From the upcoming exit of the United Kingdom from the European Union, to the devolution of the once-hopeful Arab Spring into the chaos of the Syrian civil war, together with the turmoil around the globe from Libya to the Ukraine, every industry is currently undergoing some form of disruptive change, and the pace of this change is accelerating fast.
The oil and gas industry is no exception to this change, having experienced a turbulent few years thanks, in part, to the combination of economic uncertainty, geopolitical risk and supply disruptions fuelling volatility in oil and gas prices. From the mid-1980s to 2003, the inflation-adjusted price of a barrel of crude oil was generally under $25 a barrel. This rose during 2003, peaking at $147.30 in 2008, after which the recession hit, and prices started to fall again, never quite reaching their pre-2003 rates.
Another change is the increase in competition for reserves, forcing upstream companies to drill in increasingly remote, difficult and inhospitable locations. Regulatory pressures have intensified, and upstream operators and service companies face much closer scrutiny in the wake of the Gulf of Mexico spill. Meanwhile, the industry faces a number of major structural changes, including a shift in consumption from West to East and the rise of non-conventional hydrocarbon sources such as shale gas, oil sands and biofuels.
Cost control remains firmly on the executive agenda as companies face higher costs of capital, a squeeze on cash and the need for significant capital expenditure. Mergers and acquisitions are also on the rise as oil and gas companies seek to divest non-core assets and as increased competition forces a wave of consolidation among independents.
This isn’t just a VUCA world anymore; it’s becoming ever more VUCA
Andy Grove talked about this moment of change in his book ‘Only the Paranoid Survive’, calling it a “strategic inflection point”. Today, tapping into four key points – Volatile, Uncertain, Complex and Ambiguous – we would call it VUCA TIME.
“…a strategic inflection point, VUCA TIME, is a time in the life of a business when its fundamentals are about to change…” Andy Grove
Financial markets in the West are priced for perfection. What will happen?
China’s new leadership has begun to slow the economy. Will they continue now that the GDP growth is slowing, or will they panic and do a mega-stimulus?
Geopolitics have begun to dominate the headlines. Does Russia’s annexation of Crimea echo the Cold War? Will social unrest further grow in the Arab world?
What are the key metrics for running a business today? Are they reducing costs to boost current profits? Or are they focused on innovation for future growth?
In our increasingly VUCA (Volatile, Uncertain, Complex and Ambiguous) world, the oil and gas sector’s stuttering performance is having a considerable effect on the global economy as many organisations seek dramatic cost savings in its supply chain. This outlook may be ambitious, but ultimately it is non-sustainable, as suppliers find that they are unable to deliver sought savings over the long-term and remain in business.
The situation offers an opportunity to embrace innovation-driven change. The ‘wheel of life’ is eternally rotating. Has the time come to ‘dust off’ the UK’s industry wide ‘Cost Reduction In the New Era (CRINE)’ initiative of the 1990’s?
The initiative began in 1993 and sought to reduce costs at a time when the North Sea Fields were very expensive to operate. With the support of operators, regulators and the government behind the cause, CRINE had a goal to bring an end to adversarial contracts and replace them with alliances and partnerships that shared both the risks and the rewards of oil and gas field developments and operations. It inspired technological advances that stretched traditional operational envelopes to bold new levels.
Innovation driven change offers major benefits. It imbues a culture of continuous improvement, collaboration between all stakeholders, ownership at the point of greatest leverage and a sense of trust and pride.
The foundation principles of CRINE naturally blend with VUCA Prime. The VUCA Prime was developed by Bob Johansen, distinguished fellow at the Institute for the Future and the author of ‘Leaders Make the Future’. The true leaders do not wait for the future passively. Instead of being negative about the VUCA term, they take proactive steps to shape it. Leading in a VUCA world is about transmuting Volatility to clarity of Vision; Uncertainty to Understanding; Complexity to Clarity and Ambiguity to Agility.
At TTM associates, we worked with a number of organisations that upon finding themselves in this VUCA world, have divulged their secrets for maintaining a high performing organisation in such difficult times. We interviewed managers and collected views through focus groups in North Africa where organisations have had to face the normal pressures of a rapidly evolving competitive environment, but in the face of a turbulent political situation in their countries. These managers shared stories of commitment and bravery, as well as some of the practical steps necessary to keep employees focused on the needs of the business.
At TTM associates, we use our Whole Brain Technology to SHAPE the VUCA with VUCA
Within the oil and gas context this delivers:
Leadership mindfulness that ‘nudges’ the organisation in an empowering strategic direction, where technical innovation is embraced wholeheartedly, capturing ‘hearts and minds’ in a compelling manner. Delivering common shared goals and seeing, hearing and feeling the impact of the leadership ‘shadow’. An example is seen in Scandinavia, where the organisational question: “Why did you feel it was necessary to shut down?”, has changed to “Why did you feel it is safe to start up?” – persuading the organisation in the direction of safe delivery.
Clear communications gives focus, deeper knowledge and understanding. This facilitates multi organisation collaboration, where empowered people are supported in developing and maintaining operational excellence.
An open culture where clarity of purpose is embedded into the organisation with shared ownership of delivery. Advanced technology risks and rewards are balanced in a pragmatic cost efficient manner. Leverage points are understood and optimised wherever possible.
Organisational agility is a ‘watchword’ for all. Opportunities to develop change capacity are grasped with vigour – this is the ‘life blood’ of the health and wellbeing of 21st century organisations. An integrated supply chain brings value added to many facets of the business. This develops alliances that have shared ownership – installing pride in world-class delivery.
The oil and gas industry has always been in a constant state of evolution, in turn catalysing changes in the societies in which it operates. The schismatic changes of the 1970’s heralded the dawn of a new era, however, the combination of changes that the industry now faces requires epic responses rather than simply incremental ones, for the industry to evolve and prosper. Those responsible both inside and outside the industry need to try to understand what is happening now and how it may affect the future, to explain their strategies clearly and to adapt to new situations as they develop. In a world where technology and environmental threats are forcing both industries and society to change at an increasingly rapid pace, the slow-turning super-tanker is not an image that excuses inertia in oil and gas companies and those who deal with them. All those who are either in the industry or involved with it need to share clear thinking about the future.
We require Mindful Leadership from our top companies to solidly demonstrate that incremental continuous improvement is the strategic way forward. Safeguarding the sector and the supply chain. A combination of careful planning, partnerships across the supply chain, the acceptance of technological innovation and an open mind that seeks to overcome historic barriers can provide the bedrock, as the sector explores the next 20 years – at a time when global competition can only intensify. It is a new world for the sector – one of real opportunity to be embraced by all.
- “Living and Leading in a VUCA World”, Paul Kinziger and Karen Walch [Link]
- “Leaders Make the Future”, Robert Johansen [Link]