Allen H. Mesch
President
Petrostrategies Inc.
Plano, Tex.
Managers need to develop robust strategies that will provide for survival and success in the turbulent oil and gas industry.
Through discussions with industry leaders and reviews of published information, I have developed ten basic concepts to guide strategic thinking. The principles are broad enough for application in all aspects of the industry.
From wellhead to gasoline pump, the oil and gas industry has experienced unprecedented volatility during the past 20 years. Industry dynamics make it almost impossible to predict oil and gas prices.
To determine future energy prices we require the ability to forecast economic, technological, atmospheric, and political conditions.
We realize that applying past concepts and logic to predict changes won't work. Economists have struggled unsuccessfully to make exact prophecies. Technological breakthroughs are almost impossible to anticipate. We have all had weekend picnics ruined by thunderstorms that the weatherman failed to warn us about. Political events such as the Iraqi invasion of Kuwait, the breakup of the Soviet Union, and the strong third party candidacy of Ross Perot confirm the difficulty in foreseeing these events.
Not only is the world changing, but the changes seem to be occurring at a faster and faster pace. No longer do we have the stability provided by the major energy companies that dampened the effects of change. The communications revolution has allowed markets to react quickly to news about petroleum stocks, production quotas, economics, and weather. The ability to trade on this information in energy future markets has increased price volatility.
Therefore, we find ourselves in a world that is changing more rapidly and growing more unpredictable. Given this situation, how do you operate to survive and succeed? I would like to suggest ten strategic concepts for managing in this new dynamic environment.
CHANGE IS INEVITABLE
Today's successful managers must learn to deal with changes in business conditions. The external business environment can be viewed as a PEST (Political/Economic/Social/Technological), or as Tom Peters suggests, you can learn to thrive on chaos.
We are in what Peters describes as an era of unprecedented uncertainty" where "predictability is a thing of the past." Accept this situation as the rules of the game. Unfortunately, one of the rules of this game is that the rules change. We can no longer extrapolate trends because future events (especially political and technological) are often discontinuous. Therefore, managers must think in terms of managing in an environment of significant changes and breakthroughs. The object of the game and the art of management is finding opportunities and avoiding threats.
Just because business conditions are getting more difficult to predict is no reason to stop monitoring them. Because you may wish to modify your strategy or terminate a project based on changes in business conditions, it is important to have an effective scanning system for your business environment.
MANAGE WHAT YOU CAN CONTROL
Managers should worry only about things they can control: capital expenditures, budgets, and staff sizes. This means managing costs!
Managing costs is an integral part of the oil and gas business. Only the low cost finders, developers, producers, refiners, and marketers of oil and gas will survive in the long term.
In spite of the industry's efforts to give petroleum products uniqueness (such as gasolines that have "guts" and put "tigers in your tank,"), it is very difficult to differentiate a commodity product, such as gasoline, natural gas, or crude oil. In the case of a commodity product, uniqueness can come from differentiating marketing of the commodity through contract terms, location, and custom service. However, instead of offering more service, self-serve gasoline stations cater to low prices and fast fillups. Marketers attempt to differentiate the product with accessory services such as groceries, car washes, and quick lube changes. Of course, once one company offers these features, competitors quickly imitate and the distinguishing characteristics disappear. Therefore in the long run, most of management's efforts need to be in reducing costs.
An integral part of reducing costs is improving performance. Managers should maintain their business in an efficient fashion to decrease expenses. Managers should also strive to improve company performance through programs such as total quality management.
An integral part of such improvement is measuring the company's performance against leaders in the industry, or benchmarking.
Kenneth T. Derr, chairman and chief executive officer of Chevron Corp., talks about how it is essential for oil and gas companies to reduce costs during periods of low oil and natural gas prices. Chevron is trying to reduce its oil and gas producing costs by 50/bbl or oil equivalent by third quarter 1993. The company also has targeted its high cost work processes in order to eliminate superfluous activities that don't help Chevron produce or sell products. Chevron also plans to close or reduce operations at marginal U.S. refineries that are unable to justify the added expenses of complying with new environmental regulations.
ARCO has made improvements in its West Coast operations. Costly credit card operations were eliminated, cutting 3 from each gallon sold. The company has also started to replace its full serve stations with less expensive self-serve outlets. To increase traffic, many stations have been converted to am/pm minimarkets. The larger margins on hamburger and soft drink sales help keep profits up despite low margins for gasoline. These efforts have helped ARCO increase gasoline sales. In 1990 the typical ARCO station sold 225,000 gal/ month, which was triple the industry average.
BUILD ON AND DEVELOP STRENGTHS
Managers should define the areas of expertise where their company has outstanding abilities.
These capabilities may be based on skills (technical ability, special knowledge, financial management, negotiating proficiency) or an exceptional business position (trade concession, business relationship, market share, financial structure, or product image).
Once strengths are identified, managers must find ways to make them even stronger, such as adding more skilled people, improving leading technology, and developing new markets. Managers should perfect this strength until it becomes a distinctive competence on which to build the company's business strategy.
At a recent conference, industry leaders discussed their companies' strengths and strategies.
In discussing his company's success with Cusiana oil field in Colombia, Triton Energy Corp. Executive Vice. Pres. John Tatum said the key was persistence and tenacity.
Jack Messman, president and CEO, Union Pacific Resources, talked about the company's commitment to U.S. exploration. Messman felt that leases owned as a result of government railroad land grants gave Union Pacific Resources a unique position.
Art Peabody, senior vice-president, exploration & production, Union Texas Petroleum Holdings Inc., said his company's strengths is its strong financial performance, increasing production profile, frontier exploration exposure, and 25 years of international experience.
Knowing when to build on your capabilities also involves understanding when to terminate a strategy when it is not working and withdraw from situations that don't use your strengths or are unlikely to develop into a strength. This happened recently in California, where BP and Exxon withdrew from markets because of unsatisfactory market share.
BP Oil Co. announced it plans to sell its 158 service station sites in the northern part of the state. Previously, Exxon Corp. indicated it would leave the Los Angeles market by selling its 156 stations there. The exit from California markets by BP and Exxon underscores the current strategy of big oil companies to leave markets in which they have a small market share. BP estimated its California market share at 4-6%. Some in the industry believe that a share of less than 10% or one that isn't growing to that size isn't worth the cost of advertising.
It is also important to recognize that a skill your company thought was unique may no longer be so. In exploration and production, the playing field has been leveled through technology transfer. As a result of downsizing in the oil and gas industry, a large pool of available talent has emerged. A number of industry experts in specialized fields have been caught up in staff reduction programs or have accepted early retirement from major companies. With them has gone the majors' sole ownership of proprietary technologies. These people have brought this knowledge to other companies through retainer and consulting assignments. Use of these experts combined with the availability of state of the art supercomputers and application software, makes available to smaller companies technologies that once were the exclusive property of the majors.
DEVELOP AND EXPLOIT NICHES
A niche is a situation where you can use your company's strength to obtain a unique strategic advantage.
This combination of a superior skill and market niche is fundamental to business survival and success. Target or niche marketing is the watchword with consumer industries. The oil and gas industry needs to find niche opportunities in all aspects of the industry. Unique situations might include strong market positions, special concessions, size of potential petroleum discoveries, special tailored products, prime market locations, or concentration on a functional specialty such as exploration, production, logistics, refining, or marketing.
As Tom Peters puts it, companies should "strive more valiantly than ever to achieve uniqueness" and make sure that "everyone in the organization can understand and state its uniqueness."
Ray L. Hunt, chairman of Hunt Oil Co., echoed Peters' sentiments when he said, "The way independents win here or overseas is by developing a niche and retaining the company's ability to adapt quickly."
One company that has achieved a strong position in a market niche is Schlumberger Ltd. This has been possible because of the direction provided by its chairman, D. Euan Baird. Baird refocused Schlumberger by selling Fairchild Semiconductor Corp. and two other smaller businesses. Schlumberger chose to direct its efforts toward oil field services. In 1990 oil field services contributed about 60% of the company's total $4.7 billion in revenues, while advanced technology and water, gas, and electric meters yielded an additional $2 billion.
Schlumberger has developed a strong market niche in the well testing business. To help maintain this niche, Schlumberger spent more than $500 million to develop new oil exploration technology. The company currently has a 65% share of the $3 billion well testing industry.
The growth of international exploration is good news for Schlumberger because its high tech measuring devices are used to search for oil and gas. The instruments are less critical for development, which helps to explain Schlumberger's heavy presence outside the U.S. and Canada. About 35% of foreign drilling is exploratory, compared with just 10% in the U.S., where drillers tend to stick to proven areas. Only 32% of Schlumberger's total revenues are generated in North America.
ARCO, which gained a strong market position in California by virtue of its North Slope production, has helped its position by being aggressive in producing and marketing a reformulated gasoline.
When the Bush administration unveiled its clean air package in summer 1989, one of its provisions required that alternatives to gasoline, such as methanol, be offered in the nation's smoggiest cities. just after Bush's plans were announced, ARCO introduced EC-1, a reduced emission gasoline. Breaking ranks with oil companies that opposed the idea of alternate fuels, ARCO lobbyists persuaded legislators to include reformulated gasoline in the Clean Air Act Amendments of 1990 as "clean" fuel. In doing this they took advantage of their set of skills to create a unique marketing and public relations opportunity.
DEVELOP FLEXIBILITY
The 1990s will hold a great deal of opportunity for highly focused companies that are organized to anticipate change and move quickly to take advantage of it.
In a dynamic world, you need to make decisions quickly. This means solving problems as close to the point as possible by empowering your people. Managers should delegate responsibility to field personnel and employees with customer contact. Define those decisions that can be made at these levels and allow your people to deal with those problems. When the industry is volatile, there is a natural inclination to centralize control of all decisions. This is the wrong direction to take. Decision making should be decentralized so problems can be solved quickly and efficiently. By empowering people you help achieve organizational flexibility.
Maintain flexible thinking to cope with a dynamic environment. Because past concepts won't work in every case, be receptive to new ideas. Look for new approaches to old problems by encouraging creativity and innovation. If the U.S. is to remain competitive, we must do it based on our brainpower, not by trying to compete in producing low cost goods. Innovative thinking should be the focal point in U.S. business competition. Flexible thinking helps the company adapt to new market conditions.
Unfortunately, in the era of downsizing (or rightsizing) the oil and gas industry, there is a great fear of innovation. New ideas mean challenging old thoughts and concepts. Often current management obtained their jobs on the basis of these ideas and may be resistant to try something new. Managers who want to create an innovative environment should forget the "not invented here" perspective. You should find good ideas wherever you can and use them. This includes taking approaches and technology used in other industries and adapting and enhancing them for your situation.
Tight economics and managers who are looking over their shoulders don't provide an environment where people can be innovative and take chances. When times are tough and people are losing their jobs, managers at many companies aren't encouraging creativity, but instead are saving, "Don't make waves," "Don't screw up," and "Be happy you have a job." Such advice crushes innovation and is the stuff that failure is made of.
A more appropriate approach is that embraced by Ray Hutchinson, group general manager and president, BHP Petroleum (Americas) Inc., who said, "In the Americas we have adopted and are developing a managerial style suitable for adults in the 21st Century. This involves more freedom to act, individually and as teams, in the pursuit of agreed goals. Success is rewarded. Unsuccessful endeavor is recognized as part of our normal business. Lack of endeavor is not tolerated."
FUND THE BEST OPPORTUNITIES
In developing a strategy, managers must not neglect the basics.
Companies should invest in those projects that are the most vigorous under a variety of possible business scenarios.
In support of strategic goals, companies should select projects that utilize the company's strengths and minimize company weaknesses.
Companies should avoid projects that require them to acquire new skills or utilize existing weaknesses.
Ultimately, projects should be funded that support the corporate strategy.
MAKE DECISIONS WHEN YOU HAVE TO
This is more commonly known as crossing the bridge when you come to it.
Because business conditions are rapidly changing, decisions should be made as late as possible.
Managers should develop benchmarks on projects so that funding decisions can be made at stages in the process. It is important to know when to give up on a project and when not to.
For example, managers in the exploration and production function should develop contracts that involve minimum front end obligations.
Work commitments and expenditures should have options to terminate the project after individual stages. This approach allows risk reduction techniques to be employed at each step. In the early stages of a project, the obligations are typically low cost and may only involve studies of existing information or the collection of low cost geophysical data.
If results at any stage do not meet the company's expectations, the next option is simply not exercised and conclusion of the project is reached without further commitment.
DEFINE AND MANAGE RISKS
As part of funding the best opportunity, you need to understand the company's exposure to negative situations. This risk should be quantified and reduced to acceptable levels.
Acceptable levels are based on interpretation by company management. A risky proposition for one company may not be for another, as is reflected in the number of wildcat wells drilled by independents vs. major companies.
For an international exploration strategy to be successful, it must allocate capital among a sufficient number of opportunities to diversify the major categories of risk: technical, political, and commercial.
Risk can be reduced by means of strategic alliances (joint ventures, strategic partnerships, et al.). Local partners can reduce the "excitement" of international projects. Understanding the cultural and economic problems of the region, whether it be California or the Commonwealth of Independent States, can help define the risks of your project.
Star Enterprise is a strategic alliance of Texaco Refining & Marketing Inc. and Saudi Refining Inc., a Saudi Arabian company. The Texaco-Saudi venture continues a movement started by Venezuela with its acquisition of Citgo. Texaco provided the Saudis with access to the U.S. downstream market and the Saudis provided Texaco with crude oil. Texaco supplies refineries and gasoline stations and Saudi Refining supplies 600,000 b/d of crude. Texaco needed to sell assets after settling a lawsuit with Pennzoil for $3 billion in 1987. Texaco also needed to improve its dwindling crude oil supply. The Saudis received a secure outlet for crude and a piece of the biggest refining and retailing market in the world. Although Star is currently ranked fourth in its 26 state market area, some analysts consider them a threat to displace Exxon as the number one volume seller. This venture helped Texaco reduce the risk of crude price increases and supply disruptions. The project reduced the Saudis' risk of losing markets for their crude production.
USE INNOVATION TO ADAPT
This is an aspect of being flexible and adjusting to business conditions. Expanding gasoline sales into new regions such as Asia-Pacific and eastern Europe can complement mature markets in the U.S. and Europe. Alternatively new markets can be found for products such as natural as by using it as a transportation fuel.
Karl Albrecht in his book The Creative Corporation says the successful organization of the future will be one that can change with the times. Its leaders and all its workers will be highly adaptive, psychologically resilient, and open to an evolving reality. The companies that do the best job of becoming highly adaptive and creative in their inner workings have the best chance of surviving, thriving, and gaining a business advantage over their competitors.
Creativity, at the individual and corporate level, may become one of the new weapons in the competitive arsenal of business.
A creative corporation can:
- Sense or anticipate changes in its operating environment and conceptualize them accurately.
- Evaluate its own success in terms of how well its processes fit the demand of the operating environment.
- Transform its internal processes on a relatively continuous basis to become what it needs to be to survive and thrive in the environment.
A creative corporation has the collective ability to learn in order to survive and change.
Perhaps no area of innovation is more dramatic than that of the contrarian. It takes courage to take a position opposite to the general trends in the industry, but the rewards can be fantastic.
Hunt Oil Co. and its chairman, Ray L. Hunt, are best known for success in Yemen, where the company discovered oil in 1984. When Hunt began looking for oil and gas outside the U.S. in the early 1980s, the major oil companies were returning to the U.S. as tax laws encouraged drilling and companies had cash from the higher oil prices of the late 1970s.
Now the energy business has decided to stampede overseas in search of big discoveries. While foreign exploration has become the industry consensus, Hunt says he isn't ready to abandon U.S. prospects.
"It's become a lot harder overseas. At the same time there's a lot less competition back here in the U.S.," he said. Based on his past success, Hunt said, "I believe in the future the contrarian will be rewarded more frequently than in the past."
GET ON WITH IT
With the very volatile business environment, you won't have all the answers. When business conditions are very complicated, there is a tendency to do more analysis in the hope of getting a better answer. Unfortunately, more analysis does not necessarily produce a better answer, In this situation, the manager must be careful not to fall prey to paralysis by analysis.
Tom Peters said, "With even more confusion in the market, it becomes increasingly important to replace talk with tests and substitute pilots and prototypes for proposals."
At some point, you need to make a decision and proceed with the project... drill the well, start construction on the unit, or build the new service station. just do it!
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
