The oil and gas industry responded rapidly and forcibly to the twin shocks of the COVID-19 pandemic and volatile oil price swings through enterprise-wide capex reductions. Now, as the energy industry regroups in preparation for a recovery, owners and operators should take a thoughtful approach to ramping up investment to ensure the most prudent use of capital. At the same time, they should consider divesting in areas that are no longer economically feasible or consistent with strategic priorities.
To get there, companies should reexamine business case fundamentals and stress-test the capital portfolio in light of the “new normal” of lower oil prices exacerbated by COVID-19 impacts. Two areas in particular that may need examination are vulnerable stakeholder and supply chain ecosystems and construction field operations — both of which have been significantly altered by COVID-19 site protocols and safety adaptations.
The pandemic has ushered in specific challenges — including immediate demand impacts due to restrictions on travel and contact — which have translated into tangible impacts on productivity. How the recovery will play out in the mid and long term is not clear. This makes forecasting long-term changes to oil demand, consumption, use and other societal behaviors particularly difficult. In turn, the industry is challenged to confidently forecast revenues, production demand, and the need for capital projects, as well as how those market assumptions will affect operating income scenarios.
Scenario planning for a range of outcomes is critical to determining which projects need to be put on hold temporarily or canceled altogether. Contract provisions should also factor into the cost-benefit calculation by looking closely at whether mechanisms are available to suspend or terminate given contracts when necessary to reduce value destruction if the costs to complete exceed the incremental value of a completed asset.
Whether projects are in flight or recently authorized, stress-testing the business case could extend into a review of the contractor and supply chain — both for liquidity and for the capability to deliver as promised in the contract agreement. Thorough across-the-enterprise portfolio scenario planning yields a deeper, more granular assessment of financial implications related to production, operating income, free cash flow and loan repayments.
Lastly, companies should bolster critical projects that need to be continued by strengthening project controls, risk management and governance processes. This effort will likely assist in identifying emerging risks and early warnings, and will help protect against cost increases, delays and the deterioration of returns on capital.
Strong project performance preserves reputation and competitiveness. Setting clear expectations requires a clear communication strategy to employees, partners and downstream customers. When carried out effectively, clear communications can burnish reputations and strengthen morale, relationships and trust among all stakeholders.
It is also important to assess impacts to the most critical materials, equipment, products, Tier-1 customers and suppliers, along with exposing key vulnerabilities. Having alternative delivery methods and suppliers ‘at the ready’ could make the difference in completing a project on time or reducing the impact of identified weaknesses.
Disruptive changes can often necessitate opportunities for rapid innovation. We learned from previous downturns, for instance, how to better manage CapEx and capital efficiency. Today's opportunity to innovate is underpinned by workforce efficiency and productivity through improved ways of working, upskilling and use of technology.
In addition to the current focus on economic scenarios and strategic plans, there is also a key focus on protecting the workforce in the wake of the pandemic. Near- and mid-term, this requires day-to-day tactical plans for returning employees to work. Complying with emerging COVID-19 distancing guidelines in the offices, fab shops, warehouses and field operations on construction sites (where the vast majority of the impact will be felt) will likely introduce some degree of disruption, delays and additional cost.
Consider distancing, rotating schedules, contact tracing, screening, monitoring and other hygiene-related protocols, and identify the highest-risk processes, tasks and trades. Map out the additional steps required to comply with the new guidelines, and track how each of those new steps could affect your operations, in terms of any delay or disruption they could impose, as well as the costs involved. Doing so may require additional project controls and reporting, but it will likely help maintain workforce productivity and enable comparisons with historic norms and forecasts.
This type of planning could also help generate a case for accelerating investment in new technologies, automation, retooling and upskilling for longer-term productivity, with potentially less reliance on in-person human intervention. There will likely be numerous paths toward more efficient use of resources and value creation.
The energy industry will need to adapt and ramp up initiatives in order to stay competitive in these difficult times by pulling a variety of levers. These include advanced monitoring, project management controls, technology and analytics, alternative construction sequencing, shift and crew cadence, remote assurance and quality control techniques.This will likely invoke a wave of investment in workforce upskilling and retooling, which has the potential to accelerate the Fourth Industrial Revolution.