ENERGY MATTERS © VOL. 14
an opinion editorial written exclusively for ANZMEX
8 March 2020
By Chris Sladen
Energy matters – Breakdown or breakthrough?
Sometimes, things need to collapse or fall apart so that something better can be built in its place. It is not a pretty thing when something that was created, perhaps over decades, and was very successful becomes no longer appropriate or successful. As it collapses, it is sad to see.
In energy, sometimes a business model or plan is no longer successful. This can happen when the management team think that nothing is changing, so they do not need to change. So they just keep doing the same things, in similar ways, convincing themselves that they have the right plan. It takes brave managers, with a global understanding of what is changing, and a deep understanding of what matters to keep their energy company constantly evolving and prospering.
The only sure thing in the energy sector is that it does change every day. Every time a company drills a well, or produces a barrel of oil, or sells a litre of gasoline, things change. Each time a customer or consumer makes a choice or purchase, it makes a tiny change; this happens millions of times every day; the energy sector actually changes every second, all day, every day.
The same is true for the economy as a whole. The alert manager can see the warning signs that the economy is changing or might be going to struggle, and takes action to help ensure their company does not falter. Fiscal levers are pulled to help navigate the changes and still prosper. For example, the pace of investment spend, reducing costs, a focus onto the most profitable projects, borrowing etc.
So, I was speechless when a journalist from one of Mexico’s leading business newspapers told me that the economy is in recession and the State oil company lost US$ 9 billion in 4Q last year. To put this in context, losing US$ 9 billion in one quarter is the equivalent of losing US$ 1 million every 15 minutes.
What was my opinion? It is not an easy question when the issues are so large and affect so many millions of people. First, levers need to be pulled. Secondly, change is needed, real structural change.
4Q 2019 was a difficult quarter throughout the global oil & gas sector. Prices were depressed impacting revenues and income but this was before the coronavirus Covid-19 epidemic was having an economic impact. Most oil companies continued to record a profit in 4Q. In this context, losing US$ 1 million every 15 minutes highlights the need for major change; few companies can survive this level of losses without structural changes.
In 1Q 2020, things have quickly got much worse. The global economy is being battered by coronavirus, and as activity and demand slows, oil prices are under even greater pressure which will cut revenues even further. It is not a global financial crisis with consumers not wishing to spend; this time it is a health crisis leading to disruptions for manufacturers, assembly lines, logistical challenges with breaks in just-in-time supply chains, a reduced labour force and business travel cut to an absolute minimum. Many companies will fail as they struggle with the volatility and a substantial period of severe disruption.
The oil price has already fallen over 25% in just 6 weeks. As the oil price collapses, many barrels in the ground and about to be produced will now be unprofitable. Reserves have to be downgraded as many projects will no longer be commercially viable; borrowing against reserves becomes harder. Weak economic activity also impacts margins in the refining and petrochemicals businesses.
The first responsibility of governments is to public safety, security and healthcare. There also needs to be a plan that protects the economy and future prosperity because the traditional levers and standard economic responses might not be so successful this time. Splashing cash on big infrastructure projects will not solve the problem. Devaluing the currency traditionally stimulates exports and tourism. But for Mexico’s assembly-led manufactured exports the global supply chains are becoming broken as factories shut down. As for tourism, people do not want to travel. The aviation sector is drastically reduced. Many mass gatherings are cancelled disrupting the sports, hospitality, conference and entertainment industry. The longer it lasts the more impact on reducing energy demand.
Structural change in energy companies can take many forms. This can include the way it is funded, the level of debt considered manageable, its management and Board structure and their reporting lines, decision making, key performance indicators, operating procedures, its rules, and even simply what it does do and does not do. A new approach that leads to a rapid uptake in new technologies is needed. Recent studies show that over 400 relevant technologies are yet to be implemented in Mexico’s hydrocarbons sector.
When things are falling to pieces, it can be a great opportunity to address challenges that have been ignored; this type of opportunity only comes around every decade or two. It can be a moment to regain confidence and courage, to refocus and find the strength needed to take control of a new direction. It is an opportunity to cast aside what is making everyone miserable. You cannot build a healthy business on a faulty foundation. Sometimes things need to breakdown to get a breakthrough.
About the author:
Chris Sladen runs an advisory service offering insights to inform, shape a decision, policy & regulation, and guide the next steps for energy ventures, acquisitions & divestments, energy transition and climate strategies. Chris has a unique global experience having worked in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, Europe and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris has published extensively over five decades. Chris’ articles for Energy Matters reflect his experience and enthusiasm and are not paid for in any way.
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