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 / Autumn 2010 / Issue 60(originally published by Booz & Company)


Big Oil and the Natural Gas Bonanza

Some industries — pharmaceuticals, for one — are better than others in implementing dual operating models. For example, Pfizer recently created a distinct business unit to engineer biotech-based drugs rapidly, the way the smaller startups in that sector can. These units have full P&L and development responsibilities, and can choose on their own whether to continue investing in particular drug candidates. But such industry dual operating model successes are rare. More common is the experience of the airline industry, in which low-cost, point-to-point carriers like Southwest and JetBlue have shaken up the cost structure and stolen market share from the “majors.” In response, large airlines launched low-cost brands such as United’s Ted and Delta’s Song. Ultimately, managing these separate subsidiaries with lower costs and more entrepreneurial cultures within a high-cost legacy carrier proved too difficult, and Ted and Song were folded back into their parent companies’ operations.

The oil companies’ success in capturing the potential of unconventional natural gas reserves (as well as unconventional oil from new oil shale assets such as the Bakken Formation in Montana and South Dakota, which the independents are starting to pursue) will depend on how well the entry strategy is executed. An acquisition approach will require that the oil company maintain the targeted natural gas firm’s decentralized operating model, while gingerly introducing elements of its own capabilities that add incremental value — such as an integrated supply chain to minimize procurement complexity. The goal should be to improve the natural gas company without destroying its culture, which in large part lets it thrive in the unconventional environment.

An organic approach will require openness to external ideas. The oil major must actively seek out new operational concepts suited to unconventional gas operations, by participating in industry conferences, hiring experts and specialists as advisors and teachers, and setting up internal training mechanisms. Above all, management will need to ensure that existing processes and structures do not discount these fresh ideas because of a “not invented here” bias. If a joint venture is part of this approach, the company will need to develop a plan that allows it to learn from the arrangement, by creating formal and informal governance mechanisms to promote the transfer and dissemination of knowledge.

If designed and managed appropriately, either strategy could be successful, but history suggests that most of the oil giants will struggle to make dual operating models coexist. Though it may not seem obvious today, many of these companies are likely to find that the technical hurdles of unconventional reserves are relatively minor. Far tougher — and ultimately out of reach for some — will be the challenge of changing behavior and culture.

Author Profiles:

  • Christopher Click is a principal with Booz & Company in Dallas, where he focuses on growth and organizational strategies for the upstream sector.

  • Andrew Clyde is a partner in Booz & Company’s global energy practice in Dallas, where he leads the firm’s North American energy, chemicals, and utilities practice, and focuses on corporate and business unit strategy across energy value chains.

  • John Corrigan is a principal with Booz & Company in Dallas, where he serves clients in the area of energy market strategy. 

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