Navigating the
Crude Cycle
With Low Oil Prices,
10 Strategic Actions for
Canadian Energy Companies
February 2015
$$$$
Navigating the Crude Cycle
10 Strategic Actions for Canadian Energy Companies
Amid volatile “how-low-will-they-go” prices,
energy companies are facing strong headwinds.
Investors are looking for higher capital efficiency
and incentives to continue placing their cash and
trust in Canadian energy companies, where equity
values dropped precipitously in late 2014, wiping
out billions of dollars of value.
Learning from the energy-related crisis of 2008-2009, and recalling 19861987 as well, industry observers understand that companies can win by
taking strategic action and making targeted investments in times of crisis.
By adjusting portfolios, operating models, productivity levels and market
positioning, companies can emerge from times of uncertainty stronger and
more competitive.
The saying “Never let a good crisis go to waste” is true now for the
Canadian energy industry. Many have decided to cut capital spending
and freeze the hiring of talented people. Others are considering delaying
maintenance and turnarounds. To emerge stronger from the global oil-price
shock, however, Accenture suggests 10 practical ideas for Canadian energy
companies to do now.
Navigating the Crude Cycle
2
1. Turn core suppliers into partners.
In the 2008-2009 crisis, many suppliers to the
oil patch were pressured to reduce prices. This
time around, many suppliers are prepared for this
simplistic tactic.
It will take a more sophisticated approach for energy companies to take
greater advantage of a slackening supplier market. The first step is to
identify strategic suppliers in key categories. With these core suppliers—
likely in categories such as drilling and completions, engineering,
construction, maintenance, camps, materials management and logistics—
longer-term agreements should be renegotiated to seek to achieve
immediate benefits in return for continuing and possibly expanding
business. Revised agreements could include risk sharing, innovation and
investment, and joint-performance targets and incentives. These renewed
or newly established strategic partnerships can enable energy companies
and core suppliers to increase their resiliency during a crisis and emerge
with long-term advantages.
Navigating the Crude Cycle
3
2. Apply pressure to non-core suppliers
to drive down prices.
In 2008-2009, many energy companies executed
supplier initiatives to reduce prices across the
board. These initiatives can be effective, but they
should only be used with non-core suppliers.
Companies should consider short-term tactics to help reduce costs and
search for more favorable terms: increasing spot buying, extending
payment terms, reducing safety stocks, moving maintenance, repair and
operations (MRO) inventories off the balance sheet (i.e., to vendors), and
simplifying supply-chain processes and channels.
$$$$
Navigating the Crude Cycle
4
3. Reassess capital projects—planned and
inflight—to help increase value.
Major projects have routinely exceeded cost
and schedule estimates by roughly 30 percent1.
Performance can vastly improve, judging from
Accenture’s experience, when projects are critically
evaluated in search of additional value throughout
the life cycle, from concept selection through
construction and commissioning.
Amid low prices for crude, companies are scrambling to reevaluate
projects but the use of traditional methods is likely to result in
suboptimal decisions. A comprehensive reassessment should enlist an
independent third party to review areas such as engineering, financing,
project-management capabilities and tools, key performance metrics,
and procurement and contracting strategies for materials and services.
Emerging leading practices expand the review approach to identify and
quantify operational risk and the impact projects will have on company
portfolios. When the quantitative assessment is done correctly, it can
be easier to make fact-based decisions on which projects should be
continued, delayed or cancelled.
Edward W. Merrow. “Oil and Gas Industry Megaprojects: Our Recent Track Record,” Oil and Gas Facilities, April 2012, © Society of Petroleum Engineers.
1
Navigating the Crude Cycle
5
4. Prioritize turnaround and preventative
maintenance.
When prices are relatively low, the opportunity
cost of downtime of producing assets is less.
To the extent possible, schedules for planned
maintenance and turnarounds should be brought
forward.
Executing necessary tasks during bear markets brings the added benefits of
increased availability and decreased costs of equipment, service providers
and contract labour. Market leaders are likely to use the downtime to
reinforce a clear asset hierarchy, and refocus strategies for management of
most critical assets and equipment so they are prepared as prices recover.
Navigating the Crude Cycle
6
5. Equip the field with digital technology
to boost productivity.
During downturns, it is tempting to decrease
investment in innovative tools and solutions.
Instead, companies should take the opportunity to
seek to accelerate the uptake of digital technology
in the field.
Examples include remote operating centers, a mobile-enhanced workforce,
and digital materials and equipment tracking. These technologies can
transform the way people work. Tangible benefits can be realized in terms
of increased productivity among contractors, stronger safety performance,
and gaining clearer visibility through analytics into asset effectiveness.
Those energy companies that invest now are likely to reduce their cost base
for future operations and realize the benefits sooner than competitors.
Navigating the Crude Cycle
7
6. Shrink the corporate center.
When oil ranged between $80 and $100 a barrel
for West Texas Intermediate (WTI), corporate
center costs seemed reasonable. Numerous
corporate initiatives were approved, finance and
planning departments were able to add positions
and other corporate departments grew as well.
At $45 to $60 for WTI, however, it is time to trim the fat. In the past, this
process has often been done via across-the-board cuts. Ideally, corporate
functions are evaluated in terms of value and contribution to the enterprise
as a whole. Work that clearly contributes to achievement of corporate goals
of safety, profitability, and asset integrity and reliability is justified; activity
that does not should be curtailed and the roles shed. Accenture experience
suggests that reductions of 10 percent to 15 percent in corporate costs
could be attainable by simplifying and refocusing work. This can be done
relatively quickly and without major operating model restructuring.
Navigating the Crude Cycle
8
7. Restructure functional operating models
for long-term cost reduction.
Operating models for finance, human resources,
procurement and information technology can be
operated at structurally lower cost profiles.
Here are three ways to achieve this objective:
a) Consolidate functions to bring together similar capabilities, eliminating
multiple locations that provide similar services to reduce inconsistencies
and duplicative services.
b) Relocate consolidated functions to cost-advantaged locations. This
might mean moving from Northern Alberta to downtown Calgary, from
downtown Calgary to the suburbs, or from Alberta to another province
(e.g. New Brunswick) or an offshore location (e.g. Buenos Aires).
c) Transfer management of back- and middle-office activities to a third
party to run as a service. Offer incentives to improve productivity and to
reduce costs over time even further.
Many international energy companies have taken steps in this direction.
Now would be the time for Canadian energy companies to catch up with
and potentially leapfrog competitors. Since the operating models have been
tested, the transition can be accomplished relatively quickly with minimal
business disruption. Service providers typically bear the cost of transferring
the service.
Navigating the Crude Cycle
9
8. Get smarter about people management.
Word of layoffs and unconditional hiring freezes
has spread through the oil patch. Accenture
recommends a more targeted approach in times of
crisis.
When necessary, make cuts to the bottom-performing 10 percent of the
workforce. Correspondingly, companies should allow room to backfill a
portion of these cuts with top talent. For a long time, the market has forced
companies to “make do” with what they can get in terms of people. At
times like these, however, some of the best talent may be available or open
to a change.
Contract labour is another area of opportunity. Representing up to 50
percent of Canadian energy companies’ workforces,2 expensive contingent
labour increases costs of operations and of capital projects. A stronger
bottom line can be gained through tighter management of contingent
labour, including better role definition and standardization, using analytics
for increased visibility into spend, and implementing tactics for improved
safety and quality.
Advanced Contingent Labor Management: Is the Workforce With You? Accenture. 2013.
www.accenture.com
2
Navigating the Crude Cycle
10
9. Upgrade your planning processes.
In Calgary today, energy companies’ brightest
minds are scrambling to rework the numbers on
their annual plans. The re-planning rush, however,
can lead to rash decisions with negative longterm consequences.
Here are two ideas that could upgrade your planning process:
a) Consider multiple scenarios at several price points, and build in leading
indicators that enable identification of emerging scenarios to prompt
decision-making and action.
b) Replace the traditional and arduous annual planning process with a
rolling, eight-quarter outlook. In this model, planning is refreshed
quarterly and remains up-to-date, which could lead to better decisions
for the short, medium and long term.
Navigating the Crude Cycle
11
10. Better articulate your ‘value story’
for investors.
With high prices, it was relatively easy to sell the
future value story, which is not as convincing
today.
For many companies—especially those in heavy oil—a large portion of value
is attributed to future expectations. Stock prices, in other words, have
been bolstered by the market’s belief in companies’ ability to deliver on
announced plans for profitable growth.
In times of uncertainty, however, the faith in this rationale weakens.
Company leaders should articulate how their decisions in response to low
energy prices could: (a) benefit the organization today and (b) contribute to
enhanced value in the future.
It is vital for executives to communicate effectively amid the doom and
gloom in recent reports about the industry.
Navigating the Crude Cycle
12
Conclusion
No one knows where oil prices are headed or
when they will recover. But the winners are
likely to be those who respond with measured
and focused investments, and plan ahead with a
multiyear horizon.
The leaders will use this time of crisis to refocus their company’s
vision, making vital changes that would take years to accomplish amid
organizational inertia when times are flush. In other words, seize the
opportunity that a crisis hands you and take decisive action to position
your company for high performance.
Navigating the Crude Cycle
13
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with approximately
319,000 people serving clients in
more than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive research
on the world’s most successful companies,
Accenture collaborates with clients to
help them become high-performance
businesses and governments. The
company generated net revenues of
US$30.0 billion for the fiscal year ended
Aug. 31, 2014. Its home page is
www.accenture.com.
Authors
David Taylor - Managing Director
Accenture Strategy
[email protected]
+1 403.471.3363
Author
Curtis Forsyth – Senior Manager
Accenture Strategy
[email protected]
+1 403.605.9580
This document is produced by consultants at
Accenture as general guidance. It is not intended
to provide specific advice on your circumstances.
If you require advice or further details on any
matters referred to, please contact your Accenture
representative.
Copyright © 2015 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.