Unleashing Industry Potential

Abdul-Jaleel Al-Khalifa, 2007 SPE President • president@spe.org

There is a heated debate about the fate of the petroleum industry between two schools of thought—the pessimists and the optimists. The pessimists strongly advocate that oil production has started or will soon begin unavoidable decline. They cite many examples of mature basins, such as the Lower 48 in the U.S. and the North Sea, and most obviously the fact that new discoveries have lagged global oil production since 1980. On the other hand, the optimists affirm that such doom and gloom predictions will fail, as did similar claims in the past. They cite the fact that global oil reserves keep increasing, thanks to developments in technology and better understanding and delineation of existing fields. They aim to add a trillion barrels to the current booked reserve of approximately 2.2 trillion barrels (produced plus remaining). They also count on the potential of unconventional resources, such as tar sands and oil shale. So, where do you stand in this debate? I am sure you would like to know where I stand.

Over the past 150 years, the petroleum industry has never failed to meet the growth in demand. Will it fail in the future? The market has been effective in curbing demand and sustaining supply. Also, technology innovations have continued to reshape the energy landscape. This pride in historical success, however, may lead to overconfidence and tragic complacency. We cannot look for the future in our rear-view mirror. Furthermore, it is too humble of an aim to settle for past achievements. Let me illustrate this point by discussing some realistic challenges.

At the resources level, the scenery of the oil field is not as green as before. The easy oil has been produced, and now is the time to bring marginal oil on and continue to sustain maturing fields. The addition of significant reserves from unconventional resources may not help to sustain much higher production targets. The environmental footprint, associated water usage, and gas emissions related to producing these resources are challenges that our industry needs to face at a much higher level.

The cyclic nature of the industry is due to complex variables that are outside our sphere of influence and cannot be predicted by even the most brilliant strategic planning experts. Therefore, if a “tsunami” of a demand/supply imbalance hits the industry, we will all scramble to recover the remains of the industry’s image. This tsunami can be a heated demand or an excessive supply that can lead to a glut or to a shortage in the oil market. This has happened several times and it may happen again.

In light of these challenges, it is time to aim high and not settle for only meeting demand. The issue we should address is how can we unleash the full potential of the industry? Currently, there is a flush of capital hunting for opportunities in the petroleum sector. There are also abundant hydrocarbon resources, as both pessimists and optimists agree that current ultimate recovery is low and can be significantly enhanced. The issue, therefore, is in the “soft” parts, which are the talent (employees), the leadership, and the business model of the industry. Are these related, and how can we look at them in a holistic approach?

To understand the whole system, let’s liken our industry to a human body, where corporate leadership is the heart and the talent is the blood that circulates through the veins. For the body to survive, the blood has to circulate, the heart has to beat, and the rest of the body has to be healthy. Therefore, the whole system includes three domains: our business model, corporate leadership, and talent (Fig. 1).

Fig. 1—The system approach to unleashing our industry’s potential involves three domains: human capital (talent), corporate leadership, and our business model

Human Capital

The petroleum industry lost almost 500,000 jobs in the 1980s and 1990s, according to a 2004 survey by the American Petroleum Institute. Currently, the average age of petroleum professionals is 47 years. According to the Independent Petroleum Association of America, 40% of the industry’s skilled professionals are expected to reach retirement age by 2010. A November 2006 SPE member survey showed that only 57% of petroleum professionals are engaged in their jobs.1

The University of Houston Global Energy Management Institute surveyed top upstream oil and gas companies to quantify the financial impact and lost-opportunity costs associated with the current workforce shortage.2 The study examined costs of operational inefficiencies caused by lack of experienced staff. These include lost or delayed projects, delayed geographic and market expansion, and safety-related costs. The study also considered strategic opportunity costs. The total annual cost resulting from a shortage of talent is approximately USD 5 billion. (Replacement/attrition/bonus/adjustment cost is approximately USD 2.2 billion and the lost profits is between USD 2 and USD 3 billion.) The study also estimated the annual overall impact to shareholders as between USD 32.7 and USD 45.8 billion. The study did not estimate the cost of disengaging 43% of the current workforce, nor did it assess the permanent reservoir damage and loss of oil reserve due to insufficient talent resources.

Therefore, our industry’s challenge is how to attract the best talent and how to keep them engaged through their career.3-6

Corporate Leadership

Most E&P companies develop their management succession from within the petroleum industry. Contrary to this practice, the Global Energy Management Institute survey indicated that bringing leadership from outside the energy sector will provide more strategic vision and can resolve the current issues facing the industry.2

An analysis of the careers of executives in the Fortune 100 companies indicated that a majority of the energy-sector executives have backgrounds in chemical engineering, geo-science, or petroleum engineering. Furthermore, more than 90% of these executives have spent their entire careers in the energy sector. Contrary to this, the majority of the executives of the other (i.e., non-energy) Fortune 100 companies had a master’s degree in business or finance and had experience in more diverse industries.

Therefore, our industry’s challenge is to nurture a leadership that embraces diversity, excellence, fairness, and innovation at all levels and on a much broader scale.

Industry Business Model

The petroleum industry is a long-term socio-economic endeavour that extracts a finite natural resource. Globally, the beneficiaries include producing nations that aim to develop alternative sources of revenue, as well as developed industrialized nations that aim to sustain growth and prosperity. At the company level, the stake-holders include share holders, who seek to create wealth; the leadership, who runs the organization; and the workforce, who makes things happen in the workplace. The business model has to be robust enough to satisfy all these global and local stakeholders.

Unfortunately, the current business model is short-term and cyclic, lacking the long-term vision needed for the petroleum industry. Following are two examples of cascading events that can happen within few years.

If an epidemic threatens a nation, it will slow down travel and economic growth. That reduces oil demand, which drops oil price. This in turn impacts the cost structure of corporations. Share-holders will then exert pressure on company leadership. A merger or restructure will then occur, resulting in downsizing of the workforce. And students will avoid joining petroleum-related disciplines.

If only few years later, a geo-political crisis happens close to oil basins, it will heat the market and elevate oil price. Corporate leadership will quickly meet the market demand and tap the opportunity. Drilling and production activities will increase. The company will hire a new wave of talent. And more students will join petroleum disciplines.

This cyclic and short-term business model sustains neither talent nor technology, and hence can induce a very inefficient cost structure. The current inflated market is a good testimony to this hypothesis. Therefore, our industry’s challenge is to align the business model with the long-term nature of the industry.

I do not have answers to these questions, but I hope they will stimulate a useful discussion in the professional, leadership, and business communities. It is imperative that we unleash the full potential of our industry. I estimate that the industry can gain 30% efficiency by making step changes in talent engagement, leadership development, and modifications of the current business model (Fig. 2).

Fig. 2—The industry can gain 30% in efficiency through talent engagement, leadership development, and modification of the current business model.

References

Al-Khalifa, Abdul Jaleel: “People First: People KPI,” JPT (February 2007) 10.
Gould, Luke et al.: “The Workforce Crisis in the Upstream Oil and Gas Sector,” University of Houston, Global Energy Management Institute (April 2007).
Al-Khalifa, Abdul Jaleel: “People First: Full Engagement,” JPT (November 2006) 10.
Al-Khalifa, Abdul Jaleel: “People First: Excellence and Fairness—Part 1,” JPT (December 2006) 10.
Al-Khalifa, Abdul Jaleel: “People First: Excellence and Fairness—Part 2,” JPT (January 2007) 10.
Dychtwald, Ken; Erickson, Tamara J., and Morison, Robert: Workforce Crisis, Harvard Business School Press., Boston, Massachusetts (2006)