Oil and Gas: Lessons Learned in 2020 and How to Prepare for the Future
The oil and gas industry has experienced more uncertainty in 2020 than ever before, which is largely due to the pandemic and the ensuing global supply chain disruption, volatility in demand, and the collapse of the travel industry. According to the International Air Transport Association (IATA), travel is down 30% compared to 2019, and U.S. oil production is down to 11.2 million barrels per day, from 13 million in 2019.
Successfully navigating these uncertainties demands business agility, more so now than ever before. Let's take a look at the key lessons oil and gas companies should take away from the volatility of 2020 to be better positioned for 2021.
Driving cost savings and corporate responsibility: Key lessons learned in 2020
COVID-19 has disrupted the world, spreading illness and shuttering businesses. To thrive, companies in oil and gas need to get better visibility and control over costs, and they need to focus on meeting their sustainability goals, like reduced carbon emissions. This means that:
Cost containment is critical
In 2020, companies have had to do more with less, as budgets have been cut significantly. As Martin Brotschul, Principal at Deloitte, states, "Now that the appetite for spending money is low, the ROI needs to be high."
Any initiatives must have a clear ROI, and those with a year-one payback are being prioritized. Moreover, the U.S. Energy Information Administration (EIA) forecasts that the fourth quarter of 2020 will see a crude oil average of $42 a barrel (/b), after starting strong at $64/b from the beginning of the year.
The volatility in oil prices and other pandemic-related stressors have driven the need for:
- Cost control: Oil and gas companies need to facilitate more rapid capture and analysis of spend. They also need to work to reduce costs over the long term.
- Visibility: Organizations need visibility into project costs and areas for potential cost savings.
- Predictability: Companies must be able to anticipate demand changes rather than simply reacting to them.
According to Brotschul, "The focus on cost management is critical given where oil is and where the forecasts are for certainly the remainder of this year and potentially going into next year. This drives that need for cost control, visibility, and predictability. It cannot be overstated how important that is for all companies."
Effective cost containment strategies, such as applying analytics to identify cost savings opportunities in the supply chain, and retaining core skills during headcount reductions, will be essential for driving operational excellence in the oil and gas industry in 2021.
Sustainability remains top of mind for stakeholders
Consumers today are becoming more environmentally conscious. Companies must meet this demand with sustainable products that reduce their supply chain carbon footprint and lead the industry to determine how to maximize production while remaining carbon-conscious. Concurrently, there's a need to address sustainability concerns from stakeholders, especially with sustainability now at the core of investment decisions.
Those in the oil and gas sector are looking for suppliers that align with their corporate responsibility goals. Digital technology, like business spend management (BSM) software, helps companies reduce their carbon footprint and provides the insight needed to make informed supplier decisions.
Mergers and acquisitions require visibility and control over spend
While 2019 was a slow year for mergers and acquisitions (M&A), they were on the rise in 2020 with larger M&A deals resulting from companies consolidating to cut costs.
Companies need to maximize the value of these integrations and achieve cost savings by meeting synergy targets — i.e., achieving the revenue, cost, and financial goals of the M&A. This is possible by putting controls in place to do away with unnecessary spend, such as buying items off-contract.
For example, take a look at Beach Energy, a mid-cap oil and gas company based in Australia. Beach streamlined its operational processes and gained greater visibility and control into spend across its enterprise. The result? Beach was able to exceed its acquisition synergy targets by 150%.
How oil and gas companies can better prepare for the future
"What we've seen in the past downturns is it's accompanied by a rapid inflation of costs," said Brotschul. "While companies get aggressive and take out costs in times of low oil prices, historically, as markets rebounded, they've seen their costs skyrocket. So, how do you put in place that process or system to more effectively not just take out costs in the short term but maintain and observe costs on a longer-term basis?"
The oil and gas industry can help contain costs, achieve synergy targets, and incorporate sustainable practices into their business using BSM technology.
Disparate systems lead to siloed information in different operational areas, hindering the ability to derive meaningful insights from the data across the enterprise and supply chain. BSM technology breaks down these silos to increase visibility into critical data and to help oil and gas companies achieve the following results:
Manage spend control
Getting greater visibility into all spend activities is especially crucial today when companies find themselves having to do more with less. Technology that centralizes the spend management process can help oil and gas companies operate more efficiently by doing away with legacy systems and showcasing all spend in a single location.
A comprehensive BSM system is key for controlling project costs, allowing companies to control costs as the market rises, and providing real-time visibility into all spend.
Put controls in place for supplier management
Oil and gas companies need to monitor suppliers for environmental and supply chain risks. They also need to manage and track suppliers effectively to ensure they're following protocols.
A comprehensive BSM enables suppliers to collaborate at no cost. It provides visibility into supplier performance to ensure companies are working with the best suppliers for meeting sustainability goals.
Become more agile
The uncertainty 2020 brought makes business agility more important than ever before. BSM technology drives agile innovation by enabling companies to make faster, more accurate decisions by leveraging community-powered insights for purchasing decisions.
BSM software also helps oil and gas companies measure the impact of corporate responsibility initiatives by measuring results against the company's goals.
Technology empowers companies to adapt to a changing landscape
Today, oil and gas companies must adapt to a rapidly changing landscape to be successful, and technology helps streamline this process. BSM technology provides the visibility needed to control spend, mitigate supplier risks, and make better decisions, which, ultimately, improves their bottom line.
It's critical for those in the oil and gas industry to position themselves for success in 2021, and they need an integrated, centralized solution to help them do so.