By Christophe Bourdeau from Accenture Australia and New Zealand’s Resources practice.
THERE is no doubt 2020 will be a year to remember for the oil and gas industry, thanks to the dual threat of supply side disruptions and the widespread demand shock caused by COVID-19.
In Australia, the sector has seen hundreds of job cuts; and planned spending on major transformation projects has been halted.
However, in its June 2020 Oil Market Report, the International Energy Agency (IEA) revised its oil forecasts – it now expects demand to be 500,000 barrels per day more than it predicted in May. This modest improvement is somewhat offset by the ongoing loss within the aviation industry, with the IEA warning demand levels for oil are unlikely to return to pre-COVID levels for at least another 18 months.
It can be difficult, therefore, to see 2020 as a time of opportunity.
However, navigating unfamiliar territory successfully requires a proactive approach that responds to both short and medium-term requirements. It also requires clear thinking that separates the shocks caused by COVID, and the breakdown in March of talks between OPEC+ and Russia, and those disruption trends that were already in motion.
There are key actions oil and gas companies in Australia should take now to emerge stronger – fundamentally rethinking strategies, reducing structural costs, and sustaining development of technology.
With a steadfast approach and a commitment to the next, not just to the now, companies can build the kind of resilience which will see them through uncertain times.
A zero-based mindset (ZBx) means starting from scratch and building a budget based on what your costs should be, relevant to the outcomes you want. This is a modern alternative to the practice of examining past results and incrementally carving out costs.
Organisations need to shift from asking “how much should we cut?” to “what do we need – starting from a clean slate – to run our operations optimally?”.
This line of thinking should have a specific focus on the three areas likely to deliver 15% in CapEx and OpEx savings – third-party spend, working capital forensics and streamlining the organisation.
When examining every cost, the ZBx asks “why is this needed?” and then channels savings back into growth initiatives. The result is a business model that is sustainable over time while still enabling the ability to grow when the cycle turns.
Technology is key in the process of gaining forensic visibility over spending – for example, by leveraging a battle-tested artificial intelligence tool to quickly scan and assess spend and generate insights from efforts within and across the industry.
Keep your pulse on the market
Australian oil and gas companies know that understanding the market is critical. In times of crisis it’s even more imperative companies maintain a 24/7 view so they can make regular assessments of the changing situation.
A key part of the pulse check is to generate potential scenarios that are relevant to your business. Each scenario should identify leading indicators associated with it, which will trigger actions ahead of time. All scenarios need to be regularly reviewed and maintained to ensure they remain relevant to existing and anticipated conditions.
Now is also a good time to stress test business continuity plans under a variety of scenarios, including focusing on key gaps and shortfalls over three, six and 12-month periods.
Rebalance capital spend and portfolio
During the eye of the storm we re-evaluate all decisions —what makes sense to pursue or maintain? What have we learnt from the last few months of supply and demand shocks, and the small recovery experienced in recent days and weeks?
Take a surgical approach to assessing every asset, capital spend and new business decision to reflect the new reality—namely, lower and more volatile commodity prices. Stress test marginal assets and evaluate all new investment decisions with a higher bar for risk.
And remember, while decisions may be made it is a volatile environment, so prepare to make changes dynamically.
Manage customer and commercial risks, and unlock inefficiencies and value in support infrastructure
Your relationship with your customers is vital and now is the time to maintain intimacy with a view to partnering with them through “thick and thin”.
Where possible, reinforce partnerships and commitments to key customers through concessions and flexible arrangements – keeping your existing customers is always more efficient that sourcing new ones, and word of mouth is more important than ever during a crisis.
Now is the time to review agreements and identify optimal monetisation options and favourable contracts to carefully manage through the cycle.
It is also advisable to consolidate and outsource back office operations to realise a flexible cost structure and rationalise applications, and optimise IT maintenance costs.
Protect employees with a digital workplace which enables safe and productive ways of working
One of the major outcomes of the COVID-19 crisis has been the massive shift in ways of working – from remote and flexible work practices to complete overhauls of on-site health and safety practices.
It is not too much to say the way Australians work has been changed forever.
Now is a critical time to adopt a culture for the changing work environment. There are key actions all companies should undertake to ensure they are providing their employees with the tools and support they require, while also ensuring technology, security, connection and adaptation are at the forefront of the business model:
- Assess available technology and identify how to use existing technologies more effectively and test the ability to scale it for use by all people.
- Take the time to update plans for collaboration and workforce engagement. Focus on home and broader networking, security, upgrading other tools and capabilities, and helping people understand and embrace new ways of working with each other.
- Put emphasis on encouraging people to adopt technologies that will connect them to their team members and leaders in this new environment.
- Virtual environments are now a necessity – deploy and scale to make sure needs are being met
- Use this as an opportunity to enhance business continuity plans.
It is also critical to be aware of how the culture of working has comprehensively changed in just six months. The expectations of employees, particularly of those in office-based roles, has changed as people experienced flexible working and working from home. In some instances, this has also increased employee desire to work in an office environment. Therefore, workplace models must be adaptable to suit an ever-widening spectrum of needs.
In the face of the 2020 crisis, Australian oil and gas companies have had to act quickly to optimise their company’s resilience.
To survive and emerge stronger, companies must rethink the fundamental approaches to how they work – from identifying opportunities to shift cost and business complexity, to realising collaborative opportunities with operational and technology partners. This also means considering working with peers and competitors to consolidate activity or assets through a formal or loose joint venture arrangement.
There is no doubt the current time is a challenge for oil and gas companies. However, it is also presenting an opportunity to reshape priorities, identify weaknesses and build resilience against future shocks to our supply and demand chains.