As things start to improve for the oil and gas sector, executives would be wise to remember lessons learned during tough times. Juan Carlos Gay, a partner with Bain’s Oil & Gas practice, discusses the three pillars of strategy that oil and gas companies need to implement to stay profitable.
Read the Bain Brief: Thriving in a Shallower Profit Pool for Oil and Gas
Read the transcript below.
JUAN CARLOS GAY: Four years after the oil price collapsed, we've started to see optimism back in the oil patch. We're seeing really historical prices, high prices since 2014. The earnings cycle has been positive, so companies are highly profitable. And capital is being deployed actively.
This is exactly when things start to go wrong, and there's a major risk. Because people forget the lessons learned from the downturn.
We believe the rules of the game have changed. To start with, the ability of OPEC to control the oil price in a certain range has significantly diminished. Second, the shale players, through innovation and sheer determination, have created a buffer of volumes in the middle of the cost curve that will operate as a ceiling. And we have a much more competitive landscape, with IOCs being confident, oilfield service companies being stronger and more able to compete—and interestingly enough, we have technology companies that can be actually looking in for areas of disruption.
This is a time where we believe every company in the oil and gas sector should revisit its strategy, particularly on the back of a much shallower profit pool, which we estimate to be 60% lower compared to historically. And that strategy, recognizing it needs to be different for every company, should include three major themes.
One is cost and productivity. We cannot forget the lessons from the downturn, and every company should ensure they have a competitive cost structure. There should be a differentiation to really drive to the core and play to their strengths. And thirdly, embrace digital. Digital, we believe, will be the enabler of every strategy in the oil sector. And those are the three pillars that every strategy in the oil and gas sector, we believe, should include.