The Final Frontier

The Final Frontier parses the evolution of the oil and gas sector to map out a plan for going forward. The global energy industry is huge, and it is in disarray; between low oil and gas prices, climate change, rising development costs, and ever-mounting regulations, the need for change has been made crystal clear—but planning is much easier than implementation, and stasis is not progress. This book shows how redesigning internal operating models can bring about the necessary change in the implementation of upstream capabilities-driven strategies. From integrated, national, major, and independent oil companies, to the service companies in the upstream supply chain, there isn't an enterprise in the sector that cannot benefit from reduced costs and increased efficiency. Knowing that change is necessary is not enough—this book shows you what to change, and how to change it to get off the treadmill and start moving forward.

With expert guidance through each redesign element, this insightful guide provides more than simply ideas: it provides real, practical guidance on transforming operations to keep pace with the changes and create lasting advantage.

• Identify the most relevant organizational capabilities for your resource portfolio, as well as the changes that can translate into savings and efficiency
• Build a workable plan for real-world implementation
• Redesign the operating model most suited to the needs of your business on an organization-wide basis
• Learn what to do differently and how to do it differently

The energy industry has made great strides: our understanding of the global resource base, the nature of ownership and principal stakeholders, new technologies for resource development, and our economics and business models have all undergone a tremendous revolution, but now the more difficult—and more valuable—task begins. The Final Frontier helps you navigate the future and implement the changes necessary to avoid getting left behind.

Acknowledgments ix

Abstract x

Chapter 1 Introduction 1

A Vital Industry 2

What Now? 3

Industry Evolution 6

Ten Reasons to Update Your Operating Model 9

E&P Needs a New Agenda 19

Notes 20

Chapter 2 The New Agenda 23

Upstream Cost Transformation 24

“Cut Costs and Grow Stronger” 30

E&P Capabilities 34

Resource-Based Key Capabilities 45

Notes 49

Chapter 3 E&P Operating Model Redesign 51

Internal Operating Model 55

Business Delineation and Performance Measurement 56

Organization Structure, Capabilities, and Workflows 66

Operations Management Processes 74

Delegation of Decision Rights 75

Informal Social Norms and Corporate Culture 77

Implications of Industry Evolution 80

Business Model Considerations 83

Notes 85

Chapter 4 PMI and Other Event-Driven Redesigns 87

The Search for a Perfect Ownership Model 89

Preparing to Go Public 91

Key Success Factors 92

Event-Driven Redesign 94

Note 95

Chapter 5 National Oil Company Considerations 97

National Oil Company Context 98

Sovereign and National Oil Company Strategies 103

Business Model Implications 109

Notes 114

Chapter 6 Collaborative Operating Models 117

Who Uses Joint Ventures? 118

Joint Venture Strategic Intent 122

Joint Venture Value and Valuation 124

Deal Structure 127

Joint Ventures in Practice—The “How” 132

Notes 141

Chapter 7 Financial Implications 143

Financial Strategy and Policy 145

Hedging and Trading 155

Notes 168

Glossary of Terms 171

Other Useful Links 171

Works Cited 172

About the Author 178

Index 179

“This book makes the case for change and outlines the key operating model compo­nents for a winning capabilities-driven strategy in today’s difficult environment. The opportunity to both lower cost and increase productivity makes this essential reading for executives across the O&G industry.”

—ERIC SPIEGEL, former President and CEO of Siemens USA, author of Energy Shift: Game Changing Options for Fueling the Future

“The Final Frontier delivers a masterful analysis of the current oil and gas industry and how it can evolve toward the future. Justin’s insights, which cover everything from discovery challenges to M&A and hedging, are a must for all industry professionals who wish to see beyond the technical side of the business.”

—FABIAN VERA, Reservoir Engineer, CDEUS

“This is a well-written, easily read, and well organized book. It is an excellent source for E&P companies, including NOCs, IOCs, and service companies, for planning, designing, and implementing low-cost and efficient operating models. The book presents an inclusive coverage of various business and operating models practiced in the oil and gas industry. This book is recommended for CEOs, executives, business leaders, professionals, and practitioners in the industry.”

—Dr. SAUD M. AL-FATTAH, Consultant, Saudi Aramco

“Mr. Pettit captures the essence of why E&P companies need to push forward with a new model. He concisely captures and underpins the historic practices that have led the industry to a point where a new path must be taken. His work has helped to reframe the operating model that I use. This book is a must for all executives in the oil industry.”

—MICHAEL G. MUIRHEAD, Chairman and Chief Executive Officer, Ezra Energy Ltd.

JUSTIN PETTIT is an advisor to the oil and gas industry. He entered the industry in 1992 as Senior Business Planner with Norcen Energy Resources and went on to a successful career on Wall Street, including Partner at Stern Stewart & Company, Group Head of Strategic Advisory for UBS Investment Bank, and Lead Partner in the energy and chemicals practice of Booz & Company. He also authored Strategic Corporate Finance: Applications in Valuation & Capital Structure (Wiley) and Merge Ahead: Mastering the Five Enduring Trends of Artful M&A. Mr. Pettit is a member of the Society of Petroleum Engineers.

Sweeping evolutionary change and a range of powerful disruptive forces have left the energy industry in a state of disarray. No doubt the industry has attempted to address those challenges on several fronts, but always on a piecemeal basis. As a result, cash flows continue to fall short and the sense remains that the industry has not fully adapted.

In The Final Frontier, author Justin Pettit argues that although companies have been focused on cost and productivity since before the collapse in oil prices, beyond incremental accommodations to change, scant attention has been given to what should have been a critical concern: their internal enterprise operating models.

Pettit provides an overview of the ten key challenges facing the oil and gas industry, including weak oil and gas prices, the "ripple effect" of unconventional energy sources, and mounting social license and environmental costs. And he explains why the pressures they exert in the aggregate cry out for nothing less than a radical new approach to how business is conducted from the inside out.

He then explores the redesign elements of a new internal operating model for IOCs, majors and independents, NOCs, and services companies in the upstream supply chain. He offers examples of how they can be successfully internalized and leveraged with real-world case studies of both successes and failures. Operating model redesign offers a way to cut costs and grow stronger by investing in companies' most important capabilities and leveraging the capabilities of others. It is an opportunity to tap into the creativity and entrepreneurial spirit of the talent pool and to empower employees to drive enterprise improvement. In The Final Frontier, Justin Pettit doesn't merely make a compelling case for a radical redesign of outmoded internal operating models, he lays out a blueprint for how to make that change.