We call an event a “perfect storm” when it is aggravated by a rare confluence of unfortunate circumstances. This phrase has been used over the centuries to describe floods, romantic relationships, and even the financial meltdown in 2008, but we best know it as the title of a book about the 1991 sinking of a Massachusetts fishing boat named the “Andrea Gail.”
The interlocking and mutually reinforcing circumstances bedeviling the energy industry now are so dangerous that we might need to come up with a more apt term than perfect storm. “Extinction-level event” got thrown around the other day, and it wasn’t dismissed out of hand. I would not go that far because we cannot afford to jump ship: The world indubitably needs oil and gas, as it does renewable energy, to move forward.
What we’re facing is not one storm but many colliding simultaneously at a time when the industry was already susceptible to disruption because of volatile commodity prices, high levels of debt, vulnerable supply chains, and lower financial returns due to chronic supply shock from resource abundance made acute by geopolitics, decarbonization-driven hydrocarbon demand facing gale-force headwinds, and a pandemic causing historical dislocation followed by a possible structural shift in how we live, work, and socialize. And underpinning these dizzying circumstances, energy consumption and hydrocarbon prices are becoming increasingly unmoored from economic activity.
The oil and gas industry has never been in this situation before because the concurrent confluence of these factors is new to human experience. The word “unprecedented” suffers from overuse because of its ubiquitous applicability, and despite temporary OPEC+ production cuts there is no reason to think this storm will simply blow over. We are sailing without a reliable map and can’t even navigate by the stars. The oil and gas business has always been risky, but now we have more than profits at stake – what the energy industry looks like after this period of volatility is unknown. It’s sink or swim.
To navigate these uncharted waters, the energy industry needs a new compass. To survive into an uncertain future, energy companies will need to transform themselves, undergoing nothing less than a fundamental reinvention that starts with purpose-led responsible leadership, seeks to improve sustainability, availability affordability, as well as returns and resilience, and solves for the Six C’s:
Competitiveness. Maximizing volumes is out; maximizing returns and cash flow is in. Staying competitive requires shaping a resilient portfolio and operating model, including ways of working, that achieve positive returns through cycles.
Connectivity. You’ve heard it before: Data is the new oil. The industry needs to move away from reactive, process-driven decision-making toward becoming a data- and analytics-driven intelligent enterprise. This will require an integrated, scalable and secure enterprise technology foundation with end-to-end connectivity and optimization capabilities.
Culture. The energy industry used to be conventional, inward-looking and siloed. To survive companies should rip up the floorboards and build a distinct purpose-led culture and employee experience with an emphasis on ingenuity, collaboration, and agility.
Customer Centricity. Energy companies need to stop focusing solely on selling a commodity. They will, like every other industry, need to think about their customer’s experience and value proposition. To offer an exceptional and personalized B2B and B2C experience, and build customer intimacy, energy companies will have to rethink their overall design, services, commercial models, and formats and channels – in short, almost everything.
Convergence. The industry will have to go from only making traditional oil and gas investments to capturing new cross-sectoral value pools, in particular, those adjacent to the hydrocarbon value chain. Electricity, hydrogen and biofuels are good examples. All of this will require the industry to step up its role and partner in the transition of sectors like transportation, power and heavy industries.
Carbon. Sustainability cannot remain a pro forma box to check. The industry should transform and shift its investments, operations and products toward greener solutions, managing its carbon footprint by putting sustainability and circularity as guiding principles for its reinvention.
Together, the six C’s represent a $100+ bn opportunity in FY21 and a multi-trillion-dollar opportunity over this decade. But to sail the six C’s, the energy industry is going to need clear guidance in the storm. There are eight points on a compass; over the next eight months, I’ll be laying out each one and offering an overview and practical advice to stay afloat while energy companies rebuild the ship.
We cannot return to the period of relative stability that we once called January and now call “The Good Old Days.” We cannot calm the winds or promise smooth seas anytime soon. This leaves one option: We must get better at better at sailing in a storm, and over the next few months, we’ll talk about exactly how to do that.