their latest report, 'A Sea Change - The future of the North Sea Oil & Gas', which seeks to define the state of the North Sea Oil and Gas industry and, through the contribution of some 30+ anonymous 'senior industry stakeholders', give some guidance on how the industry could change to secure a turnaround in fortunes within a 24-month window of opportunity. Whilst full of positive sentiment, I can't help but worry that fundamentally, the North Sea Oil and Gas industry is averse to change.
The strongest element of the report is the urgent need for disruptive thinking within an industry that has always cyclically repeated the past and now, in a lower for longer environment, expects and needs different results. It shouldn't take Einstein to see the insanity of that as a strategy.
In theory, three of the most innovative or potentially most impactful ideas mooted are: consortium funding; nationalisation of the supply infrastructure; and standardisation of technologies. However, in heeding lessons from other large scale industries that have been forced into significant change, these are sometimes not without their problems when it comes to practical implementation.
The exit of many forms or scale of traditional funding from the industry has crippled exploration and development activities. Consortium funding, where those Operators (or Service companies) with deeper pockets club together to finance projects of mutual benefit could well go some way to replacing some of the more risk-averse sources that have withdrawn their support in recent times, scared off by unworkable reserves or performance covenant based lending. The worry is that whilst this may reduce the capital injection required, lenders will still take funding decisions or guarantees based on the weakest link in any partnership. Recovering after the 2008 financial crash, lending institutions of all sizes, despite having billions made available to inject back into the market, were more interested in rebuilding their own balance sheets before providing much-needed market stimulation. Perhaps, in the North Sea, those with the deepest pockets could provide more assurity than others, but then with shareholder pressure, Operators and Service companies may take the same approach in addressing their own needs first.
One of the biggest threats to the sustainability of supply in the North Sea is the integrity and long-term viability of the supply structure. Much of the efficiency savings achieved in the last decades that have driven the North Sea production cost to be amongst the most competitive in the world stem from collaborative use of the offshore pipeline and tie-back infrastructure. As fields face decommissioning or reduced investment in integrity, this advantage may literally erode. So, the industry suggests passing the maintenance of the infrastructure onto the Government. However, as an option, this has a familiar ring.
The nationalised National Rail inherited a poorly maintained infrastructure from the private Rail Track group of companies. Several catastrophic failures, mismanagement and massive losses led to this re-nationalisation where the bulk of the ongoing cost for the upkeep falls to the tax payer. A similar deal with the UK people, who perhaps would not hold the same fondness for bailing out the oil and gas industry, may struggle to find far-reaching support.
A key collaborative initiative that will only work if there is true commitment to co-operate from both Operators and Suppliers is standardisation. Macondo and other milestones have necessarily driven the performance standards demanded of oilfield equipment and operations higher and higher. However, raising the bar to a level where all equipment must meet the same stringent specifications whatever the working conditions is an expensive gold-plated option that led to spiralling industry costs in recent times. Likewise, the pursuit of competitive advantage by technology developers has baked in over-complexity and a lack of interoperability that similarly impacts on costs. Lessons can be learned from the automotive industry that introduced cross-manufacturer standardisation and many other technology and supply chain collaborations that greatly contributed to reduced manufacturing costs.
An industry averse to change
Change management experts identify several common traits in individuals and organisational cultures that lead to the lack of success or failure of change programmes. I believe that industries as a whole, including the Oil and Gas industry, can also be affected by these same factors leading to less than practical success when compared to the vision or goals such as this one.
Fear of the unknown
The precipitous decline of the oil price came as a surprise to most. However, like a blind-sided boxer left reeling from a stunning left hook, the industry has taken too long to gather its wits and come back fighting.
As an industry, Oil and Gas displays an astonishing lack of flexibility in its interpretation of and reaction to the information it has to hand. Just like the proverbial oil tanker, even with all the signs of oversupply, spiralling costs and reduced global demand, the industry failed to read the signs and change direction. And now, almost two years later, we are still lamenting how the industry should change rather than celebrating how it has changed.
Greater emphasis needs to be placed on reading the signs of the cycle and not adding too much complexity on what is still essentially a supply and demand driven market.
Much hope is placed on the UK Government's fiscal mechanisms to create a more favourable market environment. Whilst the PwC report cites praise for some of the changes that have been made, they make little difference currently in a market without revenue. UK Energy Secretary, Amber Rudd, on a trip to open the new Total Shetland gas plant, made no apologies for her lack of a visit to Aberdeen fully a year after taking up the appointment that oversees the UK's energy policies - including North Sea Oil and Gas. That is clearly not something that inspires trust within the industry that the Westminster government has a clear plan. One could argue that they do not even have a vested interest in the industry with the tax take moving into negative figures for the first time in 2015-16, falling from over £2 billion the previous year and down from £10 billion contribution just five years ago.
Loss of control
The perception that change will take away control has a crippling effect. The often quoted story of the howling dog not moving from the nail it is sitting on because the pain is not yet bad enough, exemplifies how the fear of what is on the other side of change outweighs the imperative for action. But surely, the industry has endured a deep enough pain that even the most thick-skinned or stubborn cannot ignore.
The longer the industry waits to make significant changes the less chance they will be made. As the oil price appears to stabilise around $50, the industry is already showing signs of drawing its breath in preparation to releasing a collective sigh of relief. However, $50 as the new bottom is tenuous and there is still a long way to go before significant spending returns. There will be many more companies and individuals who do not retain their positions to see the benefits of a market recovery.
PwC's report suggests a 24-month window of opportunity. I would ask why more was not done a year ago when the window was open even wider.
Predisposition toward change
Finally, a person's attitude to change plays a large part in how actively they engage with it. We all know and understand that the Oil and Gas industry operates on a cycle of boom and bust. If so, then as an industry why change at all? Let's just wait for the next upcycle to swing by.
Even if there is sufficient oil under the North Sea for another 20+ years, there is the clear and present danger that without decisive change, the UK's ability to extract it profitably will be severely damaged. Lack of investment in exploration and production, the supply infrastructure or retaining the skilled workforce within the North Sea basin will all impact negatively and, again, drive costs up and competitiveness down.
It is likely that seeking salvation from outside the industry at a Government level will not bear much fruit. Instead, change should be led from the inside out. Our industry leaders, therefore, bring the greatest chance of change within the Oil and Gas industry.
Organisations that want to have a long-term future in the North Sea, need to embed change within their organisations from the top down. Executive teams need to consider change at the forefront of their strategy and decision making, ensuring that it is a core competency of management and a key skill throughout the organisation.
Through championing change, great leaders create an environment that nurtures the most innovative and creative thinking from their people. Openness, transparency and availability of information for improved decision-making build the integrity and trust needed to drive difficult changes throughout the workforce and the whole industry. Developing a wider sense of trust will also bring greater collaboration between industry players.
By David Wilson from Refining Business
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)