of deepwater or onshore conventional assets, particularly
those that will require complex, high-cost projects to reach
production.
The first step is improving the ability to accurately identify
the risk-adjusted return of every project in their portfolios.
Today, too many companies utilize a rudimentary approach
to planning that fails to incorporate all actual project risks
involved in developing the resource.
For example, some studies show as many as 60% to 65% of
capex projects in the oil and gas industry run overschedule and
over budget, significantly reducing the economic value the
project will deliver. That’s an issue with both planning and
execution, but properly identifying those risks up-front can help
companies avoid painful — and expensive — lessons.
Obviously, the more technically complex the project, the
more risk it carries. The same holds true for projects in regions
where tax, royalty and local content laws can change rapidly.
But companies don’t always incorporate these risks fully into
their pre-drilling analysis.
Reducing reservoir risk is another critical success factor.
Conventional onshore and offshore projects require more
sophisticated modeling and simulation analyses than shale
opportunities. Companies must fine-tune their decision-making capabilities by properly characterizing reservoirs earlier
in the process to eliminate the need for expensive and
time-consuming planning and design to accommodate a
wide range of outcomes.
These decisions are often impacted by the human factor,
too. A team that believes in a project will overlook obstacles
and push to drill, even when risks are high. Reducing the
human factor can help companies pursue the right projects
with the maximum opportunity for financial viability.
Another critical success factor will be employees. In this
short-cycle environment, producers will need to develop a
more flexible business model to eliminate the hire/fire scramble related to pricing changes. Smart companies will develop
a core team of employees at the bottom of a cycle and utilize
contractors and temporary employees as prices rise and
activity increases. Notably, this will require companies to step
up their employee training and knowledge transfer activities
so they are ready and able to move quickly when prices rise.
Finally, integrated companies must learn to maximize the
built-in advantage of being involved in both upstream and
downstream. In a low-price environment, integrated compa-
nies often outperform independents because they capture
value from the wellhead to the customer. For example, inte-
grated companies can utilize the product knowledge embed-
ded in the organization to help upstream personnel under-
stand how various types of crude can be blended and what
specific refiners focus on. Understanding the hydrocarbon
value chain can lead to an upside of 10 to 25 cents a barrel
in the marketplace, which can add up substantially over time.
As a result, in the future, we may see trends turn away from
the separation of upstream and downstream assets, with
more midsized companies forward-integrating into LNG and
petrochemicals to improve the economics of their upstream
production.
OTHER OPPORTUNITIES
The growth of shale as the marginal barrel of production
could also open up opportunities around the globe.
For example, governments that rely heavily on petrodollars
may reach the realization that heavy taxes and royalties are
hampering investments in their country, as capital continues
to flow to US shale with its relatively stable regulatory climate
and other benefits.
Rethinking their fiscal regimes to spur new investment
— and recapture much-needed revenues — would open up
new markets for oil and gas companies and make previously
uneconomic projects viable again. This could, in the long
term, fundamentally reset the cost structure of deepwater
and conventional drilling in some countries.
Still, the days of outsized returns are likely over. With prices
remaining relatively stable for at least a decade, and supply
being plentiful, even big discoveries won’t deliver huge premiums. When there are plenty of opportunities to drill, but
no financial incentive to do so, undeveloped reserves aren’t
nearly as valuable.
FUNDAMENTAL CHANGE
Some in the industry still believe the price of crude will soon
run back up to the $100-a-barrel threshold. But those believers
lack a full appreciation for how the fundamental structure of
global supply has changed in recent years.
With US shale leading the way, there is long-term stability
of supply — and the opportunity to increase production as
needed to smooth out shifts in demand. This new era presents
a challenge for domestic producers, certainly. But it is also
an opportunity for executives to rethink their business model
and create lean, agile and responsive organizations that can
compete effectively at any price.
ABOUT THE AUTHORS
Deborah Byers, US Energy Leader of Ernst &
Young LLP, is based in Houston in the firm’s Transaction Advisory Services practice.
Vance Scott is the Americas Oil & Gas Leader for
Transaction Advisory Services at Ernst & Young
LLP. He also serves as head of the Chicago office
of Parthenon–EY.
The views reflected in this article are the views of the authors
and do not necessarily reflect the views of the global EY organization or its member firms.
