Authors: Lorraine L. Walker and Jeff Henderson
Publication: Oil & Gas Monitor
Expansion takes back seat to process improvement and cost reduction this year
Oil and gas executives in Canada are tempering optimism with caution this year. 2013 isn’t about expansion: instead, we expect to see oil and gas companies focus on improving existing business processes to maximize profitability and shareholder value.
That’s one of the key observations from BDO’s recent survey of 84 C-suite and senior financial executives at oil and gas companies in Canada, the U.S., the U.K., Russia and Australia. We sought their views on a variety of topics, including growth strategy, industry consolidation, labour matters, and environmental and regulatory affairs.
Positive on growth, but financing a concern
Canadian oil and gas executives and their global counterparts felt positive about industry growth this year, with access to capital and continuing strong demand for resources seen as key growth drivers.
However, while some Canadian respondents felt that access to capital and credit had improved, more (43%) saw little change from the previous years. This is consistent with what we’ve heard in talking with companies across the sector. Many companies from E&P to oilfield services complain that they can’t obtain the financing they need to fund acquisitions or other growth strategies, whether from banks or new equity investors. While some companies are returning to existing investors for additional funding — where they can — others simply find themselves unable to achieve the size and scale they need to expand and compete on a higher level.
Price fluctuations continue to worry
Canadian respondents were also more likely than their international counterparts to see oil prices as a key growth inhibitor in 2013. It’s not surprising. Natural gas prices remain stubbornly low and oil prices hover in a range where a further drop could make new and future oil sands projects commercially unviable. Surging U.S. shale gas and oil production means that the situation is unlikely to change, forcing Canadian companies to adapt. The prospect of U.S. energy self-sufficiency is compelling producers and transportation players to push into new markets such as Asia — and push for new distribution channels such as the Northern Gateway and Pacific Trail pipelines.
We’ve already seen Canadian natural gas production drop in response to low prices and rising U.S. production. We’ve also seen companies pulling back on their oil sands ambitions, postponing or cancelling projects in light of the current price environment. These decisions naturally impact the entire industry, from oilfield services to refiners and transportation players. Whether persistently low oil and gas prices eventually cause the market to lose confidence in the industry remains to be seen.
Lack of skilled labour remains a challenge
Another factor limiting growth — and perhaps contributing to companies’ internal focus this year — is the ongoing shortage of skilled labour. Executives are predicting the lack of a skilled workforce will have a negative impact on their business in 2013.
It’s a common refrain from the companies we work with. There just aren’t enough petroleum engineers, mechanics, welders, field geologists, geophysicists — the list goes on. The labour shortage is hitting services companies the hardest, but this in turn limits the ability of the rest of the industry to grow. In recent years, exploration and production companies have responded by focusing on optimizing their workforces at the rig and elsewhere. We’ve seen some companies achieve the same level of production with a crew of 50 rather than the crew of 100 it took five or six years ago.
Canadians more concerned about environmental policy
Canadians were more likely than their international peers to view environmental policies as their chief regulatory concern. We’ve already seen project costs spike in part due to the cost of environmental requirements, and governments continue to set out new rules and mandatory disclosures. The new requirement for companies to fully disclose the chemical mix they use in hydraulic fracturing is one example.
Survey respondents also told us that in 2013 they plan to direct resources to addressing a range of environmental concerns, including the environmental impact of hydraulic fracturing, CO2 emissions, water pollution and ecosystem disruption.
Companies focus on improving what they already have
The executives we surveyed may have felt relatively positive about their growth prospects, but they’re clearly not without other concerns. This is no doubt why they’re taking a prudent, cautious route forward in 2013. They’re turning their focus inwards, looking for ways to improve processes in order to improve profitability and shareholder value. Over half told us that a stronger focus on internal business processes would be a key strategy for improving profitability this year.
Compared to their international peers, Canadian oil and gas organizations are more likely to be planning cost-reduction programs to improve stakeholder value this year. Canadian firms are also more likely to scale back exploration efforts in order to maintain or improve returns on existing investments.
In our view, Canadian companies are taking a sensible approach. Pausing now to ensure their businesses are as efficient, cost-effective and profitable as possible will enable companies to better withstand any heavy weather to come. More importantly, it can allow companies to seize growth opportunities that arise during a downturn or in the following recovery.
Preparing for uncertainty: areas to consider
If oil and gas companies are indeed using 2013 to make their businesses stronger and more resilient in the face of market uncertainty, there are several strategies to explore. We encourage companies to consider the following areas:
- Operational and financial processes — Are there opportunities to streamline or simplify these to make them more efficient?
- Infrastructure investment — Are you investing in new technologies to develop your assets?
- International operations – Is your organization optimally structured from an international tax and transfer pricing perspective? Are joint ventures and other partnerships generating the revenue or profits you’d expect?
- Workforce optimization — With skilled labour so hard to find, are there ways to change how work gets done across the business to achieve results with a lean workforce?
Keep investing in innovation
What companies shouldn’t do is cut back on their innovation investment — that’s a short-term approach that risks long-term competitiveness.
Innovation has long been key to the success of the oil and gas industry, and Canadian companies have a proud history as innovators. R&D has been vital to the technological breakthroughs that enable today’s companies to exploit the oil sands and shale formations around the globe. Horizontal drilling, multi-stage hydraulic fracturing, enhanced oil recovery — not to mention in situ technologies such as SAGD, THAI, CHOPS and VAPEX — were all the result of patient, ongoing investment in innovation. As well, innovation investment plays a vital role in enabling the industry to address and mitigate its potential environmental impact.
Consistent, long-term innovation investment is essential to securing sustainable success for Canada’s oil and gas industry — and it’s also vital to addressing the environmental concerns of governments, regulators and citizens. We urge companies to seek out partnerships with academia and to capitalize on government incentives such as SR&ED (Scientific Research & Experimental Development) tax credits to offset the cost of this essential investment. Companies should also consider the level of R&D incentives and support offered by the tax regimes in other countries where they have operations.
A prudent course to a prosperous future
Canadian oil and gas companies may be playing it cautious this year, but we believe it’s a smart move. Taking time now to focus on streamlining processes, uncovering efficiencies and reducing costs will not only help companies improve profitability and shareholder value — it will help them improve their competitive position overall.