COVID-19: The Driver for a Much-Needed Change in the O&G Industry

In my long career in the O&G industry, I have seen many ups and downs. The reader is for sure aware of the wide variety of reasons causing these oscillations. Yet, the ways the E&P Companies have reacted in all these cycles had a common characteristic: every single contract with the service suppliers was reviewed to get the maximum discount and price reduction possible.

This strategy has allowed the industry to successfully get through all these cycles, using supply-demand market forces to accommodate the prices of the service suppliers. This “success”, proudly celebrated as a symbol of resilience of the industry players, has only contributed to a comfortable feeling that a magic formula can handle the downturns, avoiding a deeper reflection about how to prepare for the next one or, let alone, for the doomsday. Frantic Excel spreadsheets test the robusticity of the Companies’ economics to a price of oil 5, 10 or 20% less than current WTI/Brent, but there seldom is a “plan B” for a $10, $15 price scenario.

Service Companies, in the other hand, react with more and more cuts to survive, in a silent battle stubbornly not perceived by the Operators. As a result, the quality of the people hired and the investment in training them have dramatically decreased, not to say that the best talents out of Universities do not want to work for the O&G industry any longer. Maintenance becomes low priority, senior experts are forced to retire, while technical support meagers and international assignments are cancelled, contributing to less and less dissemination and transfer of knowledge.

Under these circumstances, technology, the only hope for a quantum leap in efficiency & effectiveness will not evolve. Besides the lack of attractiveness for top scientists, R&E budgets have been slashed down to a bare minimum, especially because of the above mentioned “magic formula” used by the Operators to commoditize everything, using professional Procurement & Sourcing departments to destroy any possibility of buying based on value or total cost of ownership, cutting the power of their own internal expert users or business unit managers to decide on what to buy and from whom. Any given project sees dozens of different suppliers, hand picked based on the lowest price. Although this myriad of suppliers can “do the job”, little-to-no possible synergies like multi-skilling, resources & logistics sharing, standardization of equipment and processes ever happen, thus, total cost remain far from being optimal.

There are some shy initiatives that genuinely leverage the power of the Digital Transformation, bringing a bit of hope to the bleak scenario painted for the foreseeable future. Reducing the number of people involved in operations through automation, multi-skilling and remote operations; mitigating human error with Artificial Intelligence and promoting the use of technology through its inherit value impacting macro factors such as the cost per barrel, project NPV improvement or maximum exposure reduction should be considered in the requests for quoting, instead of complex Excel tables associated with Machiavelli Terms & Conditions that do nothing else than risk transfer and inhibit innovativeness.

The world will not be the same after COVID-led confinement. Oil will probably never go back to > $50. Amongst the few survivors, some will learn the lesson and start forming true partnerships with strategic service suppliers to build new, economically robust operations, ready to survive the Armageddon. Others, unfortunately, will cease to exist…in the end of the day, Darwin was right: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”

By: Anonymous