Commercial awareness in the oil and gas industry

Commercial awareness in oil and gas industry and could be summed up as an interest in business and an understanding of the wider environment in which an organisation operates: its customers, competitors, and suppliers.

It might also encompass the understanding of the economics of the business and understanding the business benefits and commercial realities from both the organization’s and the customer’s perspectives.

Generally, it includes awareness of the need for efficiency, cost-effectiveness, customer care and a knowledge of the marketplace in which the company operates (current economic climate and major competitors, for example).

Such commercial awareness is prominent as a supply chain management professional and should evolve with time and complexity. In oil and gas industry its business value is an informal term that includes all forms of value that determine the health and well-being of the industry in the long run. Basically, it is about moving towards driving business growth and managing complexity while controlling costs.

 

Business growth is essential for every organisation, however, for the oil and gas industry, this would require adjusting their business models constantly while managing the complexity of controlling costs from time to time.

For instance, although prices appear to be recovering — Brent crude was up around 90 percent in 2016, to just over US$50 per barrel — they are still well below $115 per barrel, the post-recession high-water mark reached in March 2011. As a result, even as companies begin to view new investments in resource development as more attractive, the upstream oil and gas sector must move gingerly. Continuing price improvements will probably be slow, and supply may be constrained by the cutbacks in reserve development projects over the last few years.

The oil price collapse, which began in June 2014, triggered a wave of cost reduction among upstream businesses. Global oil and gas companies slashed capital expenditures by about 40 percent between 2014 and 2016. As part of this cost-cutting campaign, some 400,000 workers were let go, and major projects that did not meet profitability criteria were either canceled or deferred. These steps, combined with efficiency improvements, are beginning to bear fruit for the industry. A growing number of projects can break even at oil prices in the high $20s. One good example is Statoil’s Johan Sverdrup field in the North Sea, where the break-even price of development costs has been reduced to around $25 per barrel. That would have been unthinkable a few years ago.

But upstream companies will have to be diligent about containing other expenditure increases, particularly in the supply chain and resource development arenas. That may prove difficult because the wave of worker layoffs eliminated significant experience, knowledge, and skills. The loss of these capabilities could push development project costs up substantially if they are not carefully monitored.

Therefore, smart international oil companies (IOCs) will embrace new digital initiatives as a means of offsetting expense escalation and furthering the cost and efficiency improvements they have already achieved. Such digital initiative will have have to be innovative involving changes to the organisational framework, systems, and processes (business model) due to an uncertain marketplace (its customers, competitors, and suppliers). The strategic approach will drive business value for the oil and gas industry by supporting growth and managing complexities while keeping costs in check.

Reference: https://www.strategyand.pwc.com/trend/2017-oil-and-gas-trends

Picture source: http://www.myoilandgascareer.com

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