08 Jun Clear Out Your Hedgehogs
The collapse of oil prices and the ravages and the possibilities of the pandemic are becoming clear. Management in oil and gas should be going after those cute but problematic hedgehogs guarding the status quo.
Oil Price Collapse
The collapse of oil prices itself is not a remarkable event. The industry goes through these kinds of convulsions on a regular if infrequent basis. But two things have changed the calculus. First is the new unpredictability of the OPEC organization, particularly its biggest member Saudi Arabia, in responding to global events that threaten oil market stability. Western markets had assumed (or hoped) that the Saudis would continue in their role as the global swing producer, but the Saudis had other ideas.
Second is the realization that the Russians can swing their production. For as long as I can remember, the Russians, from Putin on down, have deceitfully claimed that they cannot adjust their production downwards because the delicate nature and harsh arctic conditions in their oil fields. The agreement reached between Russia and OPEC included Russian production management, for the first time.
Both OPEC and Russia have tolerated the rising level of Western oil production, but perhaps no longer. From 2008 to 2018 according to BP, North American oil supply grew from 13.1m bpd to 22.6 mbpd (an annual growth rate of about 7%). Russian production edged up from 12.7 mbpd to 14.5 (a growth rate of just 1% per year), and the suppliers from the Middle East only grew from 26.5 to 31.7 (or 2% per year). North American oil production growth is greater than the Middle East and Russia combined.
Oil that is relatively more expensive and technically complex to produce by heavily indebted companies has taken market share from oil that is inexpensive and simple to produce from state-backed producers.
As the world steps up the energy transition, managers should anticipate these petro-states becoming increasingly self-centered and desperate to maintain market position. Market upheavals will be a permanent feature as supply and demand shift globally.
The Pandemic Effect
There’s a funny meme circulating that highlights COVID19, rather than the CEO or the Chief Technology Officer (CTO), as responsible for driving the recent change agenda. This is as true in oil and gas as in retail.
The pandemic response has ripped the curtain away from the objections of some in management to rapidly implementing many powerful changes in oil and gas. A couple of years of exposure to digital at key industry conferences means that the debate about whether digital is a thing is over. The new debate about digital is on the pace of adoption, the how of adoption, the pathway to scale. The pandemic showed that faced with an important and intractable foe, the industry could make some changes at lightening speed, instead of the usual glacial pace involving proofs of concept, prototypes, field trials, and funding applications.
No part of the sector is immune. That includes upstream explorers and producers in conventional, unconventional and offshore, the midstream sector consisting of pipelines and tank farms, the downstream operators in retail, wholesale and distribution, and suppliers to the industry.
The corporate ability to rapidly move people from offices to home office work proves that digital is real, and has swung from a line item measured in pennies per barrel of production and buried in the CFO’s budget to an existential capability. The technologies that comprise digital (cloud computing, wireless networks, phones and tablets), are the new heroes. Further, bosses might hopefully now get what agile means:
Align against an intractable foe, make the threat existential, make change happen, make it quickly. In other words, behave like a start up.
Hedgehogs — A Cute Problem Species
The CFO of an oil company called me last week to learn more about my digital awareness course. He was encountering puzzling objections from his managers in the face of digital opportunity. For example, his firm had acquired a large oil asset and the seller had shipped over boxes and boxes of paper files associated with the asset (which was not surprising as oil assets last for decades). The managers dismissed his suggestions that the paper files be converted to digital to make them more searchable.“If we want anything from those files, we’ll just go looking for it”, they claimed.
This was a recipe for the boxes never to be opened. None of the engineers would want to devote their time to pawing through dusty papers. The CFO suspected he was then going to spend twice for data and analysis that he already had.
There are a lot of old hedgehogs in management, so named because at the first sign of change, they curl in balls with their quills pointing out, making it hard to engage. Hedgehogs say things like “this won’t work in oil and gas”, or “we can do this the old-fashioned way, manually”, or “we are too regulated, too fragmented, too business to business”, or “our operations are 24/7 and can’t be taken off line except in turn arounds or emergencies”. There’s no value here, so move along, move along.
Hedgehogs are not confined to the garden or the work world. There’s a specific piece of equipment used to block tanks in war settings, called a hedgehog. It’s made of steel, designed to be immovable, features lots of sharp pointy edges, and does a lot of damage if you confront it head on.
If you want to find some hedgehogs, take a look at any brownfield plant and equipment. This gear was never designed for a digital world, does not easily support wireless networks, and is manual, paper-based, mechanical, and human centered. There are a lot of hedgehogs running this plant. Even after the pandemic effect, and in the face of oil market upheaval, hedgehogs still deny that digital solutions offer any value.
The End Game for Hedgehogs
Here’s what happens with the hedgehogs in charge.
Compromised market position
Stock market analysts are starting to ask companies to sketch out how they are responding to the digital wave, and what investments are being made. They will be comparing companies to each other and gauging competitive position. Discounts will be applied to companies that are harvesting and not investing in the digital future.
Lack of resilience
Unless a vaccine magically appears in the next 6 months, businesses everywhere will reconfigure themselves more or less permanently for our new pandemic normal. Oil and gas companies face additional headwinds from the energy transition, carbon constraints and unpredictable petro-states. A status quo business model does not look very resilient when all about you is adapting.
Poor talent outlook
Employees in oil and gas have been schooled in the discipline of the market through the downturn. They know they are dispensable, and will be looking to future proof their own careers. Hedgehogs that block digital from their companies are therefore laying the groundwork for talent erosion, or worse, zero talent attraction.
Timid digital strategies
With digital innovations impacting all parts of the economy at the same time, and accelerating in the pandemic, Boards should be asking management for a complete digital strategy refresh. The industry largely proved itself able to implement a 100% remote workforce in a week. Any digital strategy that held out the need for a multi-year roll out should be viewed as timid, cautious and uninspired.
An ecosystem of hedgehogs
It’s the small start ups that have the upper hand in embracing digital. They have fewer constraints, faster decision making, lower initial approval hurdles, and creative talent. Hedgehogs instead double down on their existing ecosystems of like-minded incumbent suppliers who, like them, are slow to embrace change.
Hedgehogs will hire other hedgehogs, and create a kind of top-to-bottom thinking model that discourages change. This manifests when front line workers challenge innovations on the basis of safety concerns. I get this — hastily introduced changes can be dangerous, and need special attention to safety and roll out. But whoever said safety or innovation? Why is digital innovation positioned as anti-safety? Surely it’s safety and innovation? This is hedgehog team-think at its best.
Clearing out the hedgehogs
Now is the time to accelerate the hedgehog strategy. Identify the hedgehogs in the business and move them along to someone else’s burrow. They are not doing you any service.
Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course.
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