The oil and gas industry finds itself at the center of a “double black swan” event combining COVID-19-driven reduced demand and a supply glut resulting in the sharpest, fastest oil price drop in decades. In our recent blog, we explored both the short and long-term actions that industry players must take to protect themselves and their workforces, operations, and customers to ensure survival and eventual renewed profitability:
- Devise a care strategy for your workforce and a resilience strategy for your business.
- Apply technology to gain efficiencies and accelerate innovation.
- Put every element of your business on the table.
As the pandemic has unfolded, we’ve tracked responses across industries and believe that most organizations are progressing along three broad horizons of response:
1. Horizon One: Viability
Decision-making focused on immediate crisis response, a high level of unknowns, crisis-mode leadership, and solidarity across the workforce
2. Horizon Two: Stability
A more comprehensive alternative analysis based on the development of multiple options and scenarios
3. Horizon Three: Adaptability and durability
A complete, comprehensive analysis of the impact to demand, supply chain, customers, competitors, and government response
In our conversations with organizations across industries, we believe most have progressed through the first horizon of viability. To accelerate crisis response, oil and gas companies have drawn on a playbook and high level of preparedness that’s unique to the industry. Securing the safety and viability of people and assets is well-trodden territory for an industry accustomed to preparing for and responding to significant incidents around the world (e.g., natural disasters, geopolitical events, macro-economic trends, etc.). Yet, today’s crisis has also created new dynamics that are less familiar, including the global nature of the initial response and the immense pressure on the workforce as employees confront uncertainty for their families, friends, communities, and society at large.
As oil and gas companies chart their next steps in the second and third horizons of crisis response, they'll need to consider several trends that are likely to persist, including corporate workers' return to the office, stabilizing energy markets, and maturing ways of working that reinforce best-practice social distancing and cleanliness behaviors. Evolving into the second horizon of stability can create the illusion of “returning to normal.” However, business leader sentiment is starting to amplify a new reality. Sixty-five percent of attendees across industries at our recent Horizons of Response webinar do not expect their businesses to return to their former state. When entering the third horizon, it will be imperative for oil and gas companies to examine every element of their operations and confront the crucial question, “What is the enduring impact of the events of 2020 on our business?” Answering this question and prioritizing crisis recovery efforts for maximum value starts with Change EconomicsSM.
Change Economics delivers a complete view of the value drivers of change and transformation, enabling more effective prioritization of improvement initiatives, and providing impact across the critical dimensions of transformation value. The result is a clear set of change and transformation priorities that accelerate growth and improvement.
• Business: Precision in meeting stated performance targets including revenue, profitability, and efficiency in a low oil price environment
• Customer: Customer experience differentiation through improved customer satisfaction, loyalty, and advocacy—ensuring a stronger focus on the consumer
• Employee: Improved employee satisfaction, engagement, performance, productivity, retention, and readiness for change
• Stakeholder: Precision in meeting stated performance targets including revenue, profitability, and efficiency, along with society's expectations for energy production
• Time and opportunity: Accelerated realization of strategic business priorities
• Enhanced capability: Sustainable competitive differentiation through the capability for continuous change and transformation
• Risk and flexibility: Improved risk mitigation and management; Increased flexibility and adaptability to seen and unforeseen environmental factors
These fundamental value drivers remain constant. Yet, as your response focus moves away from viability and towards durability and adaptability, their relative priority changes. In other words, oil and gas companies can adapt their emphasis on different value drivers to maximize outcomes through and beyond crisis recovery. Grounded in a comprehensive picture of value, Change Economics helps you design a strategy that can flex to your evolving needs based on factors inside your organization, throughout the oil and gas industry, and beyond.
Energy leaders must adapt to a new reality. They cannot compete for capital in the way they have historically. Companies in the industry now account for a mere three-to-four percent of the S&P 500 capitalization versus 15 percent just ten years ago, and we’re in a price environment that makes much of existing operations potentially unattractive. The “shale gale” blew strongly across the U.S. for several years as a transformative catalyst for oil production. Yet, free cash flow remained scarce, and the business environment looks very different today. To hedge against some of this risk, large companies remain relatively diversified in their operations. In a new normal, that combines low prices, changing consumer habits, and evolved societal expectations. This climate makes it imperative to consider the value of risk and flexibility as part of a comprehensive transformation strategy.
While demand for oil, gas, and their derivative products is likely to be a constant in the foreseeable future, change is equally constant. Setting a strategy to confront this change is key to a durable future for the industry. As consumers increasingly demand that oil and gas companies address clean air, renewables, carbon, smart transportation, and earth-friendly plastic products—all amid crisis recovery—the industry's future leaders will apply a comprehensive understanding of the value of transformation to prioritize their paths forward.