Bjorn Ewers, Managing Director & Partner at Boston Consulting Group (BCG) and Jean-Christophe Bernardini, Partner & Associate Director at Boston Consulting Group (BCG) talked to Julian Walker about the impact COVID-19 has had on the energy sector and what companies are doing to limit the fallout
What impact has COVID-19 had on the energy industry?
The impact of COVID-19 on the energy industry has been significant. Oil and gas is the lowest-performing industry in terms of shareholder return over the last decade at two percent compared with other industrial sectors, while there has been an accelerated decline over the past year. Yet another unforeseen shock stemming from the pandemic is the Oil and Gas performance and fundamentals.
The recovery timeframe is uncertain, as emphasised with no near-term price forecast reaching US$60/bbl. The oil market’s recent shock has created a highly precarious situation, with unprecedented demand destruction through worldwide social distancing and sustained lockdown orders. Furthermore, supply and storage are also areas that have been affected. In terms of supply, it is unlikely OPEC+ production will sufficiently reduce as this would require upstream and refinery shut-ins. In regards to storage, space is running out, leading physical and financial markets into unchartered territory. Whatever the recovery may be in the future, it is essential to plan for a rebound by doubling down on the transformation effort.
What should companies be looking to do to mitigate the challenges faced by COVID-19?
There are three main imperatives for companies as they attempt to mitigate the challenges faced by the pandemic. First and foremost is the response, with firms required to take rapid action to ensure all personnel’s health and safety while simultaneously ensuring business continuity. Secondly, they must regroup, taking deliberate action to manage through the uncertainty and ensure resilience. Rebound is the third imperative, which entails taking bold action to drive future value by doubling down on transformation efforts. Our observation is that today, most Oil and Gas companies have responded and regrouped. However, the ongoing situation continues to evolve, and companies should ultimately have a plan to rebound back and ensure resilience by diligently managing the cost-base.
What have the responses been so far by energy companies to COVID-19?
The effects of the pandemic are widespread, and energy companies have responded differently. That being said, there have been several overall themes. These include a push to drive the energy transition and circular economy, the financial impact causing companies to consider the best approach to manage employees and recruitment, majors postponing share buy-back programs and reducing spend, and national oil companies continuing to spend domestically while seeking to increase KBR’s Proprietary Cracker Technology Selected by Baofeng Energy for Project in China.
KBR has been awarded two contracts by Ningxia Baofeng Energy Group Co. Ltd (Baofeng Energy) for its 500KTA coal to olefins project & 500KTA C2-C5 comprehensive utilisation project to be built in Ningdong Town, Lingwu City, Ningxia, China.
Under the terms of the contracts, KBR will provide process technology licensing and process design packages for this project, which will have an annual production capacity of one million tons of olefins. Once completed, the complex will be the largest single-train methanol to olefins (MTO) plant in the world.
KBR will use a combination of its best-in-class SCORE steam cracking and MTO recovery technologies to achieve Baofeng Energy’s project objectives of highest yields and lowest capital investment. The SCORE steam cracking unit will convert the ethane and propane feedstock into ethylene and propylene, which are later separated and further purified in the MTO recovery section to ensure the quality needed to produce polymer grade ethylene and propylene. The MTO recovery process utilises KBR’s commercially-proven technology, which in addition to superior performance provides CAPEX and OPEX advantages over other technologies.
“We are proud that Baofeng Energy has selected KBR for this breakthrough world-scale MTO complex,” said Doug Kelly, KBR President, Technology Solutions. “This award is a reaffirmation of our continued commitment to helping our clients maintain their competitive edge through technological advancements and delivering the best return on their investments.”
Additionally, we have also seen midcaps aggressively cut spending, impose delays, and restructure staff, as well as shale operators quickly halting completions and refocus on core permits.
What must the energy industry do in order to survive in a post- COVID world?
To survive in the post-COVID world, five strategic imperatives should be at the core of a structural transformation effort. For starters, the energy industry should work to strengthen stakeholder value proposition. Companies should become purpose-driven to create loyalty among stakeholders and inspire them, balance investments in the core business, dividends, and new business to attract the right investors; evaluate growth opportunities considering stakeholders’ perceptions and expectations, and determine where value is created or destroyed in the integration process while rethinking the legacy integrated Oil and Gad model.
Next, the industry must future proof the hydrocarbon portfolio – optimise positions within and across the value chain to improve portfolio resilience in a lower price category for more extended periods in a decarbonised environment, define roles in the waves of industry consolidation, and access the next trench of resources at competitive terms. Another strategic imperative is to leverage the current context to accelerate the transformation of the core, implementing a new operating model to optimise cost base and setting the foundations for transformation by reinventing end to end workflows, organisational designs, and teaming constructs. At the same time, accelerating the digital transformation agenda and apply agile principles can also be leveraged to unlock step change in performance and cost (e.g. accelerating the unmanning agenda to reduce risk exposure in term of safety and reduce OPEX and CAPEX), while service delivery models ranging from internal support services to suppliers can challenge and be innovated to amplify productivity.
Building and scaling robust new businesses is also a necessity. Innovative business models to ensure a rapid and sustainable response to industry and global shifts form part of endeavours in this regard, as does identifying, growing, and scaling new businesses to capture additional value. Finally, the energy industry must also sustainably drive large scale change across organisations to survive in the post-COVID world. This entails integrating employees in the process and enabling them to make an impact, adopting a leader-led approach by activating and allowing the leaders to foster a new culture and oversee change, and running an activist Program Management Office to drive transparency and measurability of the change process.
What measures can companies take to emerge stronger from the crisis?
Looking ahead to the post-crisis era, companies can emerge stronger by engaging in a deep transformation to adapt to the ways of working in a new reality. That being said, two fundamental questions should be explored by organisations. The first is ‘how to radically drive value and transform productivity?’ The second is ‘How to innovate?’
With a clear direction to these questions, Oil and Gas companies can drive better collaboration and digital solutions to reach the next level of performance. If and when successful in this regard, they will capitalise on a host of benefits. These include identifying untapped value pools to understand existing frictions, reinventing core workflows and outcomes as a user-driven company, unlocking value with digital tools and agile ways of working through a unified digital platform, redesigning the organisation and ensuring support functions are aligned with desired business outcomes by fortifying asset centricity, and driving change at scale to measure the impact and replicate the approach across the organisation.
Will COVID-19 bring forward the need for energy companies to digitise?
Yes, digital will be critical to the structural transformation effort for energy companies. Due to the pandemic’s effects, a core reset approach is already fundamental to reinventing exploration and production workflows (related to drilling operations, production or maintenance activities, etc.), as organisations can achieve a 30–50 per cent cost reduction and drive sustainable performance. Although the global Oil and Gas industry is mature on digital strategy, it lags in execution. Despite nine out of 10 companies having some form of digital vision, only 15 per cent have multiple high-value use cases that reinforce each other to succeed in end-to-end decision-making. While digital is a key enabler, it should be fully integrated into the transformation agenda.
After all, a digitally transformed Oil and Gas company would have reinvented end-to-end workflows enabled by digital and new ways of working, step-changed performance integral to productivity gains across and within traditional silos, company-wide access to quality data so they can build gradually through use cases. Examples of use cases that BCG has seen in major producers include optimisation of cost and production by 15-20 per cent, which impacts equipment shutdown activities, leveraging digital twin technology with specific use cases to bundle and rationalise operations, and improve the sequences and gains of productivity in preparation and execution.
These use cases will need to be supported by robust data governance and a streamlined process to lead integrating silos and optimising value. At the same time, digital would also become embedded in the organisation, serving as a core part of the strategy, execution, and capabilities across the business, while the new tightly integrated ecosystem would drive and fund innovation in close collaboration with suppliers and partners.
One may ask, ‘why is this important?’ Simply put, digitally mature operators drive higher value than peers. Firstly, total shareholder return performance increases with digital maturity by six percentage points when compared between a starting and performing digitally matured Oil and Gas company. Secondly, breakeven costs for companies with a mature digital core can be lowered by one third when compared between a starting and leading digitally grown Oil and Gas company.
Will COVID-19 lead to faster energy transition?
We believe that the pandemic has pointed priorities for energy companies. In May, a joint public letter was signed by CEO’s of the Oil and Gas Climate Initiative (OGCI), reaffirming their commitment to accelerate the transition to a low carbon future, even in the face of the crisis. In the letter, they highlighted that the pandemic is further crystallising the focus on what is essential, namely health, safety, and protection of the environment. We have also seen that major Middle Eastern producers have made tangible steps towards decarbonisation and have a competitive advantage considering their reserves base.
This interview first appeared in Pipeline Magazine's September issue