Supermajors need a service ethos

by Raju Patel
Published: Financial Times
October 31, 2008

Raju Patel of Fulcrium writes in the FT.

The five largest, non state-owned energy companies worldwide (ExxonMobil, BP, Royal Dutch Shell, Chevron and Total) are termed supermajors and hold about 3 per cent of global hydrocarbon reserves. They were created from the late 1990s to hedge against oil price volatility, achieve economies of scale and reinvest cash reserves. While the supermajors got bigger, so did the challenges they face, with implications for their survival.

The good news is that scale is an advantage when exploring for hydrocarbon resources in the most inhospitable and inaccessible parts of the world, in developing technology, in undertaking mega-projects.

The bad news is that “diseconomies” were inherited with consolidation. These include issues of corporate governance, and trying to manage merged behemoths; the reduced accuracy of information flow; slower decision-making; greater responsibility for the safety of staff, contractors and for the environment; and increased emphasis on performance management.

The supermajors are now going to have to up their game to avoid being relegated to lower-value service providers – or eventually face extinction.

Technology in action
  • Subsalt imaging to aid reservoir characterisation in sand prone areas Expandable sand screens to prevent sand clogging up production casing
  • Standardisation of engineering projects – design once, use many times, as opposed to reinventing the wheel
  • Operations, Health & Safety – reducing downtime of critical equipment by preserving operational integrity
  • Drilling to record-breaking depths under high-pressure, high-temperature conditions
  • Non-seismic geophysical exploration using gravity, magnetic and electrical methods

“Winning” is often defined as gaining access to and exploring the largest hydrocarbon basins, replacing the produced reserves, successfully developing mega-projects, optimising production, and managing reservoir decline. In addition, decommissioning mature fields, health, safety and the environment have become more important. “Winning” is also defined as being able to strike partnerships with host governments, national oil companies (NOCs), other international oil companies (IOCs), and contractors.

The supermajors are positioning themselves to win by renewing their strategies for corporate governance, organisation, technology, projects, engineering and contracting.

ExxonMobil, for example, is known for its centralised management, while some supermajors give greater autonomy to business units. Both models can work, but the decentralised approach will need robust delegation and accountabilities, otherwise there is a risk the corporate centre, business units and the functions will end up tripping over each other.

BP’s chief executive Tony Hayward has embarked upon an aggressive simplification programme. Shell’s corporate mantra over the last few years has been ESSA – eliminate, simplify, standardise, automate.

As part of the simplification drive, every division, function and business unit will need to become a focused contributor to the business. Functions in particular, such as technology, procurement/supply chain, finance, human resources and legal must be organised and managed to world-class standards.

Technology is critically important, but the supermajors do not have exclusive influence over it. The value they add is in screening it in the marketplace, R&D and testing.

Having outsourced some core skills and competencies, the supermajors have become “super contractors” and “super project managers”, bringing together partners, managing and integrating huge programmes and disciplines. In effect, they are managing budgets, risk, delivery, health and safety, quality, timescales and pushing technical limits.

Whether or not they are relegated to becoming low-margin service contractors, they will still need to foster a service mindset. This means becoming agile, responsive and competitive in order to be selected as partners of choice by NOCs and host governments.

The oil-producer cartel Opec and the NOCs are growing sophisticated. They, too, are hiring the best technology and brains in the industry. The supermajors will be obliged to offer propositions that are a lot more compelling when compared to near competitors – pure service companies such as Schlumberger or Halliburton.

When all is said and done, one question remains: are the supermajors just too sluggish to leverage their scale profitably?

Raju Patel is chief executive of Fulcrium (a specialist performance management consultancy)