Why Strategy matters in the Oil & Gas Industry

In tough times such as these, strategic planning is sometimes seen as an “indulgence” – a management luxury companies can ill-afford when crisis looms. As part of our occasional series on management topics (see previous blogs on the Silo Effect, Management & Leadership, and Reputation Management) we asked Andreas de Vries, an expert in Strategy and Strategy Management for the Oil & Gas industry, to comment on why it matters:

To succeed in a competitive world, a company must either do something that nobody else does (avoid competition) or do something better than everyone else (beat competition). This is the essence of Strategy – finding a position in the market that puts you ahead of your competitors.

Contrary to what is often thought, the Oil & Gas industry is highly competitive. Indeed, the “majors” in the industry are relatively few in number. ExxonMobil, SHELL, BP, Total, Chevron, ENI and Conoco operate around the world in all segments of the Oil & Gas industry, from Upstream (exploration, development and production), to Downstream (refining, trading and marketing), to Chemicals. They don’t just compete amongst themselves, however. In every segment of the Oil & Gas industry they also compete with smaller companies that do not have integrated operations, but instead focus on that particular segment.

In the Upstream segment, for example, they compete with “independents” such as Anadarko, EOG, Apache, Occidental and Marathon Oil. In Downstream they compete with companies such as Philips66, Valero and Tesoro. And over the last few years a number of National Oil Companies have joined this competition, with successful operations in various segments of the industry. Norway’s Statoil is an example, but also Petronas from Malaysia, the Chinese state oil companies Petrochina, Sinopec and CNOOC, and Saudi Aramco.

Unsurprisingly, therefore, one finds that the Oil & Gas companies develop strategies to differentiate themselves from competitors.

For example the SHELL Strategy is to be the first mover. As indicated by its recent exploration activity in the Arctic, it likes to explore new opportunities in their early stages, giving itself “first mover advantage”.

ExxonMobil, on the other hand, focuses on Operational Excellence, i.e. delivering at the highest standards of reliability, safety and cost efficiency. So once first movers have proven that a particular opportunity can provide the returns ExxonMobil is looking for, it follows them with the intention to outperform them.

Amongst the independents, Occidental’s Strategy is to excel in the management of mature fields, so it aims at developing and applying unique abilities in areas such as Enhanced Oil Recovery (EOR) to increase and extend production from such fields. Apache has a similar Strategy, but specializes in optimizing underexploited fields.

Lastly, further downstream, the Strategy of Valero is about buying refineries on the cheap, often those that the majors no longer want, and then optimizing their performance.

But for CEOs, developing the Strategy is only the start. Generating superior returns depends on the successful execution of a strategy. Strategy-focused organizations in the Oil & Gas industry therefore consciously engage in Strategy Management. This means, amongst other things, that they will:

  • Translate the Strategy into quantified strategic objectives, so that goals become exceptionally clear.
  • Communicate the strategic objectives to employees at all levels of the organization, in a way that they learn what these mean for them and their work.
  • Plan what needs to be done to achieve the strategic objectives, identifying the tasks, assigning them an owner and due date, and preparing the necessary resources.
  • Implement strategic performance management, i.e. set out Key Performance Indicators (KPIs) that track progress towards the strategic objectives at all levels of the organization, and use this data for day-to-day decision making.
  • Manage the corporate culture: this means a)defining the values, attitudes and behaviours that support the strategic objectives; and b)ensuring that staff at all levels adopt these (rather than any alternatives), through a combination of leadership (“lead by example”) and incentives.

Implementing a strategy along these lines brings immense benefits. The Strategy will inspire and motivate. It will align the various functions of the organization and facilitate cooperation between them. It will optimize the resource allocation, focusing the improvement energy of an organization on the things that matter most. And it will provide direction and continuity in a world that is ever changing, forcing thoughtful decision making and preventing knee-jerk reactions, whether the oil price goes up or down.

That is why Strategy is critical to any company in the Oil & Gas industry.

Andreas de Vries consults on strategy and strategy management in the oil & gas industry. His articles have been featured in the LNG Journal, OilVoice, European Energy Review and The Innovation Enterprise.

Comments

  1. Great piece. I would also add that the huge amount of capital involved in the industry requires more than just a passing sense of direction within companies. Without a strong strategy — and the ability to carry it out — the potential exists for industry participants to destroy all kinds of value.

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