Where the oil and gas industry are well-positioned for value creation

Coming out of a period of stagnation and major market challenges, the oil and gas industry is now looking at the considerable potential for innovation. This progress hinges on the sector’s ability to transform operations around digital technologies, particularly in areas such as the supply chain, where the sector is well-positioned for value creation.

As technologies for extracting unconventional hydrocarbons improve and LNG is
considered to be the bridge technology into a “green energy future”, International Oil
Companies (IOC´s) found them self increasingly often with the choice of setting the focus on extracting conventional or unconventional reserves. Conventionals are relatively easy to explore and produce, from a geological and technical point of view, but mostly located in countries with high political risk. At the other side, unconventionals are definitely more resource intensive but located in countries with a stable political situation.

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As a consequence, there was an economic battle initiated between the biggest producer of conventional and unconventional fossil resources. Resulting, the current market change where increased global supply exceeded the global demand. However, in accordance with McKinsey here are five strategies IOC’s can exploring to adjust to the changing environment.

1. Cost cutting: A diet for the overweight

The cost-cutting is required to address falling revenues has come as a shock to an industry that over the years had grown fat and happy on high prices.

 2. Vertical integration: One-stop shop

Collaboration is a particularly effective way to lower costs and simplify contractor management. Combining equipment, software, and engineering, or other combinations of service offerings can unlock significant value for customers.

3. New revenue models: Sharing financial risks for future rewards

New revenue models have emerged across the oil and gas sector, including performance-based contracts that combine equipment and services, and participation in project financing (equity in exchange for equipment and service). In this way, IOCs are able to give operators more flexibility by reducing their cost base and need for investment in difficult times. This loads more capital expense on the shoulders of IOCs, but it also can create a more stable income flow.

4. Consolidation: Increasing concentration

McKinsey believes that there will be much more consolidation across segments of the oil and sector as oil prices stabilize. Many companies today are a fraction of their former scale; they could benefit from the savings in costs provided by a merger with a direct peer. The drilling sector, in our view, is ripe for consolidation.

5. New equipment and service models: Design to value

Sustained investment in new technologies is allowing some companies to capture new growth. Today’s low oil price has created a new passion for efficiency, which highlights new technologies that can drive efficiencies—albeit at a limited investment cost.

Going forward, IOCs should ask themselves whether they are well positioned to face a volatile and uncertain future. To test whether they are pursuing the right strategies, they should ask themselves a few critical questions, such as the following:

  • Do you operate a supply chain model that is resilient to changes in the industry?
  • Do you have the right collaboration within your supply chain model with customers and other suppliers?
  • Are you able to address the need to reduce cost within your supply chain model for example, through standardization?
  • Are you using digital/data and analytics as a potential game changer within your supply chain model?

By addressing these focus area the oil and gas sector could be well-positioned for value creation in the long run.

Reference: www.mckinsey.com/industries/oil-and-gas/our-insights/five-strategies-to-transform-the-oil-and-gas-supply-chain

Picture source: https://blog.riverlogic.com/how-to-master-supply-chain-optimization

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