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Service providers to the oil and gas sector have already been shifting to outcome-based models. The new uncertainty surrounding COVID-19 and the oil-price crash means they must double-down. Historically, uncertainty about investments has been a barrier to adopting emerging technology in the oil and gas sector, among other objectives—and now, uncertainty is everywhere. As oil and gas execs look to reduce capital spending and scrutinize operating costs, their providers have the technology and services to optimize processes, manage supply chains, and alleviate the impact of job losses. Providers must be clearer than ever in the value of their customers’ spending on technology and services, to alleviate some of the uncertainty that threatens the whole oil and gas ecosystem.
Historically, the oil and gas industry has responded to cyclical peaks and troughs by either injecting capital to boost production in the good times or withdrawing and hibernating using reserves in the bad times. However, at a confluence of a global pandemic, a trade war between major producers, and a systemic move away from carbon industries, oil and gas executives will understandably be looking for partners to help guide them. For the right providers, with technical expertise and business knowledge, the ecosystem presents a considerable opportunity to help oil and gas businesses remain viable in a rapidly changing world.
Oil price crashes historically mean stockpiling, pain for upstream companies, and major industry mergers
When the oil price crashes, refineries typically do two things. One, they stockpile cheap feedstock to process once the price rises again, and two, they ramp up their processing of the cheap feed to temporarily maximize margins before product prices catch up, in which case they then stockpile product.
Oil price crashes typically result in a significant amount of pain for upstream exploration and production (E&P) firms. Diamondback and Occidental are two examples of E&P companies currently struggling and rushing to cut back their operations, as both saw shares drop by more than 70%. Major oil and gas firms with operations along the value chain are better positioned to take the hit and counterbalance.
In the past, low oil prices have also resulted in a flood of mergers; for example, Exxon with Mobile and Chevron with Texaco in the late 1990s following Saudi-Venezuelan competition. It’s far too soon to predict this type of response, but from the activity of the oil and gas majors, capital and operating spending is coming under a new level of scrutiny.
Industry majors are rapidly reviewing capital spending and operating costs as many slow down their operations
Exxon Mobil’s response (at the time of writing) signals the industry’s move to cut back on capital spending and scrutinize their operating costs:
“Based on this unprecedented environment, we are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term.”
—Exxon Mobil CEO, Darren Woods, March 16, 2020
The prospect of job losses and a need to ensure processes and supply chains are fully-optimized might be catalysts for the industry to undergo a huge transition toward emerging technology like automation and AI. If this is the case, execs will need their service providers’ help, and these providers need to communicate clarity about value and outcomes of their technology and services.
Providers have been moving to outcome-based models—now more than ever, they need to provide clarity about the business benefits of their technology and services to alleviate some of the industry’s uncertainty
Providers of all manner of services in the oil and gas sector are shifting to outcome-based models. One example cited in a recent briefing involved a catalyst manufacturer, which now bills its refining clients based on the performance improvement achieved on the fluid catalytic cracking (FCC) unit that it provides the catalyst for and services. Other measures open to service providers include building contracts with clients around efficiency improvements or reducing their “mean time to failure” as oil and gas firms adjust to new availability benchmarks of well over 95% achieved by predictive maintenance, rather than the historical targets of 92% to 94%.
For oil and gas execs, providers’ shift to outcome-based models will come as a relief, but they also need to become stronger. Uncertainty surrounding financial investments is already a major barrier to oil and gas transformation (see Exhibit 1)—and certainty is not around the corner! They’ll need more help now from their service providers as technology simultaneously has the potential to reduce operating costs and help with capital allocation; clarity surrounding ROIs and business benefits is, therefore, more important than ever.
Exhibit 1: Uncertainty about investments was a historic barrier to oil and gas objectives—and uncertainty will only heighten
Top inhibitors in achieving strategic objectives (rank 1 only)
Source: HFS Research, Business and IT Industry survey, 2019, 33 energy (oil and gas) leaders
The Bottom Line: As historic uncertainty intensifies, oil and gas execs need their providers to double-down on outcome-based approaches to mitigate a new wave of oil price and COVID-19 uncertainty.
With oil and gas execs in dire need of clarity in their investments for technology and services, service providers must double-down on their outcome-based models and help their clients decipher the outcomes and business benefits that their investments will yield. COVID-19 and the oil-price crash mean more uncertainty—likely for a long time—and so investments and ongoing expenses must be more targeted than ever, with clear business benefits and outcomes in mind.