The New Volatile World of Oil and Gas http://www.strategy-business.com/blog/The-New-Volatile-World-of-...

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S+B BLOGS Published:February 19, 2015

ENERGY

The New Volatile World of Oil and

Gas
Strategy& executive advisor David Branson also contributed to this article, which is
adapted from the report Sail, not rail: Dynamic, capabilities-driven strategies for oil
and gas companies.

The oil industry, like the consumer products and aerospace and defense industries before
it, has hit a tipping point. The dramatic fall in oil prices in late 2014 caught much of the
industry by surprise and threatened the commercial viability of many existing oil plays.
Naturally, the attention of the industry and the media is focused there. But the more
significant story is not the decline, but the volatility, of prices. Prices may go up or down in
the future, but volatility is here to stay.

Indeed, the general outlook has never been so uncertainfor national and international
producers, state-owned and privately held companies, majors and minnows alike.
Political conflicts continue to escalate in oil-producing regions; the effect on the industry
of climate change (and resulting regulations) remains unknown. The slowdown in
economic growth among emerging economies has led to a hiccup in energy demand, with
no clear indication of how long that slump will last. Another major factor is rapid
innovation in hydraulic fracturing and other technologies. This has not just reduced the
cost of unconventional oil and gas plays, but it has led to oscillating returns on investment
in new fields. The broadening array of operating environments, from these
unconventional plays to mature fields to ultra-deepwater exploration, is challenging the
traditional portfolio strategies of many oil and gas companies. No single company, not

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the technical, operational and commercial capabilities to succeed
Viren Doshi is a senior partner
with Strategy& and leader of
the firms energy practice.
! EMAIL
Georges Chehade
Georges Chehade is a partner
with Strategy& and leads the
firms energy, chemicals, and
utilities practice in the Middle
East.
! EMAIL
No single company has
the capabilities to
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in all the new oil and gas operating environments.
No one knows what will happen next, so the market now places a
premium on the one thing it can count on: the ability of
companies to shape their destiny. The winning oil and gas
companies are no longer those with global scale or those that own
the most assets. The winners know they cannot afford to try to do
everything. Instead, they focus on a distinctive value proposition,
invest in the capabilities they need to deliver it, and build their
identity and business model accordingly.
Occidental Petroleum Corporation, for example, exploits its
expertise in mature field operations and enhanced oil recovery to
become a partner of choice for asset holders in the Middle East.
Apache Corporation specializes in maximizing production and
value from underexploited fields, through cost management, infill
drilling, and nearfield exploration. Petroleum Development Oman
distinguishes itself through proficiency in enhanced oil recovery,
aligned to the requirements of its maturing portfolio.
Meanwhile, large and diverse oil companies are divesting or
spinning out the businesses that dont fit with their core
capabilities systems. In 2014, both
ExxonMobil and BP announced that they
would separate unconventional shale
operations from their traditional
ations. ConocoPhillips, Marathon,
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teams are prepared to orient their portfolio around what they do best. The difficulties are
exacerbated by growing shortages of skilled personnelan ironic consequence of the
previous 20 years, when there were so many petroleum engineering graduates for the jobs
available that the field of study became unpopular. Moreover, the volatility itself seems at
first glance to argue against focusing on a single value proposition. If the world changes
rapidly, wouldnt it make sense to remain as widely diversified as possible?

In practice, however, focus can add flexibility. If your company is clear on its strategy, you
can adjust investments to adapt to changing conditions, like an expert sailor who sticks to
a single course but responds rapidly to changes in the prevailing wind and water
conditions. If you remain caught in the best practices of the pastdefining a path and
rigidly executing it in a stage-gated wayyour assumptions will not hold true; the
prevailing winds will not take you where you want to go. The answer is not to follow every
opportunity, but to pick a direction where your capabilities give you confidence. Keep
sensing the market, continuously calibrating your awareness of outside forces, and
adjusting your activity as needed.

For example, some companies take small stakes in emerging basins aligned with their
capabilities. This step positions them to move quickly if significant discoveries are made.
Others develop scenarios for different futureshigh, low, and volatile oil prices, for
exampleand plan ways to deliver profitability in their own distinctive way, no matter
which outcome arrives. Others incorporate flexibility into long-cycle investment projects
by designing modular field developments that can be scaled up or down in response to
changing market conditions. Companies in highly volatile operating environments such as
Iraq already take this approach; it will ultimately be adopted everywhere.

As an oil company, your first move in this new volatile environment should be a focused
egrated capabilities system to back it
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