Oil price crisis
Collaboration and innovation as the way forward
The energy industry is at the dawn of a new reality. A fundamental change in supply and demand calls for more drastic measures than the capex and opex reductions that we have seen so far. It all comes down to one question: what do we really need?
Bart Cornelissen - 14 june 2016
A new reality
When oil prices rose to 50 dollars per barrel at the end of May 2016, the entire industry started to breathe a sigh of relief. After nearly two years of decline, this was a welcome indication of recovery. But will oil prices ever rise to 110 dollars per barrel again? Whereas earlier crises had a geopolitical background, we are now facing a new reality, with structural changes on both the demand side and the supply side. Oil prices will eventually likely rise to 60 or 70 dollars per barrel to ensure investment levels, and as a result oil production levels keep up with demand, but triple digits definitely seem to belong to the past.
Structural changes in supply & demand
So what has changed? The global energy demand growth is slowing from 2% annually to 1%, due to energy efficiency and less economic growth. Also, energy demand is shifting towards lower carbon energy types, although the pace is quite slow – an evolution rather than a revolution. At the same time, the supply of crude oil has grown significantly, especially in the US (with shale as the new swing producer) and Saudi Arabia, resulting in an oversupply of total liquid fuels.
As expected, oil and gas producers have responded to the oil price crisis through cost reductions and M&A (mostly disposals), while maintaining dividends for obvious reasons – losing shareholders would be even worse. Cost reductions have so far consisted of cutting capital expenditures, deferring major capital projects, cutting operating expenditures and headcount, and pushing suppliers for better pricing.
Capex and opex
For instance, since the summer of 2014, overall more than 68 major projects representing 380 billion dollars of investments have been put on ice. Global capital spending has declined with 30% in 2015, and in the next 5 years, deepwater projects are heavily affected (73% of deferred project capex). Capex reductions have been especially hard on suppliers at the beginning of the investment curve and suppliers of commoditized services, bringing a new reality to their industries as well.
Has the industry responded adequately to the crisis? Actually, there is room for improvement. The industry needs more structural solutions, based on a continuous improvement drive. Some key words are: standardization, integration, optimization of supply chain, execution discipline, performance-based contracts, and specialization at planning stage.As part of these required structural changes a comprehensive perspective on innovation is also required, as much of these changes can only be achieved through innovation (core, adjacent, as well as transformational).
Optimization and standardization
It all comes down to one question: what do we really need? For instance, optimization of the supply chain means a joint design of processes instead of one-offs, which will lead to considerable cost reductions. Also, standardization can save billions of dollars. Why, for instance, use hundreds of different types of screws and valves when only a fraction of them are really needed? At the same time, the opposite is true as well: focusing on requirements instead of specifications in the tendering process can save costs. An industrial cleaning system in the Arctic area has to meet different – and more expensive - requirements than one in Africa, so why use global specifications?
Fit-for-purpose & role of innovation
Over the years, Deloitte has helped many oil & gas producers and their suppliers with the above. From long term strategic advice and restructuring to M&A and disposals. We discuss how the business has changed and how to respond. This involves a different mindset as well, from ‘this is what we do and how we do it’ to fit-for-purpose and simplification. At the same time, we also offer a longer-term perspective by advising on innovation-related issues, and how companies can organize themselves to do this efficiently and effectively.
14th Oil & Gas Conference
In fact, ‘Successful innovation – how does it work’ was the central theme of our 14th Oil & Gas Conference, which was held on June 27th. The conference featured a number of panel discussions and key note speakers such as Yuri Sebregts (Chief Technology Officer, Royal Dutch Shell), Joop Roodenburg (Chairman, Huisman Equipment), Marcel Wubbolts (Chief Technology Officer, Royal DSM), and Bart Cornelissen (Strategy & Operations, Energy & Resources, Monitor Deloitte). Again, this yearly event (the biggest Oil & Gas event in the Netherlands) attracted a large group of industry experts and fanatics, with a combination of inspiring speakers, interactive panel discussions and network opportunities.
For more information about this event, please visit our website.