Bain spots capital spending rebound on oil buoyancy

Capital spending is rebounding and new upstream projects are launching weekly as the price of oil stabilises in the $50-$70 range, according to global consulting firm Bain & Co.

Buoyancy has returned to the oil and gas industry.

“In previous cycles, this is about the point where executives forgot the hardwon lessons of the downturn and began to spend again, pursuing growth at the cost of efficiency,” said Juan Carlos Gay, a partner in the London office.

But this time a return to old habits could prove an existential mistake. Bain said fierce competition, technological disruption and regulatory complexity have combined to reduce the profit pool by more than 60% — a reality that should force oil and gas executives to keep the pressure on their efforts to reduce costs and improve efficiency.

“As with other industries such as telecommunications and financial services, in a smaller and more crowded profit pool, long-term success depends on developing a focused strategy based on clear sources of differentiation,” said Dale Hardcastle, a partner in the Singapore office.

Three strategies should help oil and gas executives approach the coming cycle with a better chance of delivering the 10%-15% returns that energy investors demand, said the firm.

Cost control is one of the few levers that oil and gas companies have over their margins. In the wake of the price downturn, many companies were able to remove 15% or more of their costs by reducing headcount and renegotiating contracts.

A second wave of cost reduction is under way, addressing process complexity, streamlining organisational design and introducing “clean sheet” programmes like zero-based budgeting. North American shale producers have been leaders in cost reduction, boosting productivity, reducing drill time and combining tasks like drilling and cementing operations. Certain innovations (like expanding the number of wells drilled from a single pad) have made it possible to get more while spending less.

“When prices were higher and margins easier to achieve, everyone could follow the same game plan — chase projects, come in over budget and still make a profit,” said Sharad Apte, a partner in the Bangkok office. “That era is over. Without something to distinguish themselves from their competitors, companies will struggle to hold onto market share.”

Getting a clear grip on unique assets and capabilities allows companies to invest with more confidence to build those strengths. Investing in people, assets and capabilities improves the chances of outperforming others, said the consulting firm.

Analytics are nothing new in oil and gas, of course: reservoir modelling uses massive amounts of data, and refineries have used dynamic process modelling to increase uptime since the 1980s. The current wave of digitisation goes further, with technological and process innovations that increase yields and improve operational performance. But the change in digital technology is occurring so rapidly and on so many fronts that a big risk is chasing after too many initiatives.

“A better approach is to narrow the vision, define a clear destination and organise investments to strengthen capabilities like channel management, partnerships and an updated digital operating model,” said Mr Gay.

Central to all three of these strategies is the need to become more agile and adaptable, nurturing promising ventures and letting go of failures, committing to the changes required by the structural evolution of the sector.