While many of us feel like we are the leading characters in a dystopian novel, professionals in the oil and gas industry may feel like they have lost three decades of progress. Oil prices are well below what we saw in the early 1990s, when the prices crashed during the ’91 Gulf War. In addition, consumers and politicians alike continue to demand sustainable practices and solutions from the energy industry.
Not only is the industry suffering demand shocks due to coronavirus quarantines, but it also is experiencing oversupply due to the tit-for-tat maneuverings of Saudi Arabian and Russian oligarchs that have only recently been resolved. According to the Wall Street Journal, Russian spokespersons say that they have $150 billion in their sovereign wealth fund to support the economy for up to a decade of low crude prices.
Oil demand is down as much as 2.5 million barrels per day, with China’s retrenchment accounting for as much as 70% of that drop. Most oil stocks have dropped from a modest 5% to as much as 40%. Dozens of companies in the sector are facing bankruptcy.
In light of all of this bad news, it is not surprising that oil and gas executives are struggling to stay positive and motivate their employees.
Oil and gas companies have altered their priorities to ensure that they stay afloat in these volatile times. They are limiting spending in order to conserve cash and refocusing efforts to generate free cash flow. Some companies are exploring asset sales or other financial options to pay down debt loads that have become a drag on operations.
Other oil and gas companies are reducing output with plans to reignite growth when prices improve. In some cases, this is also in response to Wall Street’s demands that shale companies ensure ongoing profitability; they are requiring that companies stop “counting barrels” and start counting dollars. At a break-even point of more than $40 per barrel, the pressure is on.
How to respond
According to Accenture, the solution is greater digitalization and greater reliance on partnerships. Oil and gas companies can address inefficiencies with machine learning, AI, and other innovative solutions. Supply chain collaboration solutions can help ensure that customers have products when needed and put more decision-making in the hands of the folks in the field who are interacting closely with service providers and trading partners.
Who should do the work?
Forging an ecosystem with trading partners can enable companies to leverage the knowledge and strengths of others in the industry. Research by Accenture revealed that only one-third of oil and gas companies use partnerships to support new business models, which is much less than in other industries. However, allowing increasing blurred lines between companies and partners can ensure that the organization best suited to do the work and that can do it most efficiently and cost-effectively should assume that responsibility. By deploying supplier risk solutions to leverage supplier data and ensure that compliance and safety standards are met, companies will not be throwing caution to the wind!
Companies with the long view can unleash value by embracing greater agility, adaptability, and collaboration with suppliers and trading partners. Deploying more flexible contracts with shorter time horizons that reflect greater customer focus can benefit both the companies and their trading partners.
We’re all in this together
Perhaps our friends in Russia and Saudi Arabia wouldn’t agree, but we are all in this together. When oil and gas CFOs are pressured to better manage working capital by squeezing margins and getting the most out of payment terms, their trading partners may be hard-pressed to manage their cash flow.
You may be interested in how buyers can find new sources of supplies and how suppliers can find new business opportunities. SAP is opening free access to SAP Ariba Discovery, so any buyer can post its immediate sourcing needs, and any supplier can respond to show it can deliver. And while you can’t predict how global events will unfold, you can now build resilience in your supply chain, courtesy of a global marketplace powered by Ariba Network.
Small suppliers will clearly suffer the most. However, procurement departments of larger, more stable oil and gas companies can explore ways that they can help them stay afloat. How can suppliers be paid on time or early? Can larger companies help with negotiations with payment partners to arrange for credit extensions to keep critical trading partners afloat? Check in with your suppliers using SAP’s Supply Continuity Pulse to monitor the needs of your suppliers.
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