ethining oil and gas operating models to create

The last barrel standingRethinking oil and gas operating models to create sustainable future value

The last barrel standing | Rethinking oil and gas operating models to create sustainable future value

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IntroductionWhile forecasts confirm that demand for fossil fuels is not going away in the near term,1 a decade of challenging market economics and the accelerating transition to new and green energy sources are compelling oil and gas (O&G) company executives to rethink traditional upstream operating models.

Deloitte’s recent publication, Portfolio transformation in oil and gas: Capture hydrocarbon value or embrace green energy?, describes the spectrum of strategic positions that upstream O&G companies will need to consider, from remaining a traditional upstream operator to moving intentionally to new energies, to create a forward-looking portfolio for sustainable future value. Each option will have specific portfolio and operating model implications. And regardless of a company’s choice, one thing will remain constant: Every upstream asset will need to operate with a forever-lean mindset—to be fit for any oil price and able to compete against all new energy options, especially when considering potential impacts on external stakeholder behaviors.

This article reviews the operating model implications for each of the positions available to upstream O&G companies along the energy transition spectrum, identifies three levers that support lean operating models, and discusses areas of internal transformation that can help companies maximize opportunities and minimize risk during the shift to a low-carbon future. The winners—the last barrel standing—will be those O&G upstream companies that adopt and apply a forever-lean mindset across the entire asset life cycle.

https://www2.deloitte.com/us/en/insights/industry/oil-and-gas/portfolio-optimization-oil-gas-chemicals.html

https://www2.deloitte.com/us/en/insights/industry/oil-and-gas/portfolio-optimization-oil-gas-chemicals.html


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Choosing a strategic position for the energy transitionUpstream O&G leaders are taking strategic and bold steps to move their organization through the accelerating energy transition.

In a recent Deloitte survey, 80% of energy and resources (E&R) executives reported that they either already have a plan in place or are developing a strategy to reduce reliance on fossil fuels,2 while 30% already have a fully developed plan in place. Still, many important decisions remain to be made, such as choosing a strategic company position along the energy transition spectrum. Should a traditional upstream operator remain an O&G specialist and compete for the remaining, albeit uncertain, value in hydrocarbons? Shift entirely to the green energy space? Balance the two extremes by investing in green energies adjacent to hydrocarbons? We see four strategic positions available to upstream exploration and production (E&P) organizations and national oil companies (NOCs) along the transition spectrum (figure 1).

Figure 1. Spectrum of future O&G strategic archetypes

Top macro influencers: Social Technological Environmental Economic Political

Port

folio

: hyd

roca

rbon heavy

Portfolio: new energy heavy

Portfolio: low-carbon play

Green followers Low-carbon producers

Hyd

roca

rbon

stal

war

ts Net-zero pioneers

Stalwarts

Gain market sharein hydrocarbonsbusiness

Focus on regions,resources, andmarkets with the lowest upstream costs and least regulatory risk

Producers

Build a lean, optimal, and decarbonized hydrocarbon portfolio

Perform and manage across price cycles by balancing decarbonization with an optimized portfolio

Followers

Monetize hydrocarbon assets, right-size oil reserves, pay off debts, and maximize shareholder returns

Pace into green business once green technologies have reachedcommercial maturity

Pioneers

Divest most of hydrocarbon business

Are first to fully embrace the green future

Scale and commercializegreen bets

47%surveyed

respondents

surveyedrespondents

30%

surveyedrespondents

18%

surveyedrespondents

5%Four O&G

archetypes


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Operating model implicationsEach of the strategic positions along the energy transition spectrum holds implications for upstream O&G companies’ operating models:

Hydrocarbon stalwartsThese companies typically gain market share in hydrocarbons by focusing on regions and assets with the lowest upstream costs and least regulatory risk. As the green followers move out of oil and gas, the stalwarts will be there to expand their market share. To achieve long-term success, these companies will need to adopt operating models with heavy emphasis on talent attraction and investments in the decarbonization space to offset their expanding oil and gas portfolio. Stalwarts may have advantage in their access to the upstream oil and gas talent pool as their competitors shift away from this business. However the key to attract and retain talent is offering flexible work options, higher pay, diversity, and health and wellness. Of all the strategic archetypes, this one most needs to embrace a forever-lean operating model to truly be the last barrel standing.

Low-carbon producersThese companies adjust to the new oil reality by building a lean, optimized, and decarbonized hydrocarbon portfolio to balance economics (operational efficiency) and the environment (decarbonization). However, approaching the transition solely with an engineering mindset won’t help producers remain competitive in the long term. Instead, they should feed off stakeholder pressure and to become innovative marketers to realize and communicate best-in-class results across the company’s portfolio, business operations, and emissions. This approach also creates expanded roles for energy and carbon analysts to deliver enterprise-level carbon assessments, monitor carbon calculations and progress, and recommend changes to internal processes.

Green followersThese companies adopt a more measured approach to the energy transition by exiting the hydrocarbon business after assets are monetized and the offsetting clean technologies are commercially viable. While their strategic intent is to eventually move out of oil and gas, they are still hedging on the pace of transition. In the interim, even more so than net-zero pioneers, green followers will need to effectively manage the base business by employing some of the lean operating model principles we discuss in the next section.

Net-zero pioneersThese first movers are rapidly pushing out of the traditional hydrocarbon business by divesting assets and redirecting their focus and portfolio toward a green future. Compared with the other archetypes, the long-term imperative to establish a lean operating model upstream is low for net-zero pioneers, given their eventual move out of upstream. However, even a pivot to a greener future will necessitate a new and leaner operating model. In the near term, these operators need to keep an eye on developments in their upstream portfolio to ensure a profitable transition out of the hydrocarbon business. In the medium term, they will need to adapt their existing operating model to one that is built around their green portfolio.


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Regardless of which strategic position a company chooses, adopting a lean operating model mindset can help maximize asset productivity and minimize transition risks, which may include depressed asset values, stranded assets, and changing market demand. We have identified three distinct areas that can help lower breakevens and achieve best-in-class asset performance:

leaning out base business operations and drive capital efficiency,

2 decarbonizing the E&P value chain, and

3 leveraging digital as a core enabler.

Three areas can help O&G companies lower breakevens and achieve best-in-class asset performance: leaning out base business operations and driving capital efficiency, decarbonizing the E&P value chain, and leveraging digital as a core enabler.

Lean out base business and drive capital efficiency

To adopt a forever-lean mindset, operators need to move past the traditional downturn approach of solving for the crisis and instead challenge traditional norms. Figure 2 indicates the fundamental change in mindset needed to address structural challenges and create a forever-lean operating model. This model focuses on operators’ driving value versus cost, getting the ecosystem of players to collaborate versus compete, and focusing on capabilities versus size.

Figure 2. Mindset change needed to create a forever lean operating model

Old mindsetSolve for a

market cycle

New mindsetAddress a

structural challenge

Value vs cost

Collaborate vs compete

Capabilities vs size

Slash and minimize costs today

Learn all costs (e.g., reduce facility costs at each battery

to min. requirements)

Beat up OFS companies

Price concessions; drive down all OFS unit prices

Lean the organization

Lean the headcount through spans and layers,

benchmarks, etc.

Drive efficiency, invest wisely for the future

Drive down all costs not associated with future ways of

working and value creation (e.g., maintain facilities costs

tha enable remote ops & MBE)

Partner with OFS, challenge judiciously

Work with OFS network to identify areas of mutual efficiences and savings

Create shared capacity across OFS and operator network

Reimagine a lean business model

Learn from COVID-19: Rethink onsite core capabilities,

workforce of the future, and role of the gig economy

Define base and flex capacity needs

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Three areas drive lean operating models

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Drive efficiency: invest wisely for the future: In previous downturns, operators dusted off their traditional cost takeout playbooks: cut costs across operating expenses (OPEX) and capital expenses (CAPEX). Operators should take advantage of the recent market upturn to rethink this approach and assess where can they invest wisely today to enable a fit-for-any-oil-price asset rather than revert to the old cost takeout playbook when the next downturn occurs.

Keeping costs low will be imperative for all strategic archetypes. But those remaining in the upstream business will also need to reimagine current ways of working to sustain a lean workforce throughout market cycles and invest now in areas that generate sustainable value creation, even in a market downturn. History is littered with stories of operators making short-sighted decisions to lower costs now at the expense of future performance; for example, reducing facilities costs during a downturn only to realize later that a lack of automation hinders their goals of driving a lean, efficient, and more remote field workforce, or unconventional operators who over experiment well by well in drilling and completions designs when not all of these experiments drive material performance gain.

We see four levers that operators can tap into to improve asset productivity and cost (figure 3) without hindering future results:

• Drive down unit rates. Reassess all supply chain costs to ensure the company is doing and buying the right products and services at the right cost and delivering the right results. Don’t pay more for a commodity, but do consider paying for better results.

• Drive up operational efficiencies. Continually look at what work is getting executed and how that work is getting executed. Streamline and lean out workflows, and focus on improving key operational performance metrics, such as reliability.

• Enable effective design and efficient delivery. For capital programs, standardize and streamline workflows that can reduce cycle time but don’t affect overall well productivity. For all other areas where experimentation can improve well productivity, determine what enabling processes, data, and tools are needed to deliver better performance.

• Increase well productivity. Never assume today’s performance is the best that it can ever be. Leverage analytics to reassess how the well performed relative to plan and what opportunities exist to improve results for the next well.

Figure 3. Four levers to lower breakevens and achieve best-in-class asset performance

“No regrets”Keep costs low

• Minimize CAPEX spend, focusing on high-value D&C activity

• Cut non-value-add discretionary spend (e.g., travel)

• Control OPEX activity drives aligned to value delivery (e.g., chemicals usage)

• Streamline and automate standard workflows

“Strategic”Position for the future

• Drive CAPEX efficiency through factory-based approach

• Invest in facilities costs that reduce overall OPEX through remote ops, new ways of working and leveraging scale

• Refine D&C model to enable remote operations across multiple aspects of well delivery (e.g., directional drilling)

• Develop project plan options through modular project design

Drive-down unit rates• Lower service and equipment costs• Reduce material costs

Drive-up operational efficiencies• Improve drilling and completion efficiency• Increase reliability• Eliminate non-value-add spend

Enable effective design and efficient delivery• Factory-based approach• Modular designs• Forensic analysis of contractor spend• Pervasive performance transparency

Increase well productivity• Optimize completion design• Improve production optimization• Re-evaluate optimal well spacing

Value vs cost


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Partner with OFS, challenge judiciously: The CEO of a large independent operator recently stated that no one knows his business better than the oilfield service companies (OFS) and that it was time to start actively collaborating with them. This is not a new concept, and many operators will argue that O&G is too complex relative to other industries, such as automotive, that have improved this relationship. However, as that CEO implied, it is time to revisit this suggestion. In a forever-lean operating model, every penny counts. This applies to operators as well as OFS. But the historical, transactional approach of working together meant someone had to lose if another gained. It’s important for operators to build supplier partnership ecosystems where everyone is working for mutual gain. Incentives should be realigned so that “my success is your success” becomes the new mantra. Information-sharing and transparency should be fundamental principles. Further, in a rapidly changing digital environment where no single entity can stay ahead of the curve on all fronts, being part of an ecosystem can provide opportunities for members to leverage the leading technologies and insights they need to succeed. Figure 4 provides examples of steps operators can take to change and enhance OFS relationships.

Figure 4. Steps to enhance operator-OFS relationship

“No regrets”Keep costs low

• Negotiate and reassess supply sources for commoditized services

• Pool assets to improve utilization, OFS cost to serve, and E&P pricing

• Move to performance-linked (value-oriented) smart contracts that align incentives

“Strategic”Position for the future

• Jointly diagnose cost-to-serve drivers with network of value-added service providers to eliminate waste

• Collaborate with other operators and OFS to create demand and inventory visibility to enable a shared economy approach to certain material and service needs

Collaborate vs compete

Reimagine a lean business model: In a traditional down cycle, operators often lean out the organization through a resource count–based approach that looks at spans, layers, and other benchmarks to assess what size the organization should be. For back-office roles such as information technology (IT), outsourcing is a common tactic because the function is not considered a core competency. Conversely, as the market improves, operators tend to regrow their resource base, especially with positions they deem to be a core competency. When an organization’s headcount fluctuates with the market, it becomes an expensive proposition to continually shrink headcount (separation costs, plunging employee morale) and grow it back (retraining costs, hiring incentives), especially considering the number of down cycles that have occurred this century alone.

When reimagining a lean business model for the future—one that leverages cost and efficiency opportunities via outsourcing, offshoring, and the gig economy—O&G operators should consider:

• What work needs to be done. Before determining who needs to do the work, assess whether the work is already streamlined (i.e., eliminate non-value-add work) and whether it can be further automated.

• Who can do the work. Across the petrotechnical skill set, challenge which roles really drive an asset’s overall performance, from maximizing initial production (IP) to minimizing the decline curve to maximizing the recovery factor? If the operator has used an OFS company to fill a role previously, can the model remain in place? For core roles that require a base capacity in house, can service companies provide flexible capacity that can be turned up and down as needed?

• Where to execute the work. Even if a role remains a core competency, every operator should rethink where the work can be done. Can it be offshored? The petrotechnical skill set is available in many cost-advantaged countries and can support a global footprint. This model already exists in other industries (e.g., automotive manufacturers use research and design centers in India), as well as in O&G itself, where one operator uses technical engineering centers in hub locations to support its global needs.


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Figure 5 illustrates how both core and noncore roles can be assessed, reimagined, and redesigned to support new resource models.

Figure 5. New resource models can be developed based on each function’s specific roles

Example : Drilling engineer future of work analysis

Drill plan Drill ops HandoverSite prep

What?1 Estimated true resource needs (after automation)

Who?2 Identify resource pool

Where?2 Determine location of resources

Automatee.g., initial drill plan and offset analysis

Flexible capacitye.g., direction adrillers supporting incrimental rigs

Base capacitye.g., drilling supervisor overseeing drilling ROC

Remotee.g., offshore junior drilling engineer support

Co-locatede.g., collaborate with other functions

in real time to maintain schedule

NeededEliminate

New resource model design considerations

• Challenge traditional thinking about what is core and non-core• Determine what is a true competitive differentiator and align

the roles needed to cultivate these capabilities• When defining appropriate base and flex capacity consider:

— Business activity forecast (e.g., # of operated assets)— Asset class or asset lifecycle— Non-core/non-differentiated roles that need to be part of

base capacity to fill pipelines for differentiated roles

• Ensure career paths will be clearly defined for all positions• Assess learning and development implications to assure base

capacity development and resource reskilling, where needed

Base capacity

In-house resources that can remain utilized throughout any business cycle (co-located or remote)

Flexible capacity

Outsourced “on-demand” capacity accessible for activity peaks (co-located or remote)


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2 Decarbonize the E&P value chain

Regardless of which strategic archetype an operator opts to pursue, the need to lower carbon emissions will remain. Upstream operators can employ a variety of strategies to decarbonize across the value chain. The 2030 decarbonization challenge: The path to the future of energy lists common mitigation strategies for scope 1 and 2 emissions, which are produced during operations and largely under an O&G company’s control. These include:

• Electrifying operations and incorporating renewables to fulfill power needs

• Enhancing energy efficiency and reducing energy intensity

• Adopting low-or no-emission fuels such as hydrogen, e-fuels and synthetic fuels, biofuels, and ammonia

• Improving logistics to reduce fuel consumption. For example, some operators, invoking the principles of a sharing economy, coordinate logistics, including trucks, marine vessels, and helicopters, to optimize transport times and volumes

• Establishing common standards and leading practices for improved energy efficiency and decreased emissions

• Reducing routine flaring and employing methane capture

• Optimizing production and reservoir management by using digital tools such as IoT sensors, digital twins, and virtual reality to model scenarios, monitor operations, track emissions and energy usage, and proactively maintain equipment

• Producing lower-emissions products by moving from one hydrocarbon to another (e.g., from coal to natural gas) or creating another product (such as biofuels or syngas)

• Increasing reuse or employing additive manufacturing to decrease waste and increase supply chain flexibility


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3 Leverage digital as a core enabler

Deloitte recently completed its annual upstream digital benchmark maturity survey3, in which 100% of participating E&Ps that digital is having an impact and is shifting the industry. There is clear recognition that digital will be critical for remaining competitive, with some respondents even saying it will be the differentiator between operators who consistently deliver top-quartile performance across the life of an asset and, ultimately, the last barrel standing. Some of the key themes that emerged from the digital benchmark survey:

• Remote work: While many companies are returning to the office, the traditional in-office model will not be. Our digital benchmark indicates that many operators are rethinking traditional remote operations centers (ROC). Initially, work was moved from the field to a ROC; now, some operators are evaluating what work can be done from a person’s home. Further, as operators move more work to service companies and/or offshore, new digitally powered collaboration capabilities will be required to improve how everyone works together to deliver top-quartile performance.

• Automation: Repetitive and manual tasks should be automated. Some routine tasks in a workflow have been. But process complexity needs to continue to be simplified, automated, and moved to low-cost areas (especially any routine, foundational processes). Further, engineers need to be freed from assessing every operational problem to focus on what is critical. Depending on a company’s operating philosophy and risk profiles, automation can be deployed to self-diagnose and correct an issue (e.g., optimizing routine settings on artificial lift) or flag events for human intervention and decision-making (e.g., leak detection or emergency well shut-in). A lean workforce requires digital enablement to focus on critical, higher-order tasks.

• Deeper and more meaningful insights: Increasingly sophisticated analytics can help visualize and clarify certain data and results. This is a great starting point, but the next step is to take this data to deliver deeper, more meaningful insights. Today, we can use data to identify issues. Next, we need predictive analytics to alert engineers to impending events before they happen. Then, prescriptive analytics will help inform why the event is happening and what to do about it.

• Data integration: Operators should integrate and consolidate data across multiple sources and applications to derive holistic data sets across the well life cycle and value chain. All participating E&Ps highlighted the need to continue to improve data management and governance practices. The trick is to ensure this does not become a hindrance to progress (waiting on the perfect data set before trying something new). Assess where data is sufficient to deliver meaningful benefit to the business and work in parallel on the areas that need improvement.

• End-to-end value chain optimization: In a world where oil demand is decreasing, the last barrel standing is the one that delivers the highest margin. Margin improvement opportunities may be operational (extracting the hydrocarbons), commercial (serving the right markets), or financial (hedging and trading strategies) and are best accomplished by looking at the life cycle cost and revenue options for all owned assets and working collaboratively across the value chain with internal and external stakeholders. Unfortunately, operators today tend to be siloed within their part of the value chain (i.e., drilling versus completions versus production). Instead, they should take a holistic view of a hydrocarbon, from early-stage exploration to end of life, and strengthen their value chain relationships. Digital can expose this data, shine a light on the integrated relationships, and break down these silos.


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Who will be the last barrel standing?While many upstream O&G operators have already taken big strides to reduce costs and optimize operations, breakeven improvement has generally plateaued. Company leaders will need to rethink their operating models to maximize asset productivity and further drive down breakevens to be fit for any oil price and create sustainable value in the post-transition, low-carbon, and new-energy future.


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Endnotes1. bp, BP Energy Outlook 2020: eight big questions answered; Rystad Energy, “Covid-19 and energy transition will expedite

peak oil demand to 2028 and cut level to 102 million bpd,” November 2, 2020; Shell, Energy Transition Report 2020.

2. Deloitte Insights, Navigating the energy transition from disruption to growth: Energy and industrial companies are positioned for a lower-carbon future, 2020.

3. Deloitte, “Digital Maturity Assessment for Upstream Oil and Gas Operators,” October 2021.3.

Noemie TilghmanPrincipal US Oil, Gas, and Chemicals Consulting LeaderDeloitte Consulting [email protected]

ContactsTom BonnyManaging DirectorDeloitte Consulting [email protected]

Special thanks to Daniel Ott for his contributions to this article.

Samrat DasSenior ManagerDeloitte Consulting [email protected]

https://www.bp.com/en/global/corporate/news-and-insights/reimagining-energy/eight-big-questions-from-energy-outlook-2020.html

https://www.rystadenergy.com/newsevents/news/press-releases/covid-19-and-energy-transition-will-expedite-peak-oil-demand-to-2028-and-cut-level-to-102-million-bpd/

https://www.rystadenergy.com/newsevents/news/press-releases/covid-19-and-energy-transition-will-expedite-peak-oil-demand-to-2028-and-cut-level-to-102-million-bpd/

https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/energy-resources/Deloitte-nl-eri-navigating-energy-transition-DI.pdf

https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/energy-resources/Deloitte-nl-eri-navigating-energy-transition-DI.pdf

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