Building resilience

ME PoV Spring 2020 issue

As the oil industry faces the biggest crisis in decades, how should leaders build resilience in light of an uncertain future?

The oil price collapse triggered by Saudi Arabia’s price war with Russia, combined with the COVID-19 pandemic, have precipitated a global economic slowdown that has left Oil and Gas (O&G) companies wondering in which direction the industry is heading. Russia’s refusal to curb oil production at the OPEC+ meeting held early in March 2020 had led to a rapid drop in Brent oil prices (see Figure 1). According to the Financial Times, Crude dipped below US$25, its lowest level since 2003, and fears of further price degradation are swirling. The situation in the O&G industry has been further affected by the radical stay-at-home measures taken by governments globally to tackle the highly contagious COVID-19 virus, drastically affecting oil demand and the larger global economy.

These circumstances have resulted in O&G companies experiencing a period of uncertainty threatening their profitability, with disruption to operations, and supply chains coming under pressure. In light of macroeconomic forces and an uncertain future, leaders are faced with the urgent need to respond and build resilience for their businesses. The question that remains centers on the specific actions to take in a crisis, and on the measures to future-proof their organizations from further uncertainty impacting the industry in the long run. 

Going forward, different scenarios can be considered. While a possible best-case scenario may be the quick recovery of oil demand and supply (Figure 3, Scenario C), O&G organizations must respond by taking further measures to prepare for a possible worst-case scenario, in which demand recovery is slow and a low oil price level will continue for longer (Figure 3, Scenario B). According to many experts, it is possible that the COVID-19 pandemic may have a significant impact on the already stuttering growth in oil demand as international travel may take time to recover, and as companies adapt successfully to home working arrangements, thus reducing commuting worldwide.

In response, O&G companies should not only address immediate, short-term tactical responses, but also consider longer-term strategic options to accommodate any future scenario. For the O&G industry, this exercise becomes particularly important as oilfields cannot be turned on and off overnight, given the costs and risks associated with shutting down production. In the shorter term, O&G companies will largely focus on liquidity, value preservation and continuity in operations to minimize losses, anticipate the potential scale of the crisis, and define tactical response measures such as budget cuts and supply chain stabilization. In the medium term, emphasis will be placed on profitability, in particular through savings on capital expenditure and maintaining flat dividends. This is also important for the medium-and longer-term as decisions today will have a longer-term impact given the nature of the O&G industry. For longer-term success, organizations will identify robust yet flexible strategic options in line with the energy transition, by anticipating the future business environment, assessing areas to focus their investment plans on (i.e. renewable energy, chemicals, retail), evaluating the lasting impact on areas such as the workforce, supply chains and innovation, and identifying new skills needed to fulfill new strategies. 

Future-proofing organizations is building resilience and placing it at the core of the organization’s strategy, addressing strategic drivers of various market environments to determine implications for industry dynamics and building optionality to gain flexibility to react to the most recent market developments quickly (i.e. invest or divest). More importantly, building resilience requires for the appropriate weighing of feasibility and risk against the upside potential, and against the risk tolerance of the organization. While designing a corporate portfolio resiliently may come at a certain price, portfolios that are future-proofed offer inherent value to businesses, i.e. maximized return on investment and minimal external interference from macroeconomic forces.

The question remains: how should organizations be future-proofed to achieve portfolio resilience? It begins with an evaluation of O&G industry trends and drivers--understanding what the landscape of the industry will look like in the next two decades, and identifying the main elements that have the potential to impact the future e.g. oil price shocks, pandemics, political disputes, and the energy transition. Evaluating the possible direction of the industry, and providing narratives to assess the respective implications on, among others development, investment plans, supply chains, capabilities and geographical footprint, further facilitates the understanding of strategic responses from consumers, market conditions and players. 

A wider lens perspective of the industry must then be followed by a zooming-in on the organization’s internal portfolio to determine its vulnerability and the exposure of its exploration, development, and production business units on the critical uncertainties impacting the business. The success rates of all portfolio components across scenarios must be assessed, and synergies between business units should be considered to identify spillover effects, and value-adding components. A projection into the future can ultimately be determined by deciding on offerings that are mandatory for success, and options dynamic in nature; offerings that are defined as “no-regrets” qualify as part of the future-proof of the portfolio.

In the face of certain challenges and perceived risks, resilience must start with leadership, who are rightly concerned about how their companies will be affected and what measures they have to take next. There are fundamental qualities of resilient leadership that distinguish successful executives as they guide their enterprises through crises. Leaders should simultaneously design from the heart and the head by empathizing with their employees, customers and their broader ecosystems, yet simultaneously adopting a rational line to protect financial performance from disruptions. They should typically be able to stabilize their organizations to meet the crisis at hand, while finding opportunities amid difficult constraints, and painting a compelling picture of the future that inspires others to persevere. Resilient leaders should remain focused on the longer-term horizon, anticipating the new business models that are likely to emerge and sparking the innovations of tomorrow.

Crises with deeply intertwined challenges offer learning opportunities and increased trust among all stakeholders involved, particularly as more value is created for society as a whole. It equips organizations to adapt quickly in the midst of an ever-changing global economy. Players in the O&G industry now have the opportunity to, not only address today’s challenges, but to address future ones if they take the right approach today.

by Bart Cornelissen, Energy, Resources & Industrials Leader and Managing Partner, Monitor Deloitte, Middle East
and Yasmin Fansa, Manager, Monitor Deloitte, Deloitte Middle East

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