Growth Strategy and Company Behavior; Upstream Strategy.
How companies’ culture impact their behavior, and their strategy.
If you are part of an upstream asset team (or business unit) you must have heard your seniors comment on strategy as ‘this year the production is the king’, or’ next year reserves will be the king and production the queen’. By these directions, he or she is trying to draw the team’s focus on the BU’s priorities to support corporate’s strategy in a particular fiscal year. Your individual effort usually supports a bigger purpose at corporate level.
There is not a major difference in the vision and mission of the upstream operators. The ultimate target of the sector is to provide safe, responsible, sustainable and affordable energy resources to drive our life. However, companies may have slightly different strategies to create value, and to grow business. Oil and gas companies are keen to increase the production and improve their reserve index, but how do they do that and how their capabilities and competencies support their growth strategies?
The growth strategy of a company can be a mix of 3 components; organic growth (through drill-bit, in upstream context), merger and acquisition (M&A) and alliance (Gerald Adolf, 2009). The weight of any of these components in overall corporations’ growth strategy is usually driven by key internal and external drivers such as production versus reserves priority, state of the portfolio, risk profile, market expectations, active shareholders, where the assets – or a certain production volume – are in their life cycle, and the core competency of each company.
Oil and gas companies naturally leverage their core competencies towards formulating a growth strategy. Pretty much like their natural state, they behave in that mode because they have the brain power, the muscle and internal alignment that makes their natural mode the preferred way of doing business or growing the business. It is also fair to assume a secondary competency or behavior for an E&P company as quite often – and mostly in larger operators – the leadership would like to expand the organizational capabilities and explore other means to grow. Sometime the secondary competencies are obtained through external means/factors such as acquisitions, or visible benefits in vertical integration.
Some of the well known E&P behaviors are:
Financier: A financier would try to invest in economically attractive projects through acquisition and partnership. The company of this behavior would reduce its exposure to risk by investing into right upstream projects as non-operating partner. While the financier may have a main operating zone where it has established a successful exploration and development track record, investment (and not operating) is the preferred approach for expanding the portfolio outside their domestic operating geographical area. Many of the national oil companies including ADCO, CNOOP, and Statoil fall under this category. These companies usually have access to low cost investment fund. CNOOP’s $15.1b corporate acquisition of Nexen Inc (yes, leaning towards examples from Canadian market) and many other non-operating acquisitions and partnerships over past few years is a good example of this strategy.
Explorationist: With the support of a strong exploration team (geo-physicists, seismic interpreters, geo-modelers, etc.) and a savvy business development team the explorationist would secure exploration blocks, explore, and hopefully would locate leads and prospects. Upon a discovery the opportunity would evolve into a development project and depending on its size, it would be self-funded (less likely), or it would be funded with the help of a financier (more likely). Anadardo, is good example of this type of focused and exploration driven operators. Company’s sell of 10% stake in giant gas field offshore Mozambique in 2013 (to ONGC, read more) is an example of an explorationist sharing the development risk through partial divestiture, and using the proceeds to fund other projects (GOM and onshore US).
Portfolio Manager: This category would be suitable for larger operators with a global network. A portfolio manager type operator creates value by managing a balanced portfolio of diversified asset base (conventional, unconventional, on/offshore, liquids, gas,…) over wide range of geographical locations. To be successful in this category the operator would requires a wider range of technical expertise to be able to realize and improve the value of each and the combination of the projects within the portfolio. Also the company needs to have a savvy business development team to monitor the current assets and beacon potential opportunities to further refine and optimize the portfolio. The drawback of this growth strategy is that at times a Portfolio Manager might envy the successes that an Explorationist may pose in the investment community. Conocophillips is one of the leading operators in this category.
Technology Developer: Operators in this category would try to create value through improving the value of each and every step of the value chain through technology advancements. They are usually vertically integrated. They benefit from a network of R&D centers actively working with universities and other research centers. They launch leading edge research projects – and often cross-industry projects – supported by sophisticated innovation and technology development processes. Often they surprise the market by realizing value in an abandoned assets, or by demonstrating the latest breakthrough technology that can improve the value of a refining product. Patenting and licencing commercialized technologies to others is one of their revenue streams.
Shell is a good example of this category. See how Shell applies solar techniques to generate steam in an EOR project in Oman.
It is important to notice that the core competencies of each upstream operator have roots in their soft factors of the organization such as culture, leadership style, and processes/knowledge. The competitive advantages of each company cannot be built over night, and surely cannot be developed through a Presidential memo. It is even hard to gain it through acquisition as the competencies are usually embedded into – and nurtured by – the DNA of the organization and cannot be glued to it.
Having a good understanding of the competency of each operator will be beneficial for the business development managers, portfolio managers, and ones responsible for strategic planning. You would have a better understanding of your choice of partner when you wish to manage a deep-water offshore exploration. The best partner in an exploration venture may not be the best one for unconventional development for instance. For an unconventional venture you would pick a partner who has an entrepreneurial culture and a lean delivery model to achieve cost efficiency and to beat operational and financial KPIs.
Understanding of the competency of each company could also facilitate and streamline the dialogue within a JV framework. It would enable productive partner meetings; and could avoid risk of disputes and legal actions through understanding and effective communication.
What is your experience with different growth strategies of upstream companies? Do you see a dominant behavior in your E&P company towards growth?