How can energy supply chain companies weather the perfect storm of the oil and gas price crash, Covid-19 lockdown and social distancing, pressure to fully decarbonise and, of course, Brexit?
Over the last four years, the Energy Industries Council (EIC) has worked closely with supply chain member companies to study how they recovered from the 2014 oil price crash. This work has taught us there are reasons to be optimistic and that many companies are resilient and will get through the current market crisis.
There are differences between this crisis and 2014 – most notably the speed with which commodity prices have dropped, due to Russia and Saudi Arabia increasing production when the previous Opec deal expired at the end of March, a lack of storage space and a drop in demand brought on by Covid-19.
Although Opec has now seen sense and set record oil production cuts, this has done little to prop up prices.
A more worrying difference is that supply chain companies which took 30% price cuts across the board after the 2014 crisis have been largely unable to push prices and margins back up since then, and oil companies have held on to those gains. The industry may well have had some “fat” in it in 2014, but that is no longer the case.
Through April, operator behaviours have rapidly reverted to crisis mode, sending out the standard 30% price cut demand letters once again, but this time the industry is no longer fat, after its five-year diet.
Frustratingly, many companies were forecasting that 2020 would be the first year since 2014 that volumes and order books would return to healthy levels again, but is not to be.
EIC interviewed more than 100 member companies to learn which investment and leadership strategies worked best after the 2014 crisis, allowing companies to firstly survive, and then thrive, despite and, in some cases, because of the crisis.
Our “Survive & Thrive” research is more relevant now than ever.
There are reasons to be optimistic. The 2014 crisis was a major wake-up call. Companies back then were far too reliant on upstream oil and gas and UKCS clients and has led to many actively diversifying beyond oil and gas offshore into sectors that are sometimes counter-cyclical and require similar skill sets.
This includes renewables, pharma, infrastructure, downstream and LNG. These more diversified businesses are far more resilient today than in 2014.
The UK Government has already confirmed that offshore wind developments will continue around UK shores unabated by Covid-19, providing vital lifelines for companies in Britain.
Energy transition was the main “hyper-topic” before Covid-19 struck, and there is a war of words and activism just around the corner, pushing for our government to take this chance, after lockdown, to invest more aggressively in net-zero technologies, UK-developed, securing skills and the planet’s energy future.
If Boris Johnson and Nicola Sturgeon have the courage, and can find the money, this will surely feed the supply chain for years to come and fuel a new industrial revolution.
Just imagine platforms electrified with offshore wind, and ships fuelled by “green hydrogen”, made by floating offshore wind powered electrolysis plants. Exciting times ahead. If they do not, other governments around the world will. The COP26 stage beckons.
In 2014, there was a widespread view that the energy supply chain was truly global, seamlessly supplying its products and services to UK and international clients, and was able to export its way out of the crisis. EIC data has showed this to be wrong.
Although 40% of the supply chain had some export share of their revenues, only 10-15% chose to invest in developing new export markets after the crisis – citing that it took too long, coming with too many costs and risks.
The good news is that the industry has worked closely with government and the EIC since then to shortcut the export process with better data available to help companies target best-fit export markets. The EIC also organised a new major event, the Energy Exports Conference, to bring major energy customers and their £100 billion of project opportunities to Aberdeen every year.
Thankfully, some overseas markets are still moving ahead with their projects, especially in the Middle East, where operators are continuing to invest, taking longer-term views on investments and energy transition.
Once furlough and lockdown ends, we will inevitably see a fast, downward resizing of the industry. Backlogs will vary across the supply chain, but experience from the last crisis is that this downsizing will happen quickly, and leaders will retrench with their smaller teams and wallets, refocusing on their key clients and unique selling points.
Many applied the “don’t waste a good crisis” philosophy in 2014, wildly innovating across their businesses, with a common denominator – they reached up to the top levels of their clients and engaged in “grown-up discussions” about what their clients needed in the new normal.
The answers were often challenging and always required agility, but this lifeline applies today more than ever.
Leaders will lean on and hugely value their teams and their skills, culture of quality and reputation, ability to solve problems, and their long-term loyal clients. The near future will also bring opportunities in collaboration, clustering, decommissioning and back-to-basics maximising economic recovery.
Perhaps the most tantalising area of optimism despite Covid-19 for the oil and gas industry is the possibility of full adoption of digital technology, drones, automation and unmanned assets, with all control “onshored”, using existing, proven technology from other sectors to reach the next level of cost reduction, reliability enhancement and health and safety.
We have seen the service sector constantly switching from greenfield to brownfield focus after an oil crash, and could, this time, be accompanied by the full unlocking of digital value across the industry.
Stuart Broadley, chief executive officer, Energy Industries Council