HOUSTON — As tax reform and regulatory easing across the U.S. oil and gas industry are anticipated in a new administration, EY expects innovation in financial and operational excellence will be a main driver of value and competitiveness in 2017. Continued advances are especially necessary as abundant supply and resilient shale production are anticipated to cap oil prices — creating a ceiling around $50/bbl to $60/bbl.
“The industry’s hopes have been buoyed thanks to the Organization of the Petroleum Exporting Countries (OPEC) output agreement in early December and the Trump Administration’s positions on energy thus far,” said Deborah Byers, U.S. energy leader, Ernst & Young LLP. “However, value is still king in the era of abundant oil, and US oil and gas companies must continue to lower debt and cut costs while making cautious investments to boost flexibility and efficiency. Cash flow and returns on invested capital will govern decisions in the new year.”
Given the expectation of a lower but stable oil price band, EY anticipates the following trends to dominate the US oil and gas industry in 2017:
Adoption of digital
Digital advances — from big data and analytics to the digital oilfield — have the potential to play a significant role in transforming the oil and gas industry.
A recent EY survey of global executives showed 61% of oil and gas companies are already experiencing positive change around cash flow as a result of digital transformation. However, it also found oil and gas companies are allocating less of their capital budgets to digital transformation than the global average of other industries.
“We believe one of the biggest hurdles for digital is, simply, determining where to start,” Byers said. “The industry has traditionally focused technology investment on core business functions — finding and producing oil and natural gas. However, oil and gas companies that successfully apply digital technology across their organizations will gain efficiencies and distinguish themselves from competitors.”
Given the industry’s current state, oil and gas companies need digital investments to make an immediate impact on cost reductions. Digital labor that automates repetitive high-volume tasks to make them more efficient and cost effective, also known as robotic process automation, is one solution that can be deployed easily with a quick return on investment. This not only drives performance, it also frees up employees to focus on value-added or customer-facing activities.
Transformation of the workplace
Everything about the workplace is changing, and fast, especially for oil and gas companies that face market and skills challenges never before seen.
Across many industries, workspaces are shrinking and virtual teams are the norm as businesses drive value from real estate and improve collaboration among employees and contractors — who are working from home more and more. Meanwhile, senior leaders are increasingly recognizing the value of being a purpose led organization as younger generations vocalize their preference for companies with strong community ties.
Oil and gas companies are also facing market challenges specific to the industry. As U.S. shale organizations add and cut production based on oil price, they will need a new approach to staffing that is more in line with a swift, reactive strategy. Lean, flexible workforces, the ability to staff up and down quickly as needed, and the contingent workforce will play a key role.
The influx of millennials in the global workforce will also create challenges for the industry in 2017 and beyond.
“Oil and gas is increasingly competing for workers against other industries that — rightly or wrongly — are seen as more attractive to millennials,” Byers said. “Attracting innovative thinkers and fresh talent will be critical to future competitiveness, and forward-looking organizations are already retooling and seeking new ways to attract, retain and engage workers of all generations.”
Position for growth
Consensus over a lower-for-longer oil price outlook and, as a result, greater stability in the industry has companies considering their growth agenda again. Investments in digital and labor are two examples of how EY expects U.S. oil and gas companies to prepare for future growth.
Mergers and acquisitions will play an important role in achieving growth goals in 2017. As stronger companies realign portfolios to emphasize core strength areas, weaker players will combine equity or even restructure balance sheets in order to salvage their positions.
“Historically, oil and gas companies have either focused on survival during a downturn or on the race to drill and produce as much as possible during an upturn,” Byers said. “During 2017, and as long as abundant supply is expected to cap prices, companies will focus on managing near-term value while positioning for medium- and long-term growth. With the future in mind, paying attention to ‘weak signals’ — signs of potential change within the industry — will be essential for U.S. oil and gas competitiveness and success.”