Vukani Mngxati | CEO | Accenture Africa | mail me |
The oil and gas industry are no stranger to supply and demand shocks, having faced more than a dozen such blows over the course of the past four decades. Most of the supply side blows were the result of sudden supply pullbacks in reaction to geopolitical unrest.
On average, the impact these market-tightening shocks made, lasted anywhere between one and six months.
Demand-side shocks were largely due to macro-economic contraction and have been closely connected to larger volatile economic cycles—in terms of size and duration.
The COVID-19 impact on the industry appears devastating – many companies face an existential risk. The immediate response for all oil and gas companies should be to ensure the safety of its workforce and continuity of operations.
Beyond that, many will announce cuts in broad capital and discretionary spend. However, the industry needs to recognise that both this cycle and the post-cycle will be different, and that it requires taking different measures.
Setting up a 24/7 virtual command centre
The current oil and gas crisis require a different response from the 2014 (or any other) crisis – and a different playbook. At the heart of this difference is the volatility and plan reset in the current environment.
Oil and gas companies must discard their annual planning cycles – and quarterly crisis-driven executives’ meetings of the past – and develop cross-geography and cross-functional, high-capability virtual command centres around the clock.
At minimum, an effective command centre should bring together the rapidly changing market signals and inform internal actions.
The virtual command centre should be action-oriented, risk-management-focused and optimised for business continuity.
Developing a command centre rapidly, requires a new set of skills to monitor market events driven by government actions and OPEC+ to:
- Provide deeper insights on second and third-order impacts on the company;
- Link market events to prioritise and highlight which likely bookend scenarios to invoke;
- Continuously assess the impact of the scenarios on action imperatives;
- Function as a high-powered cross-functional project management office to ensure changes cascade through the organisation rapidly and clearly; and
- Scan for and deploy new tools to enable all of the above in an extended COVID-limited environment.
As companies have quickly become accustomed to operate remotely due to the regulations that guide South Africa’s national response to the COVID-19 pandemic, those who are able to do so by design, will increasingly realise the benefits of such virtual operations, which will no doubt gradually eradicate the requirement for expensive and maintenance-intense brick and mortar infrastructure.
Fast-tracking competitiveness
The virtual command centre’s view of the market is going to demand that most oil and gas companies shore up cash coffers.
However, given multiple rounds of operational efficiency, workforce rightsizing, competitive sourcing and wider transformation efforts over the past five years, energy companies are short on cash optimisation ideas that would hit the bottom line fast. Resorting to across-the-board cuts is not the answer.
Organisations will 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 three areas likely to deliver 15% in CapEx and OpEx savings:
- third-party spend,
- working capital forensics and
- streamlining the organisation.
The need to strategise spend at pace is going to force companies to accelerate digital transformation to embrace new tools and methods such as AI-driven mapping technology to understand cost variances, new scripting tools to process data, visualisation tools that enable focusing on the opportunity and collaboration tools to drive actions.
Fortunately, companies likely have the right budget tools already. If they link them to industry-leading practices, they can create a new kind of ‘spend visibility’. In-house or external experts make it all the easier to create and develop real, practical solutions to budget woes quickly.
Improving liquidity
Companies have faced other cash crunches before. They usually responded by slashing capital spending between 20% and 40%. While this protected certain costs, they had to sit and wait for the market to rebound.
Today’s market simply won’t tolerate the same response. Instead, companies should look at their competitiveness as a foundation to measure cost effectiveness.
The survivors from the COVID-induced recession of 2020 will have wielded a scalpel in a connected fashion to cut portions of spend across three areas:
- working capital,
- capital projects and
- the portfolio.
They also will have gone deep without sacrificing capability while realising that focusing only on capital project cuts would not have provided enough firepower.
Unlocking operational and commercial resilience
Operational resilience in nearly every business depends on two critical factors.
The factors are:
- a connected, flexible workforce and
- a robust supply chain.
These two assets – intangible as they may be – can entail developing a contingent workforce and setting up remote operations.
Immediate steps you can take to connect your workforce and strengthen its flexibility while enhancing safety and increasing productivity, is to create an Elastic Digital Workplace.
This involves:
- Embedding a culture for a dynamic work environment;
- Deploying and scaling collaboration tools, including virtual environments;
- Enabling reliable, secure and ubiquitous remote network connectivity; and
- Enhancing business continuity plans.
A critical component of building resilience under the current circumstances, is to make sure the business does not develop a trust deficit by not communicating with and engaging employees in every aspect of the adjusted strategy.
Such a trust deficit can be challenging to overcome, and typically has a notable negative affect on productivity.
Leveraging support infrastructure
Companies often miss untapped value when restructuring – and paradoxically even liquidity – trapped in back-office functions and committed technology support.
To emerge from the current crisis – and navigate through any other in future, companies will need to make their cost structure leaner, more variable and flexible.
They will need to move beyond building ecosystems to power networking through forming symbiotic partnerships and alliances, or build consortia to maximise their scale and investment.
While the industry has dug itself out of many blows and proven naysayers wrong in the past, it is now faced with concurrent disruption at an existential, system-wide and player level – risks that will truly test its tenacity and durability. And while it may force a number of players to fold, those that will emerge will certainly be leaner and stronger.
