Houston OTC Leadership Dinner Executive Summary

The global oil and gas industry has endured the worst downturn in 30 years.

An overall reduction in spending on exploration and production, particularly in the UK and USA, has resulted in a dramatic fall in rig counts for onshore and offshore activities and has led to significant changes in operating systems across all aspects of the supply and value chains.

From the heights of $120 a barrel in the summer of 2014, commodity prices plummeted to sub $30 in January 2016, with a resulting fall in activity of up to 70% as record inventory levels were reached.

Opinions on what the future holds vary greatly, from concerns that a suggested influx of up to 1 million barrels a day of Iranian oil could impact heavily on global supplies, to suggestions that the market has at last entered a deficit. 

There are early signs that the haemorrhaging, which began more than 18 months ago may finally have been stemmed. While we have seen false dawns before in the current down cycle, there is every indication that this time it might be different. From predictions that oil could fall to $10 per barrel earlier this year, the price has worked its way back up to a resistance level around the $50 mark.

While the industry has to get used to the concept of “lower for longer” rather than a steep upswing in activity, the moving of the oil price in the right direction gives grounds for optimism.

Questions to be considered now include: how will the industry adapt and respond to the new commodity price environment, what will it do to ensure the momentum is maintained and what will the impact be on existing and potential employees?

Set against the backdrop of these challenges, FWB Park Brown held its annual leadership dinner in Houston, Texas during the week of the Offshore Technology Conference. The event, attended by more than 100 leaders from the energy industry and governed by Chatham House Rule, considered a range of topics relevant to the industry today and generated highly valuable insight and debate on the directions the industry should take.

The keynote speaker was Derek Mathieson, Vice President, Chief Technology and Marketing Officer for Baker Hughes Incorporated, who addressed the audience in a personal capacity. He invited attendees to consider six key challenges faced by the industry as it looks to find its focus in the years ahead. This paper captures the issues, opinions and comments from attendees to each of the points discussed.

Derek Mathieson, Mary McIntyre and Stuart Cochrane

Entrepreneurialism on the rise?

Is there more entrepreneurialism taking place inside larger companies? Are firms becoming more nimble and flexible, faster paced and larger risk takers? What roles are private equity and venture capital playing in the new world of oil and gas? These were some of the questions considered by the audience at the event. The general consensus among the gathering was that there was a significant degree of entrepreneurial spirit still within the industry, but where that existed and how that was channelled was dependent on the size of the company.

As one delegate noted: “Traditional entrepreneurs in small companies are used to stretching every dollar to the limit, but this is a very difficult dynamic and culture to replicate in a large company when cash is managed more centrally and the P&L tends to drive decision-making.

“The risk of failure in a start-up company could be catastrophic, while such risk in a large company can be managed with a diverse portfolio – and the potential consequences can lead to a very different culture. This translates into a more high-risk high-reward outcome in smaller companies which allows them to be more flexible, faster paced and larger risk takers.”

It was agreed that the industry has seen a greater influx of private equity and venture capital entrants over the years, particularly in the growth of smaller start-ups in the US shale sector, and that their influence could only grow.

“Their influence will remain strong and will continue to provide lower tier competition to the large integrated companies in both the oilfield services and the E&P sectors,” said one attendee.

The digital challenge

The biggest, most obvious way in which digital technology is impacting business models is through its ability to potentially increase efficiency and scalability. In the best of examples, it has caused businesses to no longer be vertical but rather horizontal and has led to the breaking down of silos, walls and barriers, allowing even the smallest, local organizations to create the opportunity to develop an international presence.

In the oil and gas industry, the concept of the digital oilfield and a wider adoption of digital technology are far from new, yet the audience noted a lamentably slow shuffle towards its adoption. One delegate described the oil and gas industry as still in the Dark Ages in terms of digital technology use and suggested the slow progress was part of the wider industry reluctance to adopt new ideas and process.

While other industries such as electronics recognized the notion of ‘fast failure’ as a method of quickly reaching the optimal solution, the heavy capital expenditure in oil and gas facilities and projects means the fast failure idea is not typically an option for consideration.

It was suggested that the nature of the industry was to focus on projects in their entirety e.g. the adoption of digital technology across an entire asset, and the requirement to introduce digital technology at such a scale was prohibitive. It would be better to “start with the smaller problems and work up from there.”

The employee and the company

The downturn in the oil price has resulted in the global industry shedding more than 250,000 jobs since the summer of 2014. However, as one delegate said, “the lights are still on” and there will be a need to recruit new blood once any upturn gains momentum. The question of how to attract those new personnel to an industry which is cyclical in nature and, in some areas, may not seem to suggest a long-term career, was seen as a significant challenge.

One delegate highlighted the unrealistic expectations of some of today’s graduates in terms of career path and promotion, while another said younger people would have to appreciate that the oil and gas industry of the future will not look the same as that of today or the past.

“The reality is that in this industry, salaries will be lower going forward than they may have been in the past so people new to the industry or looking to enter will have to ask themselves whether they are prepared to work harder for less money. They need to readjust and adapt to what has happened in the world in the last 18 months.”

However, the industry has to make itself more attractive to new entrants. “We need greater diversity in the mix, mind-sets and generations within the oil and gas industry,” one said. “The loss of 600,000 people through the great crew change creates great opportunities for the Millennials and Gen Y. Why wouldn’t we look at diversifying the mix when the fire of the latest downturn is raging and we need to respond to it?”

The global or local dilemma

As the industry adjusts its operating activity to meet the ever-changing business environment, it challenges the entire value chain to reassess its business models from a local to a global focus. However, the event heard that one of the largest problems in scaling or adjusting business to new markets can be a lack of free cash flow.

More and more countries are applying various in-country-value programs, which focus on stimulating and maintaining their own economies rather than global operations with little or limited local footprint.

Another recurring theme throughout the evening was the ‘crew change’ evolving from global to local resources. Many companies experience challenges in this area and it was suggested that a solution could be to establish even closer relationships with professional recruitment firms to secure the best candidates.

Is it more or less profitable in today’s world to globalize? The overall view from the audience differed depending on the sector involved. However delegates said there were higher chances of meeting profitability targets from a global spread of activity to offset against different geographical business cycles.

For new and future development projects, the solution may be to agree on standard processes across continents to better access markets, with common rules and a common understanding of clients’ expectations. Such a process may lower margins in the short term while smarter, collective working is introduced, but would have significant, longer-term benefits. 

Short-term vs long-term strategy

Attendees agreed the type and size of business and its ultimate end game would determine the strategic direction taken. As one delegate said: “Short-term for a service company can be one week; long term maybe a year. For operators, long term can be 10 years out.”

For a private company, the long-term strategy may focus on an exit plan; while for public companies the goal may be continuity – both strategies drive specific behaviours.

In terms of recruitment, it was agreed that many of the larger companies with a strong balance sheet would be expected to be in a better position to retain talent than smaller companies, which have trimmed all non-essential expenditures from their activities. It was noted too this might lead to challenges in ramping up recruitment at the appropriate time and thus impacting continuity and effective long-term planning.

While such smaller companies may thrive on their entrepreneurial thinking and innovative processes, the message was clear: “Stop thinking so much about the short-term because it will create recruitment difficulties going forward.” This also impacts a company’s ability to bounce back effectively when the market turns.

However, the growing influence of the capital markets such as investors, private equity and venture capital is often dictating strategic focus more towards the short-term than the long term.

There was also concern over the extent to which strategy was disseminated internally. Some companies shared strategy throughout all their operations while for others it went no further than senior management.

Corporate image and social license to operate

Attendees heard that while image matters, the industry or an individual’s ability to communicate with its audience is very much more important. The oil and gas industry’s image has never been outstanding, but while its operations have generally been out of sight it does perform well. On the occasions when the industry has suffered an accident or incident, it generally cleans up effectively.

However when the industry moves to operate much closer to population centres – for example in fracking – suddenly it can find few friends and advocates. The industry will face a recurring challenge with its image as it moves towards an up cycle and tries to recruit a new generation – the image of boom and bust will prevail.

Effective communications and engagement through ownership of the oil and gas story will be the key to moving the image of an industry that is generally misunderstood by the public at large to one of greater acceptance.

As one attendee said: “We have an extremely positive story to tell about the massive technological strides we continue to make and our importance to the provision of energy. It touches all of us, and we find when people understand our common purpose and our critical role in the bigger picture there is a greater willingness to engage, especially in recruitment.

“But if we don’t own our industry’s story then everyone else will. All of us, across all geographies, need to share that story to better our image and encourage the next generation to join us.”

One delegate said that the public liked the idea of green energy and a green future but that they often lacked an understanding of the economics or practicalities of achieving that. Renewable energy will be more expensive in the short term, and it does not mean that we will no longer need oil and gas as these commodities will remain building blocks of almost every aspect of our lifestyles. As ever and as in all things there is a balance.
 
Conclusion

Attendees were reminded that while the industry was living through what Derek Mathieson described as “some pretty unpleasant times” and that it had experienced some ‘catastrophic’ changes across the board, it did feel like the worst in terms of oil price and its environment were behind us.

Mary McIntyre, Managing Director, FWB Park Brown said: “The industry has been hit extremely hard and, while we are not out of the woods by any means, we are starting to see some stability.

“That sentiment of cautious optimism was evident from those who attended our annual leadership dinner, and we expect that, as the industry gets back on its feet, the need for appropriate recruitment advice will play an enhanced role.

“The industry that emerges from this current downturn will be very different from the one that went into it, with a greater realism in terms of salary expectations and more cost-effective processes.

“In turn, oil and gas must take ownership of its story and improve on communicating the benefits of it being an exciting and highly interesting sector to work in, if it is to attract the best people to take our industry forward.” 
 
The overarching takeaways from the FWB Park Brown leadership dinner are:

• Entrepreneurialism remains strong in the oil and gas industry, particularly in smaller service companies
• There has been an increase in private equity and venture capital involvement, and this will continue
• Oil and gas remains in the Dark Ages in terms of digital technology uptake; we can take this opportunity now to bring it forward
• New entrants will have to adjust their career expectations post the downturn
• Globalization and the adoption of standardized processes can offset the impact of regional business cycles
• Think long term rather than short term, especially in recruitment
• The industry and all of us in it need to own and communicate better its positive story

Mary McIntyre continued: “Our event delivered a fascinating and valuable insight of where the industry sees itself right now and going forward.

“There’s a clear acceptance that a resumption in oil price does not mean we can simply revert to our old ways, and a recognition that companies must adapt and evolve and communicate better across a range of levels to meet those new challenges, or face the consequences.”