Points of View

Oil and gas execs: look to these three priorities to deliver value and alleviate uncertainty in the face of COVID-19 and a tumbling oil price

Apr 1, 2020 Josh Matthews

Historically, the oil and gas industry has responded to oil price peaks by spending capital to boost production, while responding to troughs by withdrawing capital and slashing operating costs. Facing COVID-19, a Saudi-Russian price war, and a systemic move away from carbon-intensive energy, the oil and gas industry cannot afford to keep swaying between a focus on capital expenditure (CAPEX) and operating expenses (OPEX); instead, it must address both simultaneously. In the midst of the chaos gripping an industry that is uncertain at the best of times (see our separate assessment of how service providers must react), there’s a greater need for execs’ decisions to have outcomes and value at their heart; in this piece, we’ve picked three themes:

 

  • Artificial intelligence (AI) and analytics can optimize production and fuel predictive maintenance, for the sake for operating expenses, while improving project development and capital allocation processes.
  • IT solutions like ERP have been stalwarts in the oil and gas sector. Now it’s time to make sure they’re delivering value, as are their latest cloud-based iterations, such as the looming SAP 4S/HANA transition.
  • Clean energy sources mustn’t be disregarded—they have the potential to alleviate some of the uncertainty surrounding the industry’s investments.

 

AI and analytics can help optimize operations and facilitate predictive maintenance, while accelerating project development and improving capital allocation

 

The pharmaceutical industry is the typical example of AI accelerating the R&D-to-production pipeline, but the oil and gas industry also grapples with high CAPEX and pressure to ensure returns before investing.

 

Oil and gas execs must maintain investment into AI. Our recent report summarizes the confusion among execs in our 2019 State of Operations and Outsourcing survey: AI appears to be low on execs’ priority lists, but simultaneously attracts significant investment.

 

There is an array of AI and analytics applications for the oil and gas sector, including robotics, the industrial internet of things (IIoT), and integrated automation; we explore a wider range of options for oil and gas execs in this report.

 

Keep improving your IT and streamlining your business operations—especially for upstream E&P!

 

The oil and gas industry has been one of the leading adopters of ERP software, and the looming transition to SAP 4S/HANA is going to be front of mind for many oil and gas execs. Many, however, will be putting off making major moves, and COVID-19-based spending reassessments won’t help. This cannot, however, be a reason to take your eye off the ball; rather, use this uncertainty as a chance to prioritize spending on IT solutions and services.

 

Upstream operations (aka exploration and production [E&P]) struggle most with a low oil price. The current crash is already causing havoc, as over a dozen North Sea upstream projects face a red light this year (including Total, INEOS, and Shell), while upstream-only firms such as Diamondback and Occidental are rushing to cut back their operations, as both see their shares drop by more over 70%.

 

On the bright side, there’re many options in the service provider landscape to implement or improve IT capabilities to streamline oil and gas operations, especially for upstream activity; take a few recent and illustrative SAP examples:

 

  • Accenture recently launched its latest SAP solution tailored specifically for upstream oil and gas. Accenture has previous skin in the E&P game, specifically with Assala Energy, an E&P company that recently acquired Shell’s activities in Gabon.
  • One of SAP’s success stories is Petroleum Development Oman (PDO), that moved to SAP to manage its planning, production, maintenance, and HR functions.
  • Capgemini is another services giant with a strong SAP partner status with a focus on applying it to upstream oil and gas.
  • Absoft, a specialist SAP consultancy, has prior success with oil and gas major Total, one of the industry’s first SAP adopters going back to 1993.

 

Keep investing in clean energy—offshore wind is one example that can offer strong margins and secure return on capital

 

Wood MacKenzie estimates that $211 billion will be invested in offshore wind over the next five years. Oil and gas majors, especially struggling E&P firms, understand the waters and geo-factors where infrastructure would be located. High capital costs will be a barrier under the current uncertainty surrounding COVID-19 as many withdraw spending—but the technology is developing rapidly, and costs are coming down.

 

Returns will be another potential barrier, at least a mental one, with oil and gas majors having grown accustomed to double-digit returns compared to more modest outputs from renewable projects. But where long-term security might take precedent over immediate gain for many execs, less-volatile renewable energy projects might win out. Logistics can also prove challenging compared with, say, onshore wind (for obvious reasons), which is also less capitally intensive than its offshore variety.

 

Offshore wind is clearly not the only option open to oil and gas execs looking to diversify their portfolios in the new landscape. Equinor is a leading example, looking to invest 15% to 20% of its capital in new energy solutions by 2030. People are also paying attention to the industry’s leaders and laggards: The CDP (Carbon Disclosure Project) rank Europe’s Equinor, Total, Shell, and Eni highest, with China’s CNOOC, Russia’s Rosneft, and the US’ Marathon Oil the worst. This will undoubtedly take a big industry-wide shift, with oil and gas companies currently only spending 1.3% of their 2018 budgets on such projects, including wind, solar, carbon capture, and battery storage.

 

The Bottom Line: AI and analytics, IT solutions, and green energy investment are three of the many ways that oil and gas execs must reevaluate their priorities to thrive under the uncertainty posed by COVID-19 and an oil-price crash.

 

With CAPEX being withdrawn and OPEX heavily scrutinized, oil and gas execs can’t afford to take their eyes off of solutions that can deliver value even in the current chaos.