Oil companies are looking to reduce costs and implement structural changes in a market where prices are unlikely to reach previous peaks. This is forcing the industry to put greater emphasis on new business models, driven by integration and collaboration across the value chain.
An example of this can be seen off the coast of Norway, where oil company Equinor, oilfield service provider BHGE and drilling rig contractor Odfjell are creating a new norm for offshore E&P operations. They’ve drilled eight wells using joint teams with a shared goal and vision. It’s been such a success that the venture has increased its target to cut costs per well from 30 per cent to 50 per cent.
Alliances and partnerships, as well as some M&A activity, are the order of the day as the industry seeks to operate more efficiently and cheaply, with greater flexibility and convenience. But in a conservative industry, this doesn’t come easily. We see several companies pursuing new business models without having the fundamentals in place.
So how can businesses transition to a new kind of oil industry? Success lies in the following:
Build greater intimacy across the value chain
Oil companies have typically procured in silos. Category managers in procurement are typically measured on achieving the lowest cost per category, not the lowest cost per well or barrel. The move to new business models will require oil companies to change how they procure and engage across the value chain. Suppliers will need to focus on demand creation, engaging across client organisations to drive a mindset shift and ultimately moving to a co-development model. This requires deeper capabilities from both suppliers and oil companies, longer sales and procurement cycles, a mindset to take risk and innovate, and the openness to engage at leadership levels.
Create a fit-for-purpose commercial model
The commercial model will make or break new business models. To be successful, it needs to align interests across the value chain and incentivise deeper collaboration. For example, if drilling performance is improved and the time required for drilling a well is reduced, there needs to be consideration around how the drilling contractor is compensated. This calls for a more innovative approach to commercial arrangements and greater integration, rather than siloed working.
Integrated drilling and well service contracts are one such example. Rather than being linked to day rates and rentals, contractors’ and suppliers’ incentives should be linked to how they can deliver more effectively and efficiently. This ensures everyone has a stake in how the well performs and ensures everyone is more tightly focused on common objectives.
An alliance agreement between global exploration investment company Seapulse and Maersk Drilling demonstrates how new business models can standardise exploration drilling, eliminate inefficiencies, reduce costs and simplify the value chain. Fully integrated services will be provided by an alliance with an incentive payment scheme to drive performance and provide an upside for all alliance partners. For alliances like this to work, each player must be incentivised to pursue initiatives that maximises the total value of the project, with rewards to match their level of risk
Another example we’ve seen is where the drilling contractor gets a bonus for being below the estimated cost for a well, and a penalty for being over the cost estimate. In some cases, this has resulted in cost reduction of almost 50 per cent, and reducing future cost estimates for drilling a well. It’s important this commercial model doesn’t result in diminishing returns for any of the alliance partners, making it a scenario where a couple of the players win, while the others lose.
Anchor alliances in trust and integration
If companies approach an alliance as they would a more transactional partnership, trust could be equally superficial. In order to create openness, transparency, and overcome historical gaps in trust, organisations must be prepared to share data and information that helps the collective alliance.
Fewer interfaces and centralised tasks will reduce duplication. For example, shared inventory management will lead to synergies that can improve the timing of logistics. Partnerships will also need to work collaboratively, using joint learning sessions to improve co-development and shared learning. This will help avoid the classic mistake of running separate project teams, seeing commitment stall and losing momentum.
Financial integration matters too, as it helps avoid uncertainties over who’s entitled to what payments. In an alliance between AkerBP, Halliburton and Maersk Drilling, interests were aligned from the outset by agreeing that drilling and well services was a single operation, where all parties were working as one team, and all parties had a joint financial structure for the well, similar to a Profit & Loss, which results in all of them feeling the pain or gain of improved performance or inefficiencies.
Back up with change management and an optimised operating model
Change will only be successful if your people come with you. Without their support, an ingrained culture can be a barrier to new ways of working. Addressing this starts with senior leaders. They need to set the tone and outline a clearly defined value proposition and plan for success. Karl Jonny Hersvik, the CEO of AkerBP, has expertly demonstrated how to develop, communicate and cascadea clear vision internally and externally.
Once alliances have been established, the varying business models, capabilities and mindsets – as well as the novelty of collaboration – makes delivery challenging. Underpinning the operating model design with change management will play a key role in driving this mindset shift and alignment towards a common goal. In our experience, co-location, creation of a joint delivery teams, implementation of soft KPIs to drive collaboration, and focusing on changing individual behaviours is critical. Incorporating and communicating these elements through dedicated resources for change management can help overcome resistance and motivate people towards a common purpose.
Applying the new rules
In the new oil business, companies can thrive by teaming up with each other. But they’ll need different engagement across the value chain, new commercial models that align the interests of multiple players, deeper alliances based on trust, and being able to create an organisational appetite for new ways of working through change management. And these alliances can’t last if only one or two of these things happen. Organisations will need all of them.