Optimistic but cautious. That statement sums up the outlook from the top-level leaders of the U.S. oil and gas industry after several years of unexpected low prices. Many companies managed to weather the storm, others were acquired in corporate buyouts, and the unlucky ones had to sadly close their doors. That being said, the industry is standing steady with an optimistic outlook but operating on a look-before-you-leap strategy.
If you are an oil and gas executive, here are five challenges that will be essential in steering your company through 2018 and beyond. Be prepared to face structural and cultural issues internally; many companies—after letting go of more than 400,000 employees—do not have the talent, organizational framework, systems, processes, or attitudes to be innovative in a dynamic and uncertain marketplace. Companies must be prepared to pursue new drilling and extraction technologies and to increase funding research into sustainability and clean energy. Oil and gas companies need to diversify their energy sources if they want to remain relevant in the future and in alternative energies growth and to be able to vie for a significant market share.
1. Differentiated Capabilities
The oil and gas industry operates in diverse and hostile environments, including onshore and offshore unconventional reservoir production and exploration in hot and cold, challenging and remote environments. Directional drilling through unconventional shale plays has also become increasingly difficult to extract all potential reserves. Although the super majors and majors have tried to work in all types of oil and gas fields, these companies do not have the skills to compete in all types of environments. Smaller drilling and oilfield services companies are leading the way in this niche market, thus leading to more and more collaboration and cooperation.
2. New Business Models and Partnerships
The ever-changing dynamic of the hydrocarbons industry from being dominated by large, one-stop-shop companies to an industry that features specialist companies in narrower niches of the operating environment will require firms to establish new ways to work together and include ways that focus on the specific skill sets of each company. Looking towards the future, the model of a sole, integrated company discovering and developing a field, and operating it until it is depleted, is being phased out. New partnerships, intercompany cooperation and changes in ownership are designed to ensure that the company most able to extract the value manages the field through the most relevant stages of its operating life.
3. Sustainable Profitability
The extended oil price slump has shown the importance for companies to have backup plans to maintain profitability during different pricing circumstances. The shock of low prices and the strong possibility that interest rates will rise in the near future, increasing the cost of debt, has elevated free cash flow from earnings to priority status. Companies must think strategically and from new perspectives to protect themselves from price dips and future rising interest rates.
4. Recruiting and Retaining Talent
The toll on human resources within the oil and gas industry has been heavy. It has led to a lot of the best talent finding itself on the outside of the industry with a small chance of getting back in, or not wanting to return at all due to the cyclical nature of the industry. Many younger workers balk at employment in oil and gas because they know they can easily lose their job during a price downturn. This has put pressure on hiring managers to find the right talent at the right price.
To recruit new young workers, hiring managers must keep in mind that the younger employees are searching for less traditional workplaces; they are seeking more collaboration and open communication and less top-down decision-making. With this information, managers must work to bring about corporate change to become more attractive to make the work environment more appealing to the new generation of workers.
5. New Technology
Companies will need to assess the role that digital technologies can play in improving their performance and increasing their profit margin. Digitization should drive the innovation that improves productivity and efficiency in the field. For example, robots, automation and machine learning are becoming more common in the oil and gas industry, handling complex and repetitive tasks such as connecting pipes, assisting in directional drilling and maintaining equipment. In turn, all of these technological advancements will reduce labor requirements, thus increasing profitability. However, these will require the right implementation and gradual deployment to ensure success.
Off to the Future
Overall, the leaders of America’s oil and gas companies will face many challenges on the climb back to the top. They will need to have the foresight and strategic insight to be able to overcome and rise to success.