Crisis vs. Opportunity: Benefiting From Low Oil Prices
Introduction
In light of the recent oil price slump, everyone has been asking how companies around the world can properly deal with this landmark change in the market for the world's most important commodity. In this interview, Ramesh D Nair, Vice President of Oil and Gas Logistics explains how companies can actually benefit from this transformational period for the industry.
Q: First of all, thank you Ramesh for taking the time to speak with us. I think a good start for our discussion would be the hottest topic in town, the oil price crisis. What is your view on the current oil price crisis and where do you see the Oil and Gas industry heading to?
A: As you are already aware of the oil price crisis, especially its causes and subsequent impact on oil companies, I will try to sum up key elements of this crisis in my view.
The price of oil dropped from $108 per barrel in June 2014 to $32.25 in January 2016. That's a staggering drop of over 70% of its value, all within a span of just 20 months. The expansion of oil production in USA (especially unconventional energy) coupled with a drop in demand in regions like China and Europe, destabilized the supply-demand equilibrium and resulted in a price drop. This price drop has impacted the financial performance of oil companies as well as allied services companies that support them in exploration and production.
The next question is, how much is this "doom and gloom" going to impact long term future of the industry? This industry is not new to business cycles and the price swings associated with them. I am quite optimistic that the industry will find its direction and growth path by applying the learning from these crises. Moreover, all data that is available across the industry from organizations like OPEC, IEA and EIA predict an increase in energy demand in coming years, fueled by growth in economies like China and India. This will require development and production of new energy sources including carbon fuels and renewables. While BP research, "Energy Outlook 2035", predicts energy supply to be boosted by unconventional oil and gas and renewables, it also illustrates that there will not be any fundamental shift in the fuel mix. This would mean that oil and gas will remain as an important source of energy for long term. However, it will be interesting to watch how the current downswing will impact how oil companies behave going forward.
Q: It is indeed a tough time for anyone in the oil and gas business. However, such times give opportunity to learn and improve. What do you think are the greatest potential lessons that the industry is looking at? And how do you think the oil and gas companies have responded to combat this crisis?
A: McKinsey has attributed the roots of this crisis in their December 2014 'State of oil and gas industry report' to three key factors:
- Disappointing exploration results
- Declining production efficiency
- Exploding capital intensity
If you dissect these three themes, two key elements emerge – increased cost and lack of innovation. In the Journal of Petroleum Technology's October 2015 Issue, Mario Ruscev – CTO of Baker Hughes (one of the largest Oil Field Services company) reiterated how the cost problem impacts the industry, confiding that "In the last 10 years, we enjoyed very high prices, which made us a bit lazy intellectually, as everybody was doing well." So it will be interesting to watch how oil companies cope with cost challenges and re-ignite their innovation engine.
By far, the response from oil companies has been similar to a "garden-variety" recession, wherein you just trim down the cost in a few areas. As the volatility of oil price was too high, it prohibited oil companies from making a fundamental overhaul of their exploration and production processes. But as we can see, this is not a "garden-variety" recession and the solution to cope up with this crisis should go beyond mere cost reduction.
Q: When we speak of cost reduction, it is customary to cut new spending and investment. But, as you said, the companies should also explore options to optimize and innovate in order to cut down their operational costs and improve efficiencies. As we know, IT plays a big role in operational optimization as well as personnel management, and this presents an avenue for IBS to re-position its solutions for this changing market. How are we going about this re-positioning?
A: The changes that oil companies will go through are transformational in nature – this change will enable oil companies to re-think, re-design and re-deploy their people, processes and technology in a fundamentally different way. This change will demand participation of an ecosystem comprising of various industry players – requiring that suppliers, technology providers, and partners come together and jointly develop solutions and processes to meet these new challenges.
Our conversation in this market focuses on how we can meet their short term goals while not losing sight of long term transformation. This stems from innovative solutions and flexible engagement models which are built on business outcomes.
Our products and solutions under our iLogistics platform enable a whole ecosystem of oil companies, their service providers and contractors to come together and fulfill logistical needs. In addition to this, we have partnered with Carlson Wagonlit to design a solution that integrates corporate travel and logistics travel to drive process efficiency and uniform customer experience.
We are communicating to the industry regarding our new pricing models built around guaranteed business outcomes – providing a 10-15% reduction on upstream logistics cost. This commitment from a leading provider like us will meet the short term demands of cost control with added benefit of IBS's innovation engine contributing to their long term strategy and direction. Our past successes and our constant focus on innovation has given us a head start with this model.
Q: It is great to know that IBS is prepared to respond positively to this market change. I am sure changing the game at this pace requires equally big changes within your organization. How are we re-aligning our internal teams to meet these challenges?
A: When your target market goes through a profound transformation, it's imperative that we re-align our value articulation, customer relationship, solution design, and delivery to meet the needs of our customers. With this change in perspective, we have reevaluated at all the functions within our team to make it relevant to our customers.
We have made a series of changes in our front-end sales and account management. Dedicated Account Managers have been deployed to all accounts to respond and fulfill customer requirements quickly. In addition, we have strengthened our sales and subject matter expertise in key markets like North America and Europe by hiring industry experts.
We are continuing our investment in iLogistics Neo, our new logistics management platform as per our earlier plans, and believe that the Neo product will help us to capture opportunities when market is back on the upswing. Beyond iLogistics Neo, we have conceptualized a series of point solutions that can deliver immediate business outcomes that can be bolted on to iLogistics platform. These innovations will help us to constantly come out with new solutions for unaddressed needs of our target market.
Our service delivery team is constantly looking at opportunities to drive up product quality and improve implementation effectiveness. In addition to this, our service delivery group is leading the way in deploying our solutions in a software-as-a-service mode that significantly reduces ROI cycle for our customers through reduced upfront license fee and implementation cost and timeline.
Some of these changes are difficult for us to go through. But in a challenging environment, our success and failure depends directly on our agility to re-group ourselves to serve our customers better. I would urge our team to understand the context behind the changes and note that these changes will make us a stronger team to deliver tangible business results to our customers.
Q: It is indeed a challenging time for the teams, but isn't there light at the end of the tunnel? How would you summarize this whole gamut of changes in one sentence?
A: As Winston Churchill noted, "Never let a good crisis go to waste". Every crisis will open up a window of opportunity for us to re-assess and re-design our vision, strategy, and operational processes. This crisis will provide us an opportunity to reshape our customers' business and thereby, reshape our business for a brighter future.