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  • Date: 2/26/2014

What next for the Oil & Gas industry? 

what next
While oil and gas companies could once have counted on the core issues of locating resources and meeting rising energy demands, the industry is now facing some fundamental challenges.

Most notable is the fall off in demand for fuel, particularly for transportation. This traditionally safe area of the market for oil companies has been hit by higher efficiency standards, especially in the US and China. Consumers buy more fuel-efficient cars while whole industries invest in more efficient production processes, all of which results in declining demand in OECD countries and elsewhere.


Technological evolution in oil and gas has hit the supply side too. Engineering advances have brought on the shale gas revolution and the ability to access oil from ultra-deep waters.


Beth Mitchell, co-author of the Chatham House report, What Next for the Oil and Gas Industry? has worked in asset management since 1989. She believes it is time for far-reaching changes.


“As a former fund manager I can see plenty in this sector that might concern investors and it is clear that while some players are examining their processes and internal structures, they are not necessarily doing so fast enough,” she says.


Big companies, big projects

The large company model – integrated companies trying to cover upstream and downstream activities – is well established. According to some commentators, they are a necessity given the sheer size of key projects within the Oil & Gas sector – tens of billions of dollars in some cases.


However, companies with strong financial resources have a tendency to continue as they are, for far longer than it is wise to do so, Beth argues. We may soon see bigger companies splitting into more functional, better-focused units, she suggests.


“There is, I would argue, a strong case for one or two of the larger companies divesting all, or the vast majority, of their downstream activities to concentrate on becoming large-project, upstream outfits – still with a portfolio big enough to take on large exploration projects without betting the farm if any one of them is delayed,” she says


Costs and expertise

Cost overruns are a significant issue for investors. There is concern that companies are investing much more in these large projects, but for diminished returns, although it is certainly true that some cost increases reflect the sharp rises in commodity prices of the past six to seven years – not an issue that the industry can be held accountable for.


However, the trend towards outsourcing has left the energy sector with a project management problem. Outsourcing expertise has resulted in too little control on projects, Beth argues. “The large companies need to become skilled systems integrators rather than tacked-together, contracted-out operators and to demonstrate more overall control in project design, monitoring and – importantly – safety.”


“I think companies will have to reconsider their position to meet shareholder concerns,” she says. “Clearly they can’t take everything back in-house. We now have global service companies that represent viable economies of scale, with enormous expertise and individuals who can transfer knowledge from one project to another. The industry isn’t in a position to jettison these but investors want to see far better project control as a priority.”


So what changes are needed? Beth argues that the market will always have a place for large-scale, upstream specialists or conglomerates with very good assets, but the large, integrated company model – the proxy national oil company model – isn’t sustainable in her view.


Driving these changes will require considerable talent and fortitude at executive level. “You have to have a chief executive who is willing to entertain new ideas and we’re beginning to see signs that the industry recognises the importance of adding value, rather than relying on size. One of the first things Peter Voser said when he arrived at Shell was, ‘Measure me by cashflow growth rather than by volume growth.’ We need to see more of that at the top,” she says.


However, the sector currently suffers from a talent problem across the board. Large oil companies and service companies have found it difficult to attract young engineers and technology specialists. “The talent issue is going to require considerable focus as we move into an era where technology is increasingly a differentiator for success,” says Beth.


Anthony Lobo

Partner, UK Head of Oil & Gas, KPMG

+44 (0)20 73118482

anthony.lobo@kpmg.co.uk

 

What next for the Oil & Gas industry?

What next for the Oil & Gas industry?

 

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