Keynote Address By Dr. Babatunde Victor Adeniran - GED/COO, NNPC at the 1oth Annual Sub-Saharan Africa Oil & Gas Conference, Houston
“Current state of our Industry and the Transformational Adjustments Required to Succeed in this new Petroleum Era.”
Good day ladies and gentlemen, thank you for giving me the opportunity to share my thoughts and perspectives on the current state of our industry and the transformational adjustments required to succeed in this new petroleum era.
Setting the Scene
Since the formation of the first modern oil company – Standard Oil, in 1870 - our industry has survived almost two centuriesof cyclical peaks and downturns. We have witnessed the$140 per barrel “highs” and also lived throughthe $15 per barrel “lows”andeven much lowerthan this (based essentially on the politics of demand&supply).
Todayhowever, the industry is at a cross-road. This is because of the fundamental changes which have occurred over the last 5 years that have permanently disrupted the supply and demand dynamics.
Using the period between 2015 and 2016 as an example, there has been approximately, a25% dropin global spending on both exploration and production. The cost of which was placed at running into hundreds of billions of dollars.The dropwas found to be directly attributed to low oil prices. This is in contrast to the year 2008, during which the oil price decline was driven by demand deterioration while the decline in the oil price from 2014 to 2016 was due to excess supply.
The discovery of abundant unconventional resources like Shale Oil & Gas has generally changed the global oil and gas landscape. Arising from this technological development, new opportunities as well asthreats are being created. The consequent reduction in US Oil and Gas import demand, coupled with other economic and geopolitical factors, alongside slow economic recovery in Europe and Japan as well as the return of Iraqi grades have led to the creation of significant spare supply which has depressed global oil prices from Q2, 2014.
A recent study by the World Energy Council forecasts peak demand for oil between 2030 and 2040 at 10 to 15 percent above today’s demand. This means that over the next two decades, the world may have more oil & gas resources than it actually needs.
Therefore, undeveloped resources are likely to become “stranded” in the ground.
New energy-saving technologies and coordinated global efforts to regulate carbon emissions such as the CoP 21 Paris agreement are also reshaping the current energy mix.
On the supply side, low prices and increased price volatility have shifted the industry from large complex mega projects that will require years to develop to smaller, quick-to-monetize discoveries. In short, there has been a paradigm shift from “Big Oil” to “Fast Oil”.
Therefore U.S shale and light tight oil (LTO) players with short exploration-to-production cycles and low breakeven prices have become the new “swing producers”. They can respond quicker to market demand and are pushing out slower, higher cost producers from the supply curve.
Many oil & gas rich countries now face the risk that their unproduced reserves might become worthless in future.
Sadly, oil companies have reacted to the current downturn by downsizing their workforces. Over 440,000 (four hundred and forty thousand) industry jobs have been cut globally since 2014. In addition to theretirement of workers who started their careers in the seventies and eighties, thishas further reduced the workforce.
Unfortunately, the industry is not doing enough to attract young millennials to fill the knowledge gap created by the latterexits. The downsizing and lack of job opportunities in the industry has created a situation where many students no longer want to enroll in oil & gas-related courses. There is an imminent talent shortage. For example, only 2 percent of US college graduates consider the oil and gas industry their top choice for employment. The issue is the same in Sub-Saharan Africa where universities will need to double their graduate supply of petro-technical professionals by 2020.
Key Questions Arising
All these unprecedented structural changes pose two key questions:
How can investment decisions be optimized in a dynamic and volatile marketlike this?
What talent strategies are needed to win in future?
Let me briefly share my thoughts on these questions over the next couple of minutes.
Perspectives on the Key Questions Arising
To thrive in the new petroleum era, companies need to re-thinkthe essence of their business and their role in the value chain. I believe we are not just in the business of producing oil, we need to become more astute at spotting and capturing business opportunities in ancillary services and adjacent segments of the value chain.I quote President, Muhammadu Buhari of Nigeria opening remark during an economic summit in Nigeria in 2016 simply asking people to think outside the box.
Thinking outside the box: Over the last 3 years, IOCs have been less susceptible to upstream margin erosion from oil price drop because of their diversified presence across the value chain. Likewise, leading NOCs like Statoil and Saudi Aramco have been optimizing their “non-oil” venturesin properties, shipping, medical, insurance and bio-fuels, and so is NNPC. NNPC is beginning to toll along this line by creating “Ventures” Directorate in 2016 to commercializesome of its“cost center” entities and create non-core businesses for additional revenue generation. Adopting a diversified portfolio provides a natural hedge against the inherent volatility of the upstream business.
Oftentimes oil companies miss out on significant opportunities because of the excuse that “it is not our traditional core business”. To succeed in this new world, the oil and gas industry will need to be more agile and adaptable.
Secondly, companies will need to keep an unwavering focus on maximizing profit margins NOT production capacity. Historically, company targets and incentives have been set around maximizing production volumes and capacity utilization. The old mantra has been to “increase production and get more barrels at all cost”.
However, achieving maximum production from an asset is not always the most economically viable option. There is usually an inflection point where the cost of increasing production capacity outweighs the additional revenue to be derived.
Prioritizing profitable growth will ensure companies do not waste valuable resources developing unprofitable assets. In some cases, this might even mean exiting some assets or businesses completely.
Finally, workforces must be flexible enough to provide the agility required to navigate through this new era of high volatility. Talent strategies must leverage the full capabilities of a company’s full-time employees, contractors and service companies. For example, partnering more closely with supplier service companies on joint R&D efforts is a way to share knowledge and generate innovative mutually beneficial ideas.
Even though we are experiencing a downturn, now is the time for companies to focus on developing young talent within their organizations. Structured on-the-job training, coaching and mentoring programs should be set-up to make sure older, experienced staff transfer knowledge to fresh recruits before they retire. Talent development is not an optional Human Resources matter, it is a source of competitive advantage.
In conclusion, I believe the new market realities demand: transformational adjustments from old ways of thinking and working. Companies need to reevaluate where they play and how they invest. Those that will succeed in the new petroleum era are those bold enough to embrace change. It is fair to say that Oil & Gas will continue to occupy a strategic position in the global energy mix, with opportunities therein for not only the investors and or producers but also the consumers, for a sustainable world economy.
However, when we leave this conference and go back to our daily roles, I encourage everyone to think about these questions:
How does my company think about capital allocation and investment decisions? Do we have a 360-degree view of adjacent opportunities in our playing field?
What are we doing today to fill the talent vacuum and prepare a sustainable talent engine for the future?
With the changing landscape in the oil and gas industry, due to advancement in technology, how much are we gaining as Africans, and the value additions to Africans through local content?
While this note is setting the stage for thedeliberations over the next two days, I want towish you all a successful conference experience and also a safe trip back to your respective destinations.
Thank you once again for this opportunity.