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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
The energy industry's accelerated evolution requires visionary change The Final Frontier parses the evolution of the oil and gas sector to map out a plan for going forward. The global energy industry is huge, and it is in disarray; between low oil and gas prices, climate change, rising development costs, and ever-mounting regulations, the need for change has been made crystal clear--but planning is much easier than implementation, and stasis is not progress. This book shows how redesigning internal operating models can bring about the necessary change in the implementation of upstream capabilities-driven strategies. From integrated, national, major, and independent oil companies, to the service companies in the upstream supply chain, there isn't an enterprise in the sector that cannot benefit from reduced costs and increased efficiency. Knowing that change is necessary is not enough--this book shows you what to change, and how to change it to get off the treadmill and start moving forward. With expert guidance through each redesign element, this insightful guide provides more than simply ideas: it provides real, practical guidance on transforming operations to keep pace with the changes and create lasting advantage. * Identify the most relevant organizational capabilities for your resource portfolio, as well as the changes that can translate into savings and efficiency * Build a workable plan for real-world implementation * Redesign the operating model most suited to the needs of your business on an organization-wide basis * Learn what to do differently and how to do it differently The energy industry has made great strides: our understanding of the global resource base, the nature of ownership and principal stakeholders, new technologies for resource development, and our economics and business models have all undergone a tremendous revolution, but now the more difficult--and more valuable--task begins. The Final Frontier helps you navigate the future and implement the changes necessary to avoid getting left behind.
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Table of Contents
Cover
Title Page
Copyright
Dedication
Acknowledgments
Abstract
Chapter 1: Introduction
A Vital Industry
What Now?
Industry Evolution
Ten Reasons to Update Your Operating Model
E&P Needs a New Agenda
Notes
Chapter 2: The New Agenda
Upstream Cost Transformation
“Cut Costs and Grow Stronger”
E&P Capabilities
Resource‐Based Key Capabilities
Notes
Chapter 3: E&P Operating Model Redesign
Internal Operating Model
Business Delineation and Performance Measurement
Organization Structure, Capabilities, and Workflows
Operations Management Processes
Delegation of Decision Rights
Informal Social Norms and Corporate Culture
Implications of Industry Evolution
Business Model Considerations
Notes
Chapter 4: PMI and Other Event‐Driven Redesigns
The Search for a Perfect Ownership Model
Preparing to Go Public
Key Success Factors
Event‐Driven Redesign
Note
Chapter 5: National Oil Company Considerations
National Oil Company Context
Sovereign and National Oil Company Strategies
Business Model Implications
Notes
Chapter 6: Collaborative Operating Models
Who Uses Joint Ventures?
Joint Venture Strategic Intent
Joint Venture Value and Valuation
Deal Structure
Joint Ventures in Practice—The “How”
Notes
Chapter 7: Financial Implications
Financial Strategy and Policy
Hedging and Trading
Notes
Glossary of Terms
Other Useful Links
Works Cited
About the Author
Index
End User License Agreement
List of Tables
Chapter 2: The New Agenda
Table 2.1 Well Architecture as a Function of Rock Type and Permeability
Table 2.2 Illustration of Key Costs and Capabilities, by Resource Type
Chapter 3: E&P Operating Model Redesign
Table 3.1 Estimated New Source Production Based on Portfolios
Table 3.2 Implications of Industry Evolution
Chapter 5: National Oil Company Considerations
Table 5.1 Methane Hydrate Pilots
Table 5.2 Illustration of NOC Capabilities
Chapter 6: Collaborative Operating Models
Table 6.1 Deal Structure Landscape
Table 6.2 Alternatives in Deal Design
Chapter 7: Financial Implications
Table 7.1 Illustration of Financing Alternatives for Oil and Gas Producers
List of Illustrations
Chapter 1: Introduction
Figure 1.1 World Primary Energy, by Fuel (million tonnes oil equivalent)
Figure 1.2 Upstream Evolution
Figure 1.3 World Resource Plays
Figure 1.4 Conventional Oil and Gas Discoveries and Field Growth, by Year
Figure 1.5 Worldwide Oil and Gas Production by Majors (MM boe)
Chapter 2: The New Agenda
Figure 2.1 Illustration of Upstream Cost Initiatives
Figure 2.2 Permian Break‐Even Oil Prices by Sub‐play ($/barrel)
Figure 2.3 Key Organizational Capabilities (E&P)
Figure 2.4 Subsurface Interpretation Workflow
Figure 2.5 Relative Technology Investment Activity, by Capability Area
Chapter 3: E&P Operating Model Redesign
Figure 3.1 Operating Model Elements
Figure 3.2 How to Achieve Relevant Scale in Capabilities
Figure 3.3 Upstream Portfolio Tool
Figure 3.4 Partnering Where Capabilities or Scale Are Advantaged
Chapter 5: National Oil Company Considerations
Figure 5.1 National Oil Company Competitive Dynamics
Figure 5.2 Sovereign Energy Strategy by Archetype
Chapter 6: Collaborative Operating Models
Figure 6.1 Portfolio Production by Operator (MM boe per day)
Figure 6.2 Joint Venture Strategic Intent
Figure 6.3 Comparison of M&A and JV Deal Effort
Chapter 7: Financial Implications
Figure 7.1 Financing Strategy Framework
Figure 7.2 Private‐Sector Capital for Energy and Infrastructure
Figure 7.3 Hybrid Security Structures and Features
Figure 7.4 Strategic Risk Management Framework
Figure 7.5 What Risks to Own
Figure 7.6 Spectrum of Risk Management Tactics
Figure 7.7 Illustration of Layering
Guide
Cover
Table of Contents
Begin Reading
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The Final Frontier
E&P’s Low-Cost Operating Model
Justin Pettit
Copyright © 2017 by Justin Pettit. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
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ISBN 9781119376545 (Hardcover)ISBN 9781119376576 (ePDF)ISBN 9781119376569 (ePub)
Cover Design: WileyCover Image: © ImagineGolf/Getty Images
To Krista, Trevor, Maddie, and Teddy, for their laughter, love, and patience.
Acknowledgments
I wish to thank the many people with whom I have had the pleasure of working over the past many years, for kindly providing the impetus, expertise, and resources to produce this book, especially my former partners and colleagues from Booz, UBS, and Stern Stewart & Co. I would also like to thank my previous editors, including David Champion, Don Chew, Art Klein, and Krista Pettit, for teaching me not to write like a scientist.
However, the views expressed herein are solely my own. Moreover, any errors or omissions are strictly my own.
I also wish to thank my IHS colleagues, including Ulviyya Abdullayeva, Ruslan Anisimov, Kurt Barrow, Stephen Beck, Ryan Carbrey, Andrew Day, Erik Darner, Jean Dugan, Blake Eskew, Steve Fekete, Philippe Frangules, Bob Fryklund, Etienne Gabel, Mark Griffith, Tim Hemsted, Mark Jelinek, Ed Kelly, Jerry Kepes, Chris Kiser, Roger Kranenburg, Mike Kratochwill, Nick Lowes, Fernanda Machado, Michael Marinovic, Paul Markwell, Michael Muirhead, Gil Nebeker, Charlie O'Brien, Alastair Reid, Darryl Rogers, Jamey Rosenfield, Senjit Sarkar, Ed Scardaville, Grigorij Serscikov, Nick Sharma, Curtis Smith, Leta Smith, James Stevenson, Dale Struksnes, Jim Thomas, Rodrigo Vaz, Dan Yergin, and Tim Zoba.
Finally, I wish to thank the many clients who have challenged and entrusted me with their needs and encourage them to please continue to do so!
Abstract
This book guides the reader through the redesign elements for the internal operating model of an enterprise in the oil and gas sector—including integrated oil companies (IOCs), majors and independents, national oil companies (NOCs), and services companies in the upstream supply chain. For simplicity, this book references these companies as Exploration and Production (E&P) companies.
A culmination of disruptive forces and evolutionary change in the oil and gas industry has conspired together to make the case for a new low‐cost operating model. The industry has experienced tremendous evolution in terms of: our understanding of the underlying global resource base, the nature of its ownership and principal stakeholders, technologies and methods for resource development, and economics and business models. While companies have been very focused on cost and productivity, beyond incremental accommodations to change, there has been little effort to redesign and transform internal enterprise operating models. Moreover, unlike other industries that have undertaken operating model transformations in response to disruptive industry forces, upstream companies rarely undertake operating model change on a systematic or enterprisewide basis, except post‐merger integrations.
The industry has made great strides, but now must sort through:
What different to do
How to do it differently
Operating models and operational excellence must now be on everyone's agenda—changes can yield profound cost savings and operating efficiencies. However, change is much easier to plan than to implement, and operating model redesign is rarely executed on an organizationwide basis.
CHAPTER 1Introduction
A culmination of disruptive forces and evolutionary change in the oil and gas industry have conspired together to make the case for a new, low‐cost operating model. The industry has experienced tremendous evolution in terms of our understanding of the underlying global resource base, the nature of its ownership and principal stakeholders, technologies and methods for resource development, and the economics and business models.
The industry was focused on cost and productivity even before the 2014 collapse in oil prices, but beyond incremental accommodations in response to change there has been little effort to redesign and transform internal enterprise operating models. Unlike other industries that have undertaken operating model transformations in response to disruptive industry forces, upstream companies rarely undertake operating model change on a systematic or enterprisewide basis.
A VITAL INDUSTRY
Notwithstanding tremendous advances in renewable energy, hybrids, and electric vehicles (EVs), and agreement among our world leaders to make great strides on behalf of climate change, oil and gas companies are, and will continue to be, an important contributor to the world's energy needs and to the world's economy. Most forecasts, even under aggressive growth trajectories for renewables, still call upon the upstream for one‐half or more of our energy in 20 years.1
In the United States, natural gas and petroleum have played an important role in our energy mix for more than 100 years.2 With the benefit of more than $1.5 trillion over the past 10 years, accounting for about one‐third of all new power generation capacity, renewables now represent a small but important source of energy (see Figure 1.1). Wind and solar provide 5 percent of all electricity consumed in the United States (nuclear power accounts for 63 percent of all non–carbon‐dioxide emitting power sources—the National Review estimates that it will take more than 100 years for solar to replace the electricity currently obtained from nuclear plants).3 Even with the tailwinds of government support at federal, state, and municipal levels, including regulations, tax credits, and direct subsidy, the US Energy Information Administration (EIA) expects “fossil fuels” will provide more than three‐quarters of US primary energy in 2040.
Figure 1.1 World Primary Energy, by Fuel (million tonnes oil equivalent)
Source: BP Energy Outlook 2035
WHAT NOW?
Oil and gas companies have been focused on cost and productivity since before the 2014 collapse in oil prices. Upstream operators have made enormous efforts through massive vendor concessions, capital project deferrals, reductions in force, and “high‐grading” drilling and completion activity to the most productive acreage.
For example, in 2016, one dollar of US onshore capital yielded twice the output (i.e., BOE/D) that it did in 2014, due to lower costs and higher productivity.
WHAT NOW?
For those asking, “Are we there yet?” sadly, the answer is no. For most in the industry, free cash flow is inadequate or even negative. The question to be asking is, “What now?”
The industry has experienced tremendous evolution in terms of our understanding of the underlying global resource base, the nature of its ownership and principal stakeholders, and the methods and technologies for resource development. And business models have evolved considerably with these changes, including the adoption and growth in usage of “drilling promotes” with a carried interest, farm‐outs, and other nonoperated ventures (NOVs), an industry supply chain with a wide array of field services companies, many forms of collaborative ownership and operation through joint ventures (JVs), state ownership and control of natural resources through national oil companies (NOCs), the adoption of corporate shared services models, experimentation with business processes offshoring and/or outsourcing, and much greater use of big‐data analytics and digital solutions within the core operations.
But beyond direct accommodations in response to each of these changes, there has been very little effort to redesign and transform internal enterprise operating models. Moreover, unlike other industries that have undertaken operating model transformations in response to disruptive industry forces (e.g., retail), the upstream rarely undertakes operating model change on a systematic or enterprisewide basis. The notable exception has been event‐driven situations, such as post‐merger integration (PMI) programs where promises of synergies may trigger fundamental reviews of upstream operating models, and major divestitures such as a sale or carve‐out/spin‐off, and initial public offering (IPO) preparation.
Upstream operators were already struggling to earn adequate returns before prices fell, but now face difficulties generating sufficient cash flow even to cover their basic needs—they do not generate enough cash flow to cover operating costs, capital projects, overhead expenses, debt service, dividends, and so on. With oil and gas prices remaining low, hedges rolling off, and sources of cash falling short of uses for cash, the upstream requires fundamental gains in cost and productivity. Many of the largest (and easiest) cuts, like vendor concessions, will not be sustainable over a full cycle. Furthermore, some of the biggest gains thus far are not scalable. And the future supply gap beyond 2020 requires a significant investment to find, develop, and produce resources that are very likely to be relatively expensive barrels.
There must be considerably more work, and more difficult work, to reduce upstream costs. The industry has made great strides for sure, but now the more difficult (but more valuable) task is to sort through:
What different to do (i.e., setting the strategic agenda)
What to do differently (i.e., defining the operating model)
The first question (i.e., the “what”) establishes a strategic agenda, and relates to choices in terms of the corporate and business unit strategies, asset portfolios, and business models. Setting the strategic agenda demands choices about what businesses to be in and what assets to own. Perhaps more importantly, the strategic agenda must establish in which “key capabilities” to invest and which activities to “in‐source.” It is impossible to be “world‐class” in every capability—every aspect of activity of the business and therefore critical choices must be made.
The choices about what not to do are often more important than the choices about what to do. Most upstream oil and gas enterprises have a portfolio of too many businesses, too many assets, too many geographies, too many resource types, and too many opportunities, all of which are competing for too little capital, not enough expertise, and too limited a talent pool. Therefore, the most important strategic choices are what not to do. Moreover, these choices require an iterative process to “reconcile” between the following three critical elements of the upstream enterprise:
Aspirations, goals, and objectives for the business
Opportunities and needs of the underlying resource portfolio
Organizational capabilities of the enterprise internal operating model and talent pool
The second question (i.e., the “how”) sets the enterprise operating model, and relates to the internal architecture of the company, its operation, and its governance. Defining the operating model—choices regarding the internal architecture, performance metrics, systems, processes, and culture has a profound impact on the performance of an enterprise. An operating model is effectively the “blueprint” for the internal architecture of an enterprise, its operation, and oversight.
Now, most research and experience with low‐cost operations tends to focus on innovation in business models (rather than enterprise internal operating models) to lower the costs of acquiring and serving customers and enhance the customer experience, often with digital platforms.4–6 Where there is research and experience with low‐cost operating models, it tends to be in consumer‐facing industries, with examples such as Costco, Dell, Southwest Airlines, Walgreens, Wal‐Mart, E*Trade, and IKEA rather than “B2B” industries, or specifically, the upstream oil and gas industry.7,8
INDUSTRY EVOLUTION
Over the past century, the oil and gas industry has experienced a significant evolution in terms of our understanding of the underlying global resource base, the methods and technologies involved in its development, and the nature of its ownership and principal stakeholders. In conjunction with this change, there has been considerable evolution in business models—but so far, the accommodations made to enterprise internal operating models have been largely incremental (see Figure 1.2).
Figure 1.2 Upstream Evolution
Source: IHS Energy
What began in the early days of the twentieth century as a largely entrepreneurial effort quickly evolved into big business, in part due to the scale of its requirements, in terms of capital and expertise—in the 1960s, oil supply was safe and abundant and not a constraint on economic growth, with excess capacity exceeding demand by about 20 percent of the free world's consumption.9 This fueled the corporatization and professionalization of the industry and facilitated tremendous growth in functional expertise, especially geological and geophysical roles, engineering, and other technical functions. The growth era of 1972–1981 drove large‐scale expansion. While the 1980s were characterized by low prices, layoffs, and consolidation, they also gave rise to innovations in 3D seismic, commercial beginnings for both horizontal and logging while drilling, and many new technologies and service companies.10
While the breadth and depth of technical capabilities flourished, so, too, did the opportunity for specialized field services companies to provide such expertise on an intermittent or as‐needed basis. Similarly, business model adaptations such as nonoperated ventures (NOVs) and joint ventures (JVs) enabled companies to participate in resource development and production activities beyond the reach of their core ownership holdings or core capabilities. These vehicles also facilitated a pooling of financial capital and technical expertise, which were often in short supply, while also syndicating the project risk—which was often considerable.
As oil and gas became big business, many host countries recognized the opportunity to retain a greater share of their resource sector's bounty and control through the adoption of state‐led national oil companies (NOCs)—another variation in the sector's business models. Consolidation among the largest integrated players (mega‐mergers) facilitated consolidation—affording large economic gains in the downstream refining and retail segments of the industry and a consolidation of conventional upstream business. Many companies adopted corporate shared services models for centralized procurement and other business roles.
Consolidation of the world's lowest‐cost conventional resources under NOCs and state ownership caused international oil companies (IOCs) and independent operators to venture further afield into new international frontiers and a growing array of resource types—including ultra‐deep‐water, the arctic, shale gas, tight oil, and the Canadian oil sands. These ventures generally represent much higher cost resources and require even more specialized expertise.
In the aftermath of the collapse in oil and gas prices, efforts to offset the effects of cost inflation and capital constraints have included the sale of many midstream and downstream assets, with many upstream operators exiting these parts of the value chain to focus their efforts (and limited resources) on the needs and opportunities of the upstream. Within the enterprise, this has generally included a migration toward asset team organizations, and investments in key capabilities such as enhanced subsurface capabilities, with improved data processing for 3D seismic, greater use of geomechanical modeling and reservoir engineering, enhanced recovery (EOR), and new applications for digital and big data analytics.
Despite this evolution—our understanding of the resource base, methods and technologies for its development, ownership and stakeholders, business models—there has been little effort to redesign and transform enterprise operating models beyond incremental accommodations. Unlike industries that have undertaken operating model transformations in response to disruptive industry forces (e.g., retail), the upstream rarely undertakes operating model change on a systematic or enterprisewide basis. The notable exception is post‐merger integration (PMI) programs, where promises of synergies often trigger fundamental reviews of operating models.
TEN REASONS TO UPDATE YOUR OPERATING MODEL
Many factors have conspired together to make the case for change—reasons to adopt a low‐cost operating model. A culmination of disruptive forces—including supply gluts in US shale gas and tight oil and growing consensus among world leaders to curb fossil fuel emissions—is reshaping the global energy landscape. Despite several years of relatively high prices, upstream returns had been low, both by historical standards and relative to the cost of capital. And it has been difficult for the majors to maintain, let alone grow, production or replenish reserves. Nor can we rely on high prices. Furthermore, research indicates a major shift in how capital markets value oil and gas companies, with multiyear income, cash flow, and operational measures (including reserves) playing a much more important role in stock prices.11,12
Evolving Global Resource Base
Enterprise operating models require a much broader set of key capabilities, some new, to accommodate our evolving understanding of the global resource base (see Figure 1.3). Furthermore, the replacement challenge facing the industry is formidable—the world needs ∼60 million barrels per day of new production by 2040 to offset declining fields and net demand growth. This must be sourced from an increasingly diverse, and expensive, resource base amidst choices between enhanced recovery from mature fields, new frontiers, deep‐water and ultra‐deep‐water, unconventional resources such as tight oil, shale gas, oil sands, and coal bed methane, and emerging but largely unproven sources, like the arctic, seabed methane hydrate, and carbonite reservoirs.13 The industry is pursuing higher‐cost resources, more technical/lower quality reservoirs, heavy oil, or harder to commercialize gas, and with more above‐ground risk.
Figure 1.3 World Resource Plays
Source: IHS Energy
Disruption from the “Ripple Effect” of Unconventionals
Rapid growth in US onshore unconventional liquids production and high levels of natural gas production (despite falling rig count and new well spuds) have contributed to keeping liquids, gas, power, and industrial feedstock prices low. This has fueled disruptive change throughout the economy and altered the competitive landscape for refiners, petrochemicals companies, and energy infrastructure. In the upstream, shorter cycle times and very different subsurface risk and cash flow profiles have challenged strategies with disruptive impact along several dimensions:
Increased short‐cycle supply, reduced prices, increased price volatility, and challenged the role of OPEC; there was a westward migration in the balance of power and a reorientation of crude and product flows and trade patterns.
Shifted capital inflows toward US onshore; private capital dove headfirst into the upstream sector; many exploration and production (E&P) companies created separate organizations for unconventionals investment and/or operation.
Provided operational blueprint for developing lower permeability oil and gas reservoirs internationally.
Challenges to pricing mechanisms, market liquidity, and competitiveness of global gas/LNG projects.
Increased cost‐competitiveness of US petrochemicals; capacity shifted away from foreign naphtha‐based markets toward US ethane‐based conversion capacity and downstream manufacturing.
Reduced US carbon footprint and increased cost‐competitiveness of US power‐intensive industry; there was more displacement of coal‐fired (and even some nuclear) power generation.
Discovery Challenges
The challenges of our evolving resource base are accentuated by a decline in conventional exploration—conventional oil and gas exploration is yielding lower volumes of higher‐cost, lower‐value reservoirs. We are replacing cheaper, high‐quality barrels with high‐cost/lower‐quality barrels (see Figure 1.4). Accounting for the rise of unconventionals—a relatively high‐cost resource—only makes this picture worse.
Figure 1.4 Conventional Oil and Gas Discoveries and Field Growth, by Year
Source: IHS Energy
The year 2015 marked the lowest point for conventional oil and gas discovery in many years—the absolute number of wells drilled generally has not been in decline as much as the volumes being discovered—a smaller number of large fields. Nor have there been many billion‐barrel discoveries—the Piri gas field in Tanzania was 1.9 Tcf (i.e., 318 million boe), accounting for 16 percent of total volumes. A growing proportion of discoveries are in the higher‐cost deep‐water (i.e., 1000 to 5000 ft) and ultra‐deep‐water (i.e., >5000 ft); discoveries in shallow water (i.e., <1000 ft) and onshore are in decline. And more gas than oil is being discovered, which are lower economic value resources.
The rise of unconventionals, plus successful openings in places like Mexico and Iran, bring great promise but do not address all of our replacement needs. Nor will growth in renewables. The global resource potential remains enormous but appraisal and development is costly and technologically complex. Many new plays still require economically viable fiscal terms, operating structures, and costs. We must replace “cheap barrels” in the context of an evolving and increasingly expensive resource base, disappointing conventional exploration results, project delays, and rising costs and capital intensity.
One bright spot has been the offsetting effect of “field growth”—upward adjustments made to the volumetric resource estimates of prior year discoveries—which now often exceeds new discoveries. Roughly 2000 conventional fields have their technical resources revised upward every year based on factors such as more/better data, de‐risking milestones, and enhanced interpretation. Therefore, some companies might opt to focus on existing basins and fields over traditional frontier exploration in order to reduce costs and mitigate declining exploration success rates. Others might opt to focus on unconventionals, which carry a very different subsurface risk (and cost) profile than conventional frontier exploration.
Fading Production
Upstream operating cash flow is both inadequate and in decline. Despite a period of high prices, returns in the upstream oil and gas sector were already down (i.e., both relative to historical returns on capital and relative to the cost of capital) well before the 2014 collapse in oil prices. Moreover, as illustrated in Figure 1.5, major producers struggled to grow their production (and to replenish reserves). Production is fading, operating margins have shrunk, the supply chain of services companies has telegraphed that its prices must rise, and the amount of invested capital has soared.
Figure 1.5 Worldwide Oil and Gas Production by Majors (MM boe)
Source: IHS Energy
Many large NOCs, such as
