Business Models in the time of Coronavirus

A general consensus is that the Oil & Gas industry is very much a traditional industry. One, where contracts are won and executed over extensive periods of time. One where even winning said contracts may take even more time than executing them. It seems quite paradoxically when we are in the business of ‘making energy’. Energy that puts the world in motion and drives innovation at every other level of our society. So why wouldn’t the Oil & Gas Industry embody exactly that. Innovation that drives innovation.

First of all, what do we mean by a traditional business model. It’s quite simple and a basic economic law – supply and demand. On the supply side we have countries with massive resources, such as Saudi Arabia, the US and the UAE. Each country has private or government-owned companies that either cover the drilling and processing aspect of the industry or the whole supply chain spectrum. The overall objective is to balance the production of oil & gas to avoid market saturation and maintain a profitable price per barrel of oil. It’s on this price that all other industries are basing their own financial structure, knowingly or not.

On the demand side we have customers. We know who they are: governments, businesses, us, everyone in the world. But the ‘us’ of now are different from the ‘us’ from 20 years ago. McKinsey Consulting nailed this in their ‘The Oil & Gas Organization of the Future Report’. Demographically, the bulk of the active labor force is shifting to the millennials. On the operational side with nearly 100% but some also moving up on the executive ladder. And the core drive of a millennial is data. If they require data in their work, they require it in their consumption as well. Internet of Things, Industry 4.0, 5G, all are example of technology driven by data, aggregated in a platform that enables digital control over physical products. And that platform will need extensive amounts of energy. So how rentable it is to just think of Oil & Gas as two boxes that exert opposite forces on a resource. A resource that is not as scarce as we believe. A resource that has several ‘greener’ alternatives, creating a market that is ever increasingly aggressive.

But let’s not get ahead of ourselves and look at the elephant in the room. COVID-19 managed to reveal both our digital dependency and our social individuality in the same time. The internet allows us to work from home, stay informed, connect with our friends, buy our products and so on. And with each action that we do we reveal a little bit more of our profile. But it does not substitute the human interaction. The best way to express our individuality is face-to-face. And why is that relevant? Because companies in the Oil & Gas industry will be facing clients more digitally adept, persuaded by the power of Big Data but won by Customized Service. After coronavirus, clients and companies alike will know what works on the computer and what just does not. And if it is the latter, the reason is as simple as not being service-centric.

The future business models in the Oil & Gas industry will not start at the resource, it will start at the end-user. It is a manner of reverse engineering and instead of focusing on the technical aspect, we are focusing on the human one. Data can create order from chaos on the technical aspect. But only people can truly create a customized experience. And that is the crux of our believes here at SAS Environmental Services.

Energy world today: Where are we heading?

Last time we discussed the state of the energy industry, its environmental impact and its effects on traditional business models during one of the most challenging times in the 21st century. Today we are going to look closely at how the industry is shifting. The global socio-economic mutations are rapidly adjusting to the COVID-19 context, but not fast enough to get ahead of the curve. In this situation, most energy companies are trying to mitigate the damages. Others are getting ahead of the competition. And some are repositioning in an effort to help now and be relevant in the future.

With the recent apparent breakdown of the OPEC+ agreement Saudi Arabia and Russia have started a mute war on oil price. The first bold move comes with the increase in oil barrel production planned for April. Saudi Aramco will see a 1 million increase to 13 million barrels per day (Mmbpd). This trend is picked up by the neighboring countries with ADNOC increasing its supply to 4 Mmbpd with plans to reach a 5 Mmbpd target.

But this action won’t affect only Russia. The United States were the biggest producers in 2019 with 17.94 Mmbpd and an 18% market share. The US is seeing dissension in its approach of the current pandemic but still responded to the current energy climate. Mike Pompeo, the US secretary of state made a direct appeal to Saudi Arabia to ‘rise up to the occasion’ and cease its current war with Russia. It goes without saying that with the current oil price drop – of 20% globally - the US cannot hold indefinitely against the Middle East. Chevron will reduce its capital expenditure by one-fifth, a staggering sum of $4bn. Philips 66 will cut spending by $700m to $3.1bn across the year. They are joined by international giants like Shell and Total who are also planning to cut spending by $5bn to $15bn and $20bn respectively. This financial restructuring, together with other major trends such as China’s (5% of world oil production market share) faster deceleration in energy demand Iran’s (4% of world oil production market share) socio-economic structure completely overwhelmed by COVID-19 will definitely shake the Top 10 largest rankings of oil producers of 2020.

This glimmer of the current status-quo may provide clean energy companies to provide innovative solutions to the current crisis that could offer the same input without the long-lasting effects of fossil fuels. However, clean energy companies, like everyone else are facing the same economic slowdown. Unlike their counterparts, the clean energy sector does not benefit of a safety net. The draft of the 3rd phase of the US stimulus package contains no energy related funding beyond $3 billion aimed at the strategic petroleum reserve. If we look at the economics of the renewable energy, the oil and gas lower prices will put under pressure the renewable energy sources. This in turn will dramatically affect the supply chain itself. Without a proper policy support. The clean energy sector will be forced to wait for credit markets to recover, allowing cheap hydrocarbons and fossil fuels to negate any developments seen in 2019.

With the worst oil crisis in 100 years, the fact that the oil industry is struggling to cope with the effects of COVID-19 crisis leaves us in an urgent need of innovation. The energy industry will not be the same after this crisis. The Oil and Gas industry was already under pressure before the current crisis and once the world emerges from the Corona virus pandemic the energy industry will need to genuinely innovate and collaborate. Simply cutting oil industry costs & day rates, as after the previous downturn is not going to be sufficient. From here on only companies with a genuinely novel and unique proposition and technology will be able to deliver improved value to the end customer.

There is substantial work to do in the environmental remediation of the legacy created by the oil industry. There is also substantial improvement to be made in environmental practices in the day-to-day work carried out to bring essential oil & gas to the global market.

This is a situation where those who dare will lead the industry.