Insight # 9 : Business Outlook 2010 : Surviving the Scrum

Outlook 2010 : Oil & Gas : Riding Out the Turbulence

by Walid Mourtada

In examining the outlook for oil and gas in 2010, first, we need to consider the waves of the last 18 to 24 months, which have created tremendous shifts in the energy industry.

  • The price of oil has been on a rollercoaster ride, with a variation of over $100 per barrel in a matter of months, before settling in to a more stable trading channel in the high $70s.
     
  • We have seen vast swings in the profitability of refining and marketing operations. For the first time in a few years the conversations have shifted from the need for new U.S. based refineries and companies seeking refining capacity to refineries being idled and marketed for sale. Further, it is now more financially attractive to import finished products from overseas than refine them on the US eastern seaboard.
     
  • The once mushrooming alternative energy business such as solar has stalled as the pricing spread between new and legacy energy sources has expanded, despite incentives being provided to bolster the alternative energy business.

Although the industry looks turbulent, there's a clear path forward to stable ground. Exploiting particular trends will pay off large dividends for those willing to invest.

Improving Reservoir Recovery Rates in Upstream

We have seen several instances over the last year where technology can provide significant competitive advantage. There are several examples where reservoirs have exchanged hands only to see production rates doubled when proprietary technology was applied. Coupled with depleting overall reserves, improving recovery rates will grow as a focus area. The path to improving recovery rates lies in the R&D portfolio. A streamlined approach of bringing the best technologies in an expedited manner to the oil field will provide companies the competitive edge.

Addressing Cost Structures in Downstream

In an environment where consumer demand for finished products remains low and crude prices have continued to rise, driven more by a weak dollar than fundamental demand, we've seen cracking spreads and downstream margins deteriorate overall. This pattern has surfaced as a key priority for long-term survival of the downstream business, addressing cost structure.

I see definite parallels here between the oil business and automotive, which has also had to shift from delivering margins through a high-utilization, high-volume business to ferreting them out in a low-volume business. Key to both industries is successfully addressing cost structure in an asset-intensive, high-fixed cost industry. But here's where the parallels end. The downstream business is for the most part a commodity business. This year's model is exactly the same as last year's model. Absent the issues of product attractiveness, a well structured cost structure program is crucial for long-term viability.

Aligning Capital Spend to Strategy

I've previously written about how to decompose strategy into drivers that can be acted on and how to select an optimal portfolio based not just on financials but on a mix of financials and strategy. This approach of aligning a portfolio to strategic goals is becoming more critical to delivering on strategy in a capital-constrained world. It's also gaining interest. Recently, Pcubed delivered a presentation on the topic at the Global Refining Summit in Houston, garnering the highest attendance among the breakout sessions. (If you'd like a copy of the presentation, please contact info@pcubed.com.)

As an industry energy won't be calming down any time in the foreseeable future. Those who survive and thrive will do so because they're defining where and how to spend capital today to give their organizations a geographical and market structure to weather the future.