ENERGY MATTERS © VOL. 7
an opinion editorial written exclusively for ANZMEX
24 July, 2019
By Chris Sladen
Energy matters – can a plan really capture the future?
There has been much attention from the media and analysts on the new 221-page Plan recently issued by Mexico’s State Oil company. For me though, it was a more general reminder that the beginning of August usually marks the start of the annual planning cycle in major oil companies and energy companies around the world.
Plans are started now for what work will be carried out next year. Which projects will be funded? What will be the targets for next year and the risks that will need to be managed? And how this relates to a longer-term strategy? Remember that ‘tomorrow belongs to the people who prepare for it today’.
The number one priority, first above all others should be health, safety, environment and security. How will no harm to people, no accidents, no spills and no damage to the environment be achieved? How will you eliminate lost time incidents? How will you avoid negative impacts to communities? How will you boost energy production and curb emissions? Sadly, these are still not priorities for many energy companies, and often they do not feature in plans. It says much about their corporate culture.
The next priority should be what to expect crude oil, natural gas & product prices to be? And what fluctuations to anticipate? If your plan only contemplates a fixed price, you probably have a problem. If you ignore this or consign a few comments to an annex, you are probably on the wrong track. Without understanding the fiscal uncertainty and how to operate safely, then any plans are probably both financially flawed and operationally damaging.
A good plan will be one which has absorbed a deep understanding of oil, gas & product prices, the no.1 uncertainty. Changes in the oil price dramatically affect profitability. Whilst supply/demand balance is fundamental for prices, there is an overprint of global politics, global economics and of course OPEC policy. But there are also other factors at play. Oil, gas & product prices also impact the prices one must pay for oilfield services companies to provide drilling, surveys, equipment and maintenance. When oil, gas & product prices are high, oilfield service companies usually charge more, suppliers charge more, eating into the profit margin of oil companies. When oil, gas & product prices are high, Governments start to see much higher incomes due to higher taxation, royalty income and production sharing effects. So, in this setting oil company profitably is ‘squeezed’.
When oil, gas & product prices are low the industry generally struggles. Income falls substantially, Government budgets reliant on oil income become short of money, and companies have much less to invest in new production, and even less to find new resources. Debt becomes difficult to repay. Many companies become prey to takeovers while others cease to function. The oilfield services companies reluctantly reduce the prices they charge. The whole industry is squeezed. Oil companies will try to increase their production to improve cash flow. Whilst the widespread reaction throughout the industry is to fire thousands of staff (if not millions globally), this being a quick way to reduce costs.
Whether oil prices are high, medium or low, there needs to be a year-on-year improvement in efficiency. How will this be delivered next year? Is it even in the plan? Without a desire for greater efficiency, the ability to compete and win simply fades away.
Companies who leave the plan on the shelf once it is finished and approved have achieved ‘planning for planning’s sake’. They file it away and don’t look again until it’s deemed time to start over again. A good plan is a living document, one that is reviewed every quarter by all staff, monitored and updated regularly, with ethics and compliance as a core. ‘Plan your work and work your plan’. Implementation is tracked and measured, metrics are continually reviewed and made known to identify how the company is doing relative to the plan, and adjustments are made, as well as larger-scale mid-course corrections before it becomes too late.
Organisational decisions should be made in the context of the plan. Does your plan include a manpower plan? To plan successfully needs the right mix of people in the process. A limited perspective can lead to a more limited plan compared to a diverse group of team members with both strategic and tactical insights. A facilitator can often help by asking difficult questions. And does everyone get a chance to input or comment? Often the quietest voices in an organisation hold critical information and data for the plan.
One of the reasons that a plan does end up sitting on the shelf, is that while it may seem to be a great plan by those who wrote it and approved it, maybe the organisation it is meant for works in silos rather than integrated teams. ‘Good planning without good working is nothing’. There needs to be buy-in at all levels of the organisation, not just at the very top. Have all the Board read the full plan and understood it all? Hopefully so! Have all employees read & understood the plan?
Finally, keep it simple – any plan the size of a book is unlikely to fit well in any company culture. It is just more likely to sit on a shelf! It is a common mistake to try to plan too far ahead. ‘The chain of destiny can only be grasped one link at a time’. So, any numbers that forecast in detail many years off into the future are likely futile and just one of many possibilities; make sure you don’t believe them too much…
For all ANZMEX members about to embark on planning for coming years, and trying to capture the future, I hope it goes well, and of course ‘by failing to prepare, you are preparing to fail!’
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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ANZMEX ORG A.C. is a politically neutral business council with no political affiliation. The views expressed in this column are not necessarily representative of the official views of ANZMEX or any of its officers or staff.