The Oil & Gas (O&G) industry is facing incredible challenges amidst the COVID-19 pandemic. The industry’s demand destruction at the same time as its production contention has resulted in both the oversupply of resources and the subsequent oil price collapse. While challenging external forces are not new to O&G companies, they are finding themselves having to adapt with greater speed and agility to address the current landscape and prepare for a new market reality.
The current oversupply scenario has filled almost 7 billion barrels of global storage and cargo vessels are being used as crude storage rather than transport. The subcontractor services ecosystems have been the first casualties of the crisis, with contracts terminated, projects postponed, operations minimized, and rate-cuts demanded. The magnitude and implications of this challenge have motivated political alliances, agreements, and decisions previously considered impossible, such as widespread production cuts.
Supply/demand imbalance will impose a new economic reality that challenges organizations’ ability to maintain production in individual fields, sanction new development, or even explore new areas. Likewise, downstream runs have been curtailed and await an increase from the nominal 30-40 percent decrease in fuels purchases.
Even in the midst of all this, O&G companies are planning for their larger transformation that will address society’s expectation to transition energy beyond hydrocarbons.
Against this market backdrop, organizations need to think about the path forward on three timelines:
- Respond – Focus on short-term priorities of safety and operations
- Recover – Empower and enable organizations to adapt to the new situation
- Reinvent – Develop new operating models and capabilities for growth.
Respond – Focus on short-term priorities of safety and operations
O&G companies must prioritize the safety and health of mission-critical employees and partners. At the same time, they have to enable new ways of working, internally as well as with ecosystem partners. The industry approach of integrated operations is a best practice that other industries are now embracing to keep the lights on. Upstream organizations will leverage their remote and virtual ways of working to rapidly adapt to COVID-19 realities.
Companies are focusing on preserving free cash flow through cost-cutting, postponing projects, cutting dividends, and suspending share buybacks. National oil companies are balancing their social programs with these economic headwinds.
At the same time, companies are looking to stabilize IT and address cybersecurity to protect operations, technical integrity of facilities, availability of materials, and scheduling and deployment of labor. They are also revisiting risk analysis, technical and operational integrity and critical resources, and assessing individual assets’ financial sensitivity, and creating options based on technical considerations, interdependencies, and contractual obligations.
Recover – Empower and enable organizations to adapt to the new situation
Adapting for the longer term, companies must focus on:
- Performing cost takeout initiatives in procurement, inventory optimization and workforce demand alignment, and cross-discipline work planning/execution
- Examining financing options for ongoing projects to preserve cash
- Enabling tighter collaboration with strategic suppliers and partners to develop mitigation and crisis plans that protect capabilities and skills required for normalization
- Acting on asset analysis, inclusive of M&A and divestiture options
- Leveraging exponential technology for better process visibility and workflow efficiency.
Reinvent – Develop new operating models and capabilities for growth
As the new normal reaches a steady state, O&G companies have to focus on reinvention:
- Co-innovating across disciplines, including new ways of working that take into account lessons learned from the pandemic, operational boundaries of assets, and exponential technology
- Building on internal and strategic partners’ strengths to restore operation of highest yielding and economically sustainable fields
- Exploring new technical options for extended economic life of assets
- Embedding sustainability requirements and costs in all green/brown field analysis.
COVID-19 will be controlled. Critical infrastructure and O&G production will be a prerequisite to normalize all economies as the world recovers. As we emerge from the pandemic, society, shareholders and employees will have higher expectations for operational integrity to embed sustainability goals, as well as resilience to the cyclic economic challenges the industry still will face. Likewise, the forced transition to digital connectivity will afford new approaches and ideas to drive business performance, and also challenge some historically held ideas about what actions must be conducted where, and by whom.
O&G companies embracing the new normal will gain a competitive advantage in a more sustainable hydrocarbon industry. While new regulations may emerge, digitally enabled companies will be more equipped to respond with agility to marketplace volatility.
To support our clients, IBM has developed best practices and recommendations for actions to take now and after the pandemic. Click here to access our COVID-19 Action Guide and related resources.
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