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Thought Leadership Blog
The Day After: How the Gulf
oil spill has forever changed the short-term plans and long-term strategies of
all players in the industry.
July 10, 2010
David C. Skinner
Chairman, Decision
Strategies
The Day After
Events like 9/11 crystallize in our minds a true sea change
in the world and how we perceive the future. These events are typically so
dramatic that we can usually remember where we were the day of, or the day
after, such terrible events. The day after the Horizon explosion on April 20,
2010, I was having lunch with some industry friends. We were distressed by the
accident and began to explore what this could mean for the Gulf of Mexico, BP,
and the industry as a whole. Over the last few months, I have visited with many
more friends and colleagues at major oil companies, independents, service
providers, and businesses that have been impacted by the accident. This paper
captures many of the concerns and begins to explore the consequences of the
spill and how it has created greater uncertainty for all players and their plans
for the future.
Without a doubt, the oil and gas industry will be dealing
with the consequences and the lessons learned from this accident for years. Like
the rock thrown into a pond, the effects will ripple further and further
outward. The immediate and obvious changes will include tougher inspections and
permitting processes, more rigorous safety standards, higher F&D costs, and
elongated timeframes for bringing projects online. Other changes that will
probably occur are requirements for significant investment in new clean-up
technologies, regular oil spill drills along the coast, and greater
coordination between industry and government. The industry needs to prepare for
major changes in the way business is done, especially in the Gulf of Mexico.
Ripple Effect of Potential Changes
Near-Term Impacts
Oil companies naturally and quickly looked inward first. Most
of my clients and industry friends acknowledge they have enacted changes (ripples)
to operating policies, both offshore and onshore, to deal with potential oil
spills. The changes range from how business units interact with Health, Safety,
and Environmental groups all the way to putting in place new internal
governance procedures for decision-making.
I anticipate that changes will continue with increasing input from governmental agencies, but these near-term changes will not be the
factors that transform the industry.
Significant Changes
are Just Over the Horizon
What will drive the industry to make significant movements
of invested capital? It will be the outer ripple effects from significant
government legislation that lead to operator portfolio changes, player
collaboration and consolidation. The industry must prepare to deal with these
major strategic shifts as complex public, political, and competitive issues
play out globally.
A friend of mine was involved in the Texaco/Pennzoil
litigation years ago. He said that the huge judgment against Texaco, while not
killing the company outright, changed how it pursued opportunities. My friend
felt that this led to the eventual merger with Chevron. He further commented
that the same fate might befall BP. It could emerge from this disaster, be
allowed to survive, but forsake any ability to prosper. At the moment, most
people are focused on the immediate cleanup and permanent control of the
Macando well. In time, attention will turn toward the longer-term view of the
Gulf of Mexico, deepwater drilling, and increased regulation and controls.
The Tipping Point
There are currently more than 35 legislative actions being
contemplated that will impact the viability of many Gulf of Mexico projects.
These actions may also significantly change the make-up of the players in the Gulf
deepwater. If smaller operators cannot meet insurability requirements, they
will be forced to exit or to find partners with broader financial capacity.
This, along with other events, could cause a tipping point where players
reevaluate their positions. Smaller companies may decide to exit or be forced out. Others will find greater opportunity in staying
and growing, causing significant movements of capital and assets. In the end,
it’s plausible to see only major IOCs and NOCs in the Gulf of Mexico deepwater.
Should that occur, many of these companies would need to reevaluate their
portfolios, shedding assets in other areas - probably international.
On the other hand, even the major IOCs and NOCs may see the US
Gulf of Mexico as too onerous an environment in which to participate and simply
move capital and people to other global opportunities anyway. This could create
a “dead zone” in the deepwater Gulf where the risks and costs are perceived to
be too high. In this scenario, drilling contractors and other service providers
move their assets out of the Gulf resulting in an area with too few players to
be a viable option in the operators’ portfolios. Companies that can think ahead of the “herd”
and who can clearly evaluate the risks and uncertainties of the new environment
will realize growth opportunities as competitors leave.
Understanding the
Uncertainties
How can these intrepid pioneers continue to be successful?
They must focus on the things that can be controlled and work to understand
those that can’t. A company must strive for clarity and insight to make good,
informed decisions. Uncertainty and risk are not necessarily bad unless you
don’t know how to deal with them properly.
Legislative actions – Federal,
state, and local government
Clearly we have major uncertainties around legislative action. The current federal administration is not pro-oil and may use this accident to push more its “green” agenda. However, the world is still very dependent on hydrocarbons and that will not change in the near future. To deal with legislative uncertainties, the oil industry needs a coordinated strategy to reset public perception around the industry’s safety record and ability to deal with significant events like the Gulf oil spill. We also need to help the public become more informed about the trade-offs, both cost and benefit, between hydrocarbons and renewables. The legislative uncertainties will revolve around public perception and federal policies driving a pro-green agenda. This set of uncertainties will clearly impact strategic planning and analyst guidance for all the commercial players.
Producer actions –
Operators large and small
If deepwater becomes too difficult for all but the supermajors
and NOCs, how will that impact onshore opportunities? Where will the
independents go to find growth opportunities? There are major uncertainties
regarding how the players will react and interact. This could become the
biggest chess game ever played, with the health and survival of the industry at
stake. These uncertainties will drive competitor movements, portfolio composition
and balancing, and long-term efficiencies in F&D.
Support actions –
Service providers and contractors
How long will drilling contractors wait before moving key
equipment and personnel to more prospective areas around the world? If doing
business in the US becomes too difficult, how many will stay and how will that
impact the cost and timing of projects? These uncertainties are clearly
interlinked with the two previous groups. Businesses will always look for ways
to support customers and make a profit. The uncertainties for producers are the
new ranges of costs, quality, and timeliness of service.
Influencer actions –
NGOs, non-oil businesses
Because of the magnitude of the Gulf oil spill, there will
be many non-government organizations and others wanting to influence the future
and the “punishment” to be meted out to the oil industry. The uncertainty for
the industry is how influential and potentially radical these ideas may be and
how receptive governments will be to making broad sweeping changes.
Developing Robust
Plans
So what do we do? Planning in a vacuum never works - neither
does ignoring uncertainties or risks. We must do an even better job of
understanding objectives, considering and explicitly positioning ourselves for
a wider range of possibilities, and recognizing the inherent uncertainties that
will impact us.
Think of the current environment as a game where there are
many players, all with different objectives, values, and areas of control and
influence. Your task is to understand these players and develop a plan that allows
you to plot a course through the game successfully. In navigating today’s oil
industry game, there are very few certainties and tremendous complexity as nearly
every action causes some kind of reaction.
How do you play the game? Where would you make your first
move? When I ask these questions, many of our clients are often stumped.
Uncertainty and risk have created rampant paralysis at many levels in the
industry. Companies that are going to make a difference and emerge from these
troubled – rippling – waters will be the ones who are able to careful frame the
alternatives, develop clear and complete understanding of objectives and value,
and resist the human tendency to not deal with uncertainties and risks.
To develop a robust strategy you need a process that brings
consistency, a sound framework for evaluation of trade-offs, and a level of
clarity that brings confidence in the final course of action. The plan will
stand the test of time if you can accomplish the following:
1.
Have
agreement from key decision-makers on the strategic question
2.
Have
clear value measures (objectives) and understand the trade-offs in a
qualitative or better yet quantitative manner
3.
Have
identified the set of decisions that act as boundaries on the strategy and have
identified the key decisions that need to be made going forward
4.
Remove
ambiguities on how the action plan will be decided
5.
Deal
directly with uncertainties and risk in a manner that captures the range of
possible outcomes, both good and bad
6.
Understand,
identify, and mitigate (as much as possible) human factors that can limit the
creation of value from the plan
7.
Define
key off-ramps to the plan and trigger points which indicate a change in
direction or deviation from the plan
8.
Make
sure the key decision-makers and influencers have been included in the
development of the plan from the beginning, not just a review at the end
9.
Ensure
that execution of the plan is successful by incorporating alignment cycles and
other change management methods into the design of the plan not just after the
fact
10.
The
discussion and development of the strategic themes should push its creators to
an uncomfortable level with the ideas. Also don’t forget to address any
“elephants” in the room.
Decision Strategies works with clients to develop robust
strategies and plans that stand the test of uncertainty, risk, and time. Our
proven process has helped clients both large and small make wise choices in the
face of extreme uncertainty. Over the last decade we have helped clients create
over $76 billion (client defined value) in new value by not only dealing with
uncertainty but also learning to prosper from it. For more information on how
we can help you please visit our website www.decisionstrategies.com.
