strategy+business is published by PwC Strategy& LLC.
or, sign in with:
strategy and business
(originally published by Booz & Company)


Big Oil’s Big Shift

Moreover, regardless of the outcome of the civil lawsuits rising from the Gulf spill, their visibility and virulence will make any oil company think twice before risking the same sort of liability again. Companies will need impeccable safety and environmental records to attract investment. Less competent upstream oil companies will have a much more difficult time keeping their operations well funded.

In the face of all this, the cost of oil production will increase considerably. The most vulnerable category of businesses will probably be the smaller independent oil companies that are directly engaged in exploration and production. Some of them will now find it so expensive to work in deep water that their operations there will be threatened. They may reallocate their capital elsewhere, perhaps selling their interests in deepwater operations to the oil majors. As for oil-field services companies, which generally provide technology, expertise, and ancillary operations to the sector, they will now be able to charge higher prices to cover their costs, including the wages of more experienced workers expert in rigorous environmental and safety practices. Insurance premiums will also rise, as will investment costs for maintenance, contingency planning, and the infrastructure needed to provide safeguards, such as blowout prevention devices, sensors, and oil-spill-response vehicles and equipment.

All these cost increases, many of them made in direct response to the Gulf spill, will probably drive up oil prices. Adam Sieminski, chief energy economist for Deutsche Bank AG, has forecast a price rise of US$5 to $10 per barrel over the next few years due to the accident.

Ironically, these developments could represent an advantage for the oil majors in the long run. Two things that they will have going for them will be their expertise across the value chain and their appetite for risk. Using their long experience in the oil patch, the majors will increasingly have to pull together and oversee networks of independent companies to take on the challenges of the next wave of drilling. Some critics have called for the majors to stop partnering with contractors, but this won’t happen; the expertise and technology necessary to handle more complex drilling activities is scattered among too many different companies.

But the oil majors will have to manage their contractors differently, working more closely in teams with business partners that earn their trust over a long period of time, and in some cases taking stakes in third-party providers to better control their performance. This partnership model must be built on interdependence and mutual respect — a significant change from long-standing practices in some parts of the sector. The oil majors will also need to revise their operating models, sorting out a different mix of activities to outsource, and bringing some of the most critical oversight functions back in-house — so they can address quality issues and place employees on the front line to better oversee the growing situational risk in oil drilling.

Some new types of partnerships in the industry will emerge between national oil companies and the oil majors. NOCs operating in more and more complex environments will seek partners that can manage both risk and liability. Oil majors may have to wholeheartedly embrace this role (and the skill set that goes with it) to survive. Of course, sooner or later, some NOCs will concentrate on building their own capabilities to own and manage risk and liability, thus cutting the majors out of even this part of the business. By that point, some NOCs may be moving into international waters and becoming, in effect, oil majors themselves. Meanwhile, there will be entrepreneurial opportunities for new firms that can provide services for oil-spill prevention and cleanup, emergency response, and operational safety, as well as companies that develop new oil-field technology.

Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store


Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.