Big Oil: Toughen It Out, or Business Model Reboot? - Upstream Oil & Gas

Big Oil: Toughen It Out, or Business Model Reboot?

By Maurice BernsJohn HartungHege Nordahl, and Philip Whittaker

Big Oil’s operating model has been under pressure in recent years as the majors face mounting competition from more specialized independents and as lower oil prices have crimped margins. For the majors, costs have risen and returns have fallen. However, the days of Big Oil are by no means over. Its unique blend of technical capability, capacity for risk, global reach, and financial strength will play an important role in oil and gas development in the years ahead, according to a new report by The Boston Consulting Group and Morgan Stanley Research.

The report, Big Oil: Toughen It Out, or Business Model Reboot?, shows how Big Oil’s model must evolve for it to maintain its relevance.

First, the majors need to reset their costs by a significant margin. This goes beyond simply using their market power to extract lower prices from suppliers. The majors must drive fundamental change internally, embracing technical standards, operating efficiency, and strategic alliances with other operators in addition to traditional cost cutting. Most operators have, at best, just begun these steps.

Second, Big Oil must overhaul its operating model. The model of the broad generalist is under pressure, and specialization is on the rise. The one-size-fits-all model of the majors is not well suited to these changes. Big Oil must reduce complexity and overhead while developing a portfolio of focused businesses.

Finally, Big Oil must embrace cultural change to sustain its reduced cost structure and overhauled operating model. The majors still lack a truly cost-conscious culture; their focus has long been on safety, volumes, and reliability. Unless this focus changes, efficiency programs will not realize their potential, and Big Oil will continue to face the declining returns of recent years. Big Oil cannot afford simply another episode of incremental cost adjustment—its problems run much deeper, and 2015 may be not only the best but the final chance for some companies to shape a competitive future.

The report identifies three areas on which the majors should focus in adapting their business models for this new environment:

  • The majors should adopt new performance metrics and reward systems. They also must remove organizational layers and rethink how decisions are made within their organizations.
  • Operators must focus on transparency, performance management, and leadership. To change core values, executives must clearly define accountability, improve transparency by insisting on frequent performance reporting, implement cost-focused management, and demonstrate stronger leadership overall by making visible, cost-focused decisions themselves to demonstrate their commitment.
  • In today’s geographically and technically varied environment, Big Oil must consider new ways of doing business, such as more intensive collaboration with suppliers. It also may need to curb exploration, consider other methods of adding reserves, and, in the case of integrated companies, adopt the cost focus that has long been used by downstream segments.

Making changes in these areas is the first step, sustaining them is the second. The report targets eight specific areas across Big Oil’s operations, from technical specifications to maintenance to organizational structure, which must be reexamined if the majors are to embrace meaningful change.

The potential rewards, however, are great. Big Oil could reduce costs by 20 percent or more, the report finds.

However, the report also stresses the need for Big Oil to act soon. Considerable gains are up for grabs in the rapidly changing environment. Lower oil prices are forcing a race to efficiency across the industry. Big Oil, which has found itself at a disadvantage in recent years, now has a chance to reboot its business model and solidify its defining role in the global energy market of the future.

Big Oil: Toughen It Out, or Business Model Reboot?