P.J. Carroll
President, Shell Oil Co.
Houston
From a presentation to Price Waterhouse World Petroleum Industry Group's annual meeting, Houston
The changing winds of competition are buffeting the oil industry.
Companies are undertaking massive restructuring to respond to those changes to be competitive on a global basis.
But restructuring and cost cutting - even reengineering, painful and extensive though that might be - will not be enough to assure survival of a major oil company in the 21st century.
Here's how we got to this point.
"GOOD OLD DAYS"
The paradigm of the oil company before the oil price collapse was: find and produce the most oil reserves the fastest.
More than a decade of high margins and expectations of even higher prices created a culture whose singular mission was to find and produce oil, no matter whether it involved remote and difficult basins, enhanced recovery, good or bad reserves, low or high cost.
But even during this period, which many of us now look back to as "the good old days," the socioeconomic mission under which the oil industry had operated as an engine for industrialization and economic growth, as well as a strategic weapon, was changing.
One would expect that declining U.S. oil production and increasing reliance on imports would make energy security a broad concern. However, the oil price collapse made apparent that security of supply was not a strategic issue. That view was punctuated by Desert Storm.
At the same time, there was an emerging public debate about the health and environmental risks attached to the "addiction to oil" typical of industrialized countries.
The result was that a set of complex environmental regulations was put in place. Thus, as energy security faded into the background, environmental concerns continued to remain on the public agenda, and environmental controls continued to be put on.
RESTRUCTURING
The drop in oil prices first in 1983 and then in 1986 caused profits and assets to plummet, leading to the extensive restructuring we've seen over the past several years. Companies down-sized to become lean and mean once more and reengineered themselves to improve operations throughout the three primary value chains.
Companies continue to dispose of assets, acquire assets, downsize, and reposition themselves in ways which significantly alter where and how they operate to make a profit. Cost reduction and downsizing have initiated a painful process of reengineering.
There are still huge inefficiencies in the U.S. industry. Some of this is due to the large number of medium and small players, as well as a number of large players who continue to participate in areas where they are medium and small players.
ADAPTATION
Companies who fail to adapt to changing times and conditions, who fail to restructure their efforts in terms of their future customers and markets, will fall by the wayside.
Adaptation must come in four ways:
- We must manage the challenge of a diversified and changing work force and prepare our people to constantly renew themselves in an industry that is being redefined at an ever increasing rate. Consequently, individual and team learning must be a priority for all corporations.
- Companies must learn to leverage their technologies and core competencies to create new products, services, and markets - even new industries.
To do this effectively, companies must invest in collective learning. They must learn new ways of organizing work such as via crossfunctional teams, where employees have responsibility to gain knowledge of new disciplines and technologies.
- Companies must have organization flexibility to move into new areas of growth faster than their competitors. Moreover, they must have the ability to quickly establish alliances and partnerships to capture market opportunities to either reduce the cost or speed the process.
THE "SEAMLESS" COMPANY
My fourth adaptation point can happen only if the previous three are in place:
- Oil companies must learn to think of themselves not as oil companies, not even as energy companies. They must learn to operate under a new paradigm, namely that of an energy provider and service company satisfy-mg customers with ever increasing number of choices to purchase energy.
A customer of energy for home heating for instance, will have the choice of fuel oil, gas, electricity, or energy under a pricing formula that diminishes the customer's risk. Under this paradigm, a company will have to become truly "seamless."
Internally, this means that work is organized not by departments or businesses but by work that needs to be done so resources from different parts of the company are gathered, often ad hoc, to work on a particular project.
Corporations will have to concentrate more and more on their core competencies which create competitive advantage. By competitive advantage we mean access to opportunities that others may not see or the ability to create higher value out of an opportunity visible to all.
At the same time, companies must outsource noncore competencies. Among noncore competencies are activities many companies consider today critical for their success. They may include accounting, payroll, invoicing, perhaps even transportation, logistics, and legal services.
The challenge for a truly seamless company is to rigorously differentiate between its core and noncore competencies.
Obviously, a single set of core competencies cannot apply to every integrated company, not even to every E&P company. Some companies might decide that information technology (IT) and commodity type activities are non-core activities.
I tend to disagree. I believe that a company's IT architecture-as well as certain commodity type activities, if they are linked to core competencies-must be managed throughout the value chain for competitive advantage.
It is of critical importance that outsourcing of activities deemed noncore are managed carefully and effectively through strategic partnering and service contracts. This means that seam- less will also apply to external relationship as oil companies, while continuing to manage projects, let others, such as service companies, execute the work.
In a truly seamless company it will be difficult to distinguish between company employees and the employees of a contractor.
NO GUARANTEE
These adaptation requirements present enormous challenges to our industry.
However, I venture to say that, even if a major oil company succeeds in meeting these challenges and operates under a new paradigm, there is no guarantee it will still be a major company in 2010. All these challenges are merely necessary steps for survival in the 1990s-requirements to continue to operate.
Organizational efficiency is not synonymous with social legitimacy. Successful reengineering, even continuous adaptation and learning, will not be sufficient to assuage the public's pro- found concern about the social mission of the oil industry and the legitimacy of oil companies.
Let me be clear. I am talking about social legitimacy of oil companies, not about their contribution to the economy.
There always has been a discrepancy between the oil industry image, the value which society at large places onan industry, and the measure of its economic contribution.
Let me give you some U.S. numbers. The oil and gas industry is a significant and crucial component of the U.S. economy. The industry is large. It employs 1.5 million men and women and represents 3-5% of the economy, depending on the measurement used.
According to the most recent available data, oil and gas is larger in output than health services and pharmaceuticals, larger than the domestic automotive industry, and larger than the total of education and social services, computers and computer services, and iron and steel manufacturing-all considered critical for the U.S. economy.
Our industry's wages are about 14% above the U.S. average, and more than 8% of industry employees are scientists or engineers, compared with U.S. average employment of 1.4% scientists and engineers.
POOR IMAGE
Those figures stand in stark contrast to the low public image of the oil industry.
For some time, public mistrust of oil companies centered around concerns of energy security, particularly during the first oil shock in the 1970s.
However, events revealed that what matters to Americans is the uninterrupted supply of inexpensive oil. Deployment of U.S. forces in Desert Storm demonstrated that we are willing to go to war over this. As a result, energy security has ceased to be an issue for the U.S. public.
However, low public opinion of the oil industry - and oil companies - persists. It is driven now primarily by environmental concerns.
The growing cost of environmental protection has played a key role in our industry's declining return on investment. While the U.S. industry recognizes the need to take appropriate steps to safeguard the environment for future generations, those costs add up to pressures on international competitiveness.
NO WEANING FROM OIL
The issue of sustainability is the crucible around which the fires of legitimacy will burn.
Let us recall that oil and gas are fundamental enablers of the domestic economy. More oil and gas are consumed indirectly via goods and services people buy than through direct sales of fuel to individual customers.
Using substitutes for oil and gas is very difficult in today's economy. Trying to do so before the technology for cost competitive alternatives is developed could jeopardize the well- being of the nation's citizen and the competitiveness of its manufacturing industry.
There will be no technology, no social event that could bring about a weaning from oil by 2010.
Continuing advances in technology and production and consumption of oil and gas will lead to significant efficiency gains and increasingly effective management of their environmental impacts. But the U.S. and the world will still be using large amounts of oil and gas in 2020, not significantly different from the 60% share of world energy consumption those fuels represent today.
A major oil company will still be a necessary economic contributor in 2010 while public sentiment will continue to view such a company as a necessary evil. To legitimize its right to operate, industry and companies must acknowledge the radically new approach to energy that is emerging and take the lead in improving relations with their many stakeholders.
THE 2010 COMPANY
What then will the major oil company in 2010 look like?
It will have repositioned itself from a formerly largely defensive and mostly positive, proactive, and forward-looking force in national and international communities. It will have developed a cooperative team building spirit in which other companies, the public environmentalists, the government, and other stakeholders participate.
It will also be a company that will provide returns to the shareholder that are commensurate with risks. It will be a company in which each part of its value chain is as efficient as the best firm in that industry segment. Without that, companies cannot justify to investors the value of integration.
Most likely it will be a highly decentralized company with each of its segments operating as autonomous entities. It will have outsourced as much as 40% of its current activities. It will have far fewer employees-perhaps as little as one third of its professional staff of today.
How will it feel to work for such a company? Exhilarating and scary.
Those who are part of this company and have helped it transform into a world class financial performing business, engaged with its stakeholders, its values in alignment with those of society, will find work richer and will emerge more satisfied than before. For commitment is based on aligned interests, and all sides enter into it with full expectations of mutual benefit.
Through this process we have the opportunity to become our collective and individual best.
Copyright 1995 Oil & Gas Journal. All Rights Reserved.