Opinion: Restructuring for the New Energy Reality
Oil and gas is used to a severe business cycle, where prices can go down from $100 to $25, and companies in the industry are used to contracting and expanding their business accordingly. But what’s happening now is different. Prompted by the COVID-19 pandemic, oil and gas is undergoing some of the biggest changes it has seen since the industry first emerged more than a century ago. And the industry that emerges from this one will not look the same as before.
At the beginning of last year, the sector was still recovering from the 2014 crash in oil prices, when an abundance of shale oil being extracted in the United States sparked a global price war. It was just beginning to negotiate the path toward international climate goals when the pandemic hit, sending demand for oil tumbling down 30 percent, with prices along with it.
Companies in the industry have responded by restructuring, merging with or acquiring other companies, or otherwise trimming their workforce in order to stay competitive in lean times. But the changes aren’t just a response to the pandemic. Countries around the world are introducing more ambitious measures to reduce greenhouse gas emissions, with the United States pledging in April 2021 to reduce emissions up to 52 percent by 2030. Such policies mean the oil and gas industry will never return exactly to what it was before, prompting big changes in the workforce as it adapts to new realities.
BP recently made headlines by gutting its exploration division, reducing a team of 700 geologists, engineers and scientists to less than 100. That’s just a small part of a much larger reorganization that will see the petroleum giant reduce its global workforce by 15 percent.
BP is far from alone in its ambitions. Analysts at Deloitte have projected that 70 percent of jobs lost during COVID-19 will not return by the end of 2021. That’s a remarkable contraction, made all the more remarkable considering that the smaller workforce that remains will need to handle the industry’s transition to cleaner energy. Oil and gas companies need to be ready for the enormous challenge of finding out how to reorganize their workforces — not just for efficiency, but for survival.
The Human Impact
From a human resources perspective, oil and gas is a particularly complicated industry. Companies need to operate where the oil and gas is and they have to distribute it everywhere that is needed. A vertically integrated oil and gas company will be involved in everything from exploration to production to distribution, with workers in situations as diverse as corporate offices, geological field sites, refineries and retail employees taking cash from customers.
Further complicating matters is the scope and diversity of the workforce. Before the pandemic, less than one percent of oil and gas workers were able to work flexibly or remotely, according to Deloitte. There’s usually a mixture of full-time employees and contractors who have to be where the oil is, and it can be in all different parts of the world. Factor COVID and travel restrictions, different pandemic restrictions and responses, and there is a lot of complexity to consider.
The current economic situation means companies need to do all of that while making do with less.
Planning for the Future
Visualizing organizational change will be crucial in the coming years as the oil and gas industry recovers from COVID-19 and embarks on the path to energy transition. As Deloitte noted in a recent report on the future of work in oil and gas, the key challenge is to create more efficient operations while also pivoting to new forms of energy — or as Deloitte put it, managing “big layoffs amid the great crew change.”
The report notes that, “instead of developing a piecemeal digital and automation road map for a business unit, organizations need to redraft the operational vision and ascertain the future ways of working for the entire organization.”
This is where many companies risk stumbling as they try to find a path forward. It can be difficult to visualize all of that change easily. Changing the company has many drivers: changes to regulation, consumer preference, technology and now pandemic effects — and all of this is usually assessed and measured in financial terms. The price of oil and downstream products, the trading price of the stock, its effect on the company’s capitalization and mix of cash, equity and debt are all contributing factors. Going from these drivers and factors we move from the company’s stated strategies and financial statements to the actual structural elements of the company itself.
Visualizing the Future
Even if a company has a clear vision of the future state in terms of business lines, geographies, assets, and customers, the intersection of that vision with the organizational structure and the people inhabiting it has to be understood. For example, pivoting focus from traditional upstream exploration and production activities to a greater emphasis on carbon-reducing business lines changes required skill sets, assets and locations. The right mix of full-time employees and contractors with the correct leadership and oversight to implement the desired changes needs to be understood, assessed, planned and delivered. Looking at the company in pure financial terms, or even as names in boxes with salaries or contract costs, will not generate the needed outcomes.
Consultants and practitioners often find themselves stuck in Excel worksheets and large, purpose-built Excel models that have been populated with data extracted from systems and databases. This poses a serious problem when we move into human capital management and transactional systems — especially when we are expanding and contracting in response to the price of oil and changes to budget spending. That data is churning as teams change and employees come in and out or are moved around. With the underlying data rapidly changing it is even more critical that decision makers are presented with insights based on accurate and current data. This requires a dynamic response rather than traditional, static methods.
We often hear about manual work caused by changes being modelled on a password-protected worksheet that quickly becomes outdated before the insights are presented for action. This increases cost and time to value and involves other departments like IT having to source the data and refresh it. Static data like this also leaves secure systems that are subject to security roles, segregation of duties and auditability and adds risk, as companies are working with sensitive, personal data.
What’s more, even if analytic tools were used in the initial assessment going into the modelling exercise, not being able to incorporate desired changes in the model — plus the changing data against the key people analytic drivers — makes it impossible to understand the actual effects of the scenarios.
That’s where a secure and collaborative technology solutions can help. They can ingest and update the required data, but also assess the quality of the data to avoid the problem of modelling based on bad information. Dynamic analytics helps create actionable insights for managers and HR professionals to understand and carry those into modelling exercises. Each scenario can be dynamically tested against the people metrics, whether performance, tenure and demographics or even diversity, inclusion and engagement.
It’s these insights that will help companies embark on the restructuring they need to cope with the new oil and gas reality. Although the COVID-19 pandemic introduced even more complexity into an already complicated industry, it may best be understood as a catalyst for change — an opportunity to shake off old ways of doing things in order to embrace the future.
Tags: market analysisAuthor: Richard Marshall, Head of Global Oil & Gas Industry Practice at Nakisa
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