How to cope with the oil shock

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Businesses in the oil and gas industry are adjusting to oil prices that are at a six-year low. While the immediate future remains unclear, many expect the price of crude to, in time, reverse its recent decline. In the full article from which this abstract is drawn, we explain how companies in the upstream oil and gas sector can get ahead of their competitors by developing strategies that will work in today’s low-price environment, but also encourage “business resilience” in the face of future market uncertainty.

The current lowprice environment demands that upstream businesses make changes to their strategy and operating models.

Building a business resilient enterprise: six key steps

EY’s experience and research has suggested that the following six factors are crucial to developing business resilience in the upstream sector:

  1. Agile operating model
    A successfully agile operating model focuses on recalibrating a firm’s organizational architecture so that costs are cut in the short term, while simultaneously protecting its most important value drivers, such as the unique talents and skills of its workforce. In our experience, an agile operating model also typically involves fostering lean and integrated supply chains, ensuring that the organization has a well-defined purpose and that technology and innovation are embedded.
  2. Selective investments
    In a volatile market, effective portfolio management relies on actively monitoring investments against a portfolio return objective. Companies should also work hard to evaluate their portfolio, selling off any investments that they do not manage well or identifying assets that would be better managed as part of a strategic partnership, for example.
  3. Strategic partnerships
    During a downturn, forming strategic partnerships can be a good strategy for tackling risk and improving output. For instance, an upstream business might form a strategic partnership with a drilling contractor, rather than just simply hiring the contractor.
  4. Integrated supply chains
    Although it may well be necessary for a producer to request price drops in order to cut costs in a low-price market, we also recommend that this is twinned with an effort to build integrated supply chains involving cooperative, strategic partnerships with their suppliers.
  5. Commercial excellence
    Upstream companies make money and create value in two ways: on assets (bringing the hydrocarbon out of the ground) and on paper (selling the hydrocarbon to customers). The integration of commercial and operational activities is what we call “commercial excellence,” and its focus is on top-line growth and extracting maximum margin for the hydrocarbon that is extracted.
  6. Operational excellence
    When it comes to achieving operational excellence, the key is to ensure that all processes are lean and efficient – without creating any associated increase in risk – and that the management structure is optimized to serve this end. We have found that speeding up the decision-making process can lead to big dividends in terms of increased output and reliability. For example, one energy company was able to reduce costs by no less than US$1 a barrel.

The complete article was written by:

  • Fay Shong
    Principal, Advisory Strategy, EY, US
  • Jim Franks
    Principal, Advisory Strategy, EY, US

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