The Covid-19 pandemic has everyone rethinking what steps to take for resilience today, and how to safeguard that resilience for an uncertain energy future. Nearly every oil and gas executive said, in the just released EY Oil and Gas Digital Transformation and the Workforce Survey, that their company will have to change how it operates coming out of the downturn. What’s implied by that result is that oil and gas executives don’t expect the market to ever go back to where it was.
They are right. Oil demand is unlikely to return to the path it was on before the pandemic. New ways of living, working and operating our day-to-day lives have taken hold and are likely to permanently transform traditional choices. When we get to the other side of the pandemic, electric vehicles may be more prevalent and more electricity may come from renewable sources. Capacity across the value chain was sized to meet everyone’s old views. The disconnect between supply and demand will be here for some time and will drive down returns and force transformation.
There are three key themes for oil and gas companies to consider as they transform. First, they will have to allocate capital to reflect their strategic ambitions to decarbonize and achieve net zero. Second, they will have to integrate technology platforms to enable data-driven decision-making capabilities. Third, they will need to enter collaborative ecosystems and understand how organizations (both internal and external) disrupt and enable each other. All of these actions must also provide healthy returns on investment, something the industry has struggled to do over the last few years.
While capital allocation continues to be top of mind for companies, the focus on digitalization and the need to cultivate more coordination between suppliers and customers needs greater attention. As an example, one critical vehicle for transformation — and for deploying technology platforms — is oil and gas supply chains.
When Covid-19 hit, it presented a major shock to supply chains. As early as February 2020, academic researchers and consultants started talking about lessons learned for supply chain managers from the Covid-19 pandemic. A common theme in building supply chain resilience is overcoming a lack of information about the external environment (where the pandemic hit) and the internal environment (primary and secondary sourcing).
The pandemic has presented an opportunity for companies to reengineer the supply chain and transition from a traditional linear model to a networked ecosystem where any event occurring in the supply chain is seen by all. Across all industries, digital technologies are allowing for this evolution and greater visibility. In a world where oil and gas are abundant and demand markets become increasingly competitive, oil and gas companies must seize every opportunity to reduce costs and increase efficiencies.
Data analytics are necessary to make the right decisions. In fact, 90% of oil and gas executives in an EY survey said investment in digital technology was needed to survive current market conditions. Furthermore, executives ranked the increasing availability of data analytics and insights as one of the top-three trends expected to positively impact their company’s business growth in the next three years. Clearly, oil and gas executives understand the need to fully embrace new data analytics, digital technology and maximize the ROI from those investments. A true digital transformation and access to new markets will not be possible without first a data transformation. Decarbonization and a pivot to a customer focused model will only intensify that need.
Another important aspect of transforming the oil and gas supply chain is managing the ecosystem that links upstream operators to the web of equipment manufacturers, material providers and service providers. It’s complex, which can carry a lot of risk and potentially cost. Part of that complexity is likely to take care of itself as the service sector consolidates and integrates as a matter of economic necessity. Service companies were hit hard in the downturn that started in late 2014 and never fully recovered their pricing power and profitability. They don’t have much to give in the way of cost concessions and the result is likely to cause increased deal activity and vertical integration.
Additionally, there’s significant value leakage in the upstream supply chain because material producers and service providers aren’t aligned. EY estimates show an oil and gas company could potentially unlock more than $145 million of value annually by integrating its key processes across the upstream oil and gas value chain with a common data model. Notwithstanding any consolidations, the opportunity for operators and their array of service providers and suppliers to team “virtually” through closer collaboration and digitally enabled risk-sharing is huge.
Supply chains and logistics are at the heart of any successful oil and gas business. If companies create more resilient and efficient supply chains, they’ll make more money. While companies across every segment of the industry know that digitalization and increased collaboration is necessary, the real question becomes how to get there? Oil and gas companies will have to balance the need to perform now, while also transforming for the future. Once the business strategy reflects it, the answer will likely be more cultural than technical: creating a future-proofed workforce with a data-driven and risk-aware mindset.
The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.