E&P Challenges and Opportunities: Rhapsody in “C”
Helge Hove Haldorsen, 2015 SPE President
Last month, my column set the course for my new term as SPE president by encouraging our 124,000 members to be very proud of their professions, which provide energy for human progress. As the ExxonMobil ad says: You have “changing the world” in your job description. In this column, I will describe the challenges and opportunities that our members and the exploration and production (E&P) industry face. Solutions to the challenges will come through SPE, a catalyst for innovation and rapid global sharing of incremental and radical improvements. In the process, we will help our industry become E&P 2.0.
Have you noticed that everything critical to respond to, address, and improve on in E&P seems to start with the letter C? We see changes all around, increasing complexity costs relentlessly rising, correct petroleum engineering forecasts few and far in between because of insufficient cross-discipline collaboration with the industry’s capital efficiency and competitiveness taking a beating. E&P investor focus is firmly on value rather than volume. Investors want to see a high TSR (total shareholder return), a positive net cash flow after dividend, and a strong return on investment—basically more bang for each invested buck. Unlike a few years ago, a strong production growth outlook (for example, to 2020) no longer earns you a premium valuation in the marketplace and short-termism is rather prevalent.
Local communities in which we operate rightly expect more from us to earn their trust and a constant and relentless focus on HSSE-SR (health, safety, security, environment, and social responsibility) every day is what it takes. With absolutely no short cuts allowed. Then, there is the joint global challenge around climate change, sustainable development, and the notion of a carbon bubble (that there is an upper limit to how much fossil fuel can be burned and CO2 emitted if the planet is to stay below 2°C relative to preindustrial levels.) Compounding the issues, we have the industry big crew change going on with attempts to navigate success with less experienced leaders and professionals. At the April 2014 Cambridge Energy Research Associates (CERA) Week in Houston, the buzz was: “A new sense of reality has set in. The cost side now exceeds the income side in many E&P projects and USD 100/bbl is the new USD 20/bbl. Industry needs USD 100/bbl for field development projects to fly.”
On the positive side, we are teaming up as an industry every day to deliver more than 90 million BOEPD and 350 Bcf/D. We just have to do it more safely, more cheaply, more quickly, more sustainably, and with higher margins and returns to be competitive. That is the core challenge and that is the core opportunity for us, our employers, and for the E&P ecosystem as a whole (universities, research and development, service companies, oil companies, and more.) It is a mission to share for the industry and all of SPE’s 124,000 members and staff. For the next 50-plus years, hydrocarbons will continue to fuel the world and it is our duty to take every integral part of E&P to the next level in order to relentlessly improve the sustainability and competitiveness of our business.
Whereas we have often heard that the easy oil is gone, now it seems as if every barrel is difficult and expensive to get to the consumer. In actuality, it has never been an easy task to extract natural resources and to bring them to market. What is the solution to all this? What should we do? How can each of us and SPE play a key role? Well, the answer is right here in SPE’s mission: to collect, disseminate, and exchange technical knowledge. And SPE’s vision: to enable the global oil and gas E&P industry to share technical knowledge needed to meet the world’s energy needs in a safe and environmentally responsible manner.
To me, the only way to improve every aspect of what we do is to imagine safer, quicker, more sustainable, cheaper, more value-creating ways of producing oil and gas. If we cannot, then we have a failure of imagination and the industry would be in danger of ending out on its asymptote. Perhaps imagination soon will become a key competitive advantage. Having imagined it, we need to engage in creative destruction all along the E&P value chain in incremental ways (small and gradual improvements) and in disruptive (or radical) ways.
Connected employees are much more valuable to their employers. So, where do creative, good ideas come from? You sitting all alone in your office looking for them? Hardly. Compare that with attending a few SPE conferences, listening in on a variety of papers, connecting with like-minded professionals, attending a workshop on a niche topic you work on, or reading a new issue of The Way Ahead and HSE Now. You will “honestly steal” loads of people’s imagination, adapt it to your circumstance and apply it in your job, thus creatively destructing things around you and creating 2.0s where you are. The question should not be: Can I afford to go? It is rather: Can I afford not to go? The majority of new good ideas (for you) comes from outside your company. After attending an SPE meeting, I know I come home with a notebook full of ideas that I want to try at home and a stack of business cards: my new valuable connections. I have come to believe that people’s innovative ability really is a function of how curious they are, how much they “feel like a student” all their lives, and yes, how connected they are. Curious people know a million things and they become innovative and creative by making unexpected connections between things. By connecting two unrelated dots, each dot by itself often wholly unremarkable, you can spark an original, creative idea. Therefore, just like oil is found in the mind of explorers, E&P 2.0 is found in the mind of curious people connecting dots they collected at SPE conferences or at SPE Connect or by speaking to someone completely outside the E&P business. To appreciate how much we can learn from creative destruction processes going on outside E&P, I suggest reading “The Creative Destruction of Medicine” by Eric Topol.
Our industry is very competitive and the concept of competitive advantage is applicable to the many layers of the E&P ecosystem. It can be used in the context of oil and gas competing with renewable energy sources in 4 Es: E1–sufficient energy supply, E2–developments must be economic, E3–environmental footprint must be minimized, and E4–education of stakeholders and science, technology, engineering, and mathematics (STEM) students is a must Competitive advantage for oil supply sources (and geographies) such as deep water, improved oil recovery, unconventional resources, oil sands, and Arctic oils competing with each other in a Darwinistic survival of the fittest oil context in which again, the winner is the oil that is “fittest in 4E.” The next level of competitive advantage is between companies and corporate cultures, and even between you and me.
There are two principal ways of being fit and winning in the marketplace to achieve cost leadership or some other type of corporate competitive and unique differentiation that sets you apart and helps you deliver above average returns for the sector. With no differentiation, professor P. Kale of Rice University says that you end up being stuck in the middle with below average returns as a consequence. The most common competitive advantages that companies strive to generate are: structural competitive advantages (you lease up the sweet spots in a play at a low acquisition cost), frontline execution advantages (nobody can execute like you and the resulting earnings per barrel or margin is the best in the play), and early foresight/insight advantage (you introduce something new or 2.0 in the field before anybody else, such as being able to do hydraulic fracturing without using water).
Collaboration: The New Competitive Advantage?
Traditionally, many have had the mental image of business equals war. I think increasingly, collaboration can be the new competitive advantage. Soon the boss will say: Show me your network rather than show me your organizational chart. In a world with 7.2 billion people, many more solutions will have to be collaborative with collaborative people having an advantage. Human resources personnel already say: hire for attitude, train for skills. Did you know that if A=1, B=2, C=3, D=4 … and Z=26, then ATTITUDE=1+20+20+9+20+21+4+5=100? It is quite possible that in many situations, more value can be created in E&P with C for collaboration than with C for competition. Collaboration 2.0 may be the next big thing and, therefore, SPE has a very bright future since collaboration is the core of SPE’s vision and mission. Team SPE is 124,000 members on a mission to share! By constantly renewing and adapting SPE to the changing needs of our global membership and the E&P industry and by using the best e-tools available for connecting and sharing and innovating, SPE 2.0 becomes the rising tide that helps lift the industry to E&P 2.0. I encourage everyone to please come forward with your best ideas for SPE 2.0. If SPE was a big jazz orchestra with 124,000 instruments, the music we play is best when everyone jams along and offers his or her great instrumental solos in the “Major Cs” that we have discussed.