Home > Uncategorized > Rethinking the oil and gas organization

Rethinking the oil and gas organization

 

By Christopher Handscomb, Scott Sharabura, and Jannik Woxholth

Organizational choices made during a time of resource scarcity need reexamination when the cycle turns.

When business cycles turn, cyclical industries can struggle to retool their organizations for the new environment. For instance, today’s oil and gas companies were developed in a time of resource scarcity. To get at those hard-to-find, difficult-to-develop resources, companies greatly expanded the role of their central functions—mandating them to set common standards, make technical design decisions, track company-wide metrics, and disseminate best practices. This worked well during a decade of high growth and high prices but created complexity that added costs, stifled innovation, and slowed down decision making. As these central teams expanded, general and administrative costs grew fivefold, hitting nearly $5 per barrel in 2014 (exhibit), with the biggest increases coming from technical functions such as engineering, geosciences, and health and safety.

Oil companies have cut support functions since 2014 but must consider more radical organizational changes as prices remain weak.

With prices now below $50 a barrel, that organizational blueprint is no longer sustainable. While companies have cut their support functions since 2014, the overall organizations supported by these functions are also smaller. This suggests further reductions in corporate functions will be needed, as well as new organizational models.

A more agile organization, with fluid teams and looser hierarchies, can lower costs and create greater responsiveness to today’s vastly different markets—ranging from megaprojects to less asset-heavy unconventional shale-oil and renewable-asset plays. Technologies such as networked sensors that generate and share data can help optimize production processes, while digitally enabled automation of routine manual activity can reduce human risk and spur productivity. Critically, the structures built to manage scarce talent and large-scale megaprojects will need to be fundamentally redesigned. We see two models arising: for lower-risk assets such as tight oil, a very lean corporate center with highly autonomous asset teams will suffice, while higher-risk, more capital-intensive assets will need a comparatively stronger center with deeper functional and risk-management capabilities.

For additional insights, see “The oil and gas organization of the future.”

About the author(s)

Christopher Handscomb is a partner in McKinsey’s London office, Scott Sharabura is an associate partner in the Calgary office, and Jannik Woxholth is a consultant in the Oslo office.

MORE FROM MCKINSEY QUARTERLY

Report – McKinsey Global Institute

The age of analytics: Competing in a data-driven world

Article – McKinsey Quarterly

Transformation with a capital T

Article – McKinsey Quarterly

Making data analytics work for you—instead of the other way around

Interview

The next acronym you need to know about: RPA (robotic process automation)

Interview – McKinsey Quarterly

Nokia’s next chapter

Article

Bracing for seven critical changes as fintech matures

Advertisements
Categories: Uncategorized
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: