During the past year, the energy industry has undergone dramatic changes, best illustrated by the precipitous decrease in the price of crude oil. Several countries rely on this sector, both to provide jobs and to provide capital, and everyone from businesses to consumers is affected by the price of oil. On the hiring front, cost-cutting and job losses have become a reality in 2015, and executives will need to increase efficiency of operations in order to remain profitable. Managing and navigating through this changing landscape could define some companies in the sector.
In early 2015, prices for crude oil plummeted, dropping to US $49 per barrel. Not only is this nearly half the price of crude oil at this time last year, but it is the lowest since March 2009. However, prices are expected to increase slightly over the course of the next year, averaging US $58 per barrel in 2015, and up to US $75 per barrel in 2016.1 Several factors are driving this drastic global change.
“As a result of the phenomenal activity, compensation has doubled over the past 10 years, during which time it has been relatively easy to be a CEO of an oil company. But now the conditions are changing dramatically. The focus on efficiency and profits is at a much higher level. CEOs and top management will have to deal with new and worst-case scenarios. Today’s environment is a game changer.” -Birger M. Svendsen, Managing Partner, Boyden Norway
1. Shale Oil Production in the United States
Major technological advancements in the United States energy sector have substantially expanded the country’s oil and gas production.3 In particular, shale is a key force and has especially impacted certain states. As the following chart indicates, crude oil production in the continental U.S. has significantly increased since 2010, with another exceptional rise last year. In fact, according to the Energy Department, the U.S. is at a nearly “three-decade high in terms of output”. Of note, 2014 saw the highest levels of crude production since 1986. Texas in particular is performing exceptionally, accounting for more than one-third of total U.S. production and averaging over three million barrels of crude a day. This is a marked difference from just four years ago, when production in Texas was just one-third its current level.4 North Dakota is another state experiencing a significant boom, producing one million barrels of oil per day.5 Shale oil has been the primary driver of these huge increases in U.S. supply.
2. Saudi Arabia Continues Maximum Production Despite Lower Prices
Saudi Arabia produces 10 million barrels of oil per day. Prices were maintained based on the expectation that the country would cut production in order to stabilize prices.6 However, the country has opted not to curb production, and it is willing to deal with lower prices to prevent losing customers to the U.S. and other large competitors. “It’s a strategy of maintaining market share until the price of oil rises again.”7 In early 2015, Saudi Arabia, sensing stronger demand on the horizon, raised the official selling price of oil to Asia and the U.S. Despite this measure, global markets remain oversupplied, with little evidence that the price war would terminate in the short term.8
3. Iraq and Libya Continue Production Despite Regional Instability
The political climate in certain regions will also likely impact pricing. Iraq and Libya have been traditionally politically unstable. Notwithstanding this unrest, they have historically produced oil at a surprisingly stable rate, with the two countries alone producing approximately four million barrels a day.9 This has added to the already oversupplied global market for oil. Recently however, the chaos in Libya and Iraq has left certain opinion leaders concerned about the continued supply in these countries. If production drops, prices will increase.10
4. Organization of Petroleum Exporting Countries Does Not Curb Production
The Organization of Petroleum Exporting Countries (OPEC) failed to reach an agreement to curb production in November of 2014, directly contributing to decreased oil prices in the months that followed. OPEC controls approximately 40% of the global market, thus it plays a pivotal role; the organization’s decisions are crucial.11
“The situation in the Middle East remains unstable with Libyan oil production at a virtual halt, Iraq severely reduced and uncertainty surrounding the final deal with Iran, which will allow that country to export again. An Iran deal with phased relaxation of sanctions will allow the gradual introduction of more oil to the market, which is the best-case scenario to avoid another crash in the oil price.” - Magdy El Zein, Managing Partner, Boyden Middle East
Executives managing in this uncertain and ever-changing environment must be mindful of the myriad factors that impact their bottom line. Beyond pure supply and demand fundamentals and technology enhancements, political factors and global regulations play a role in this industry more than in most other sectors, and without a strategic eye at the top, oilfield service providers and users of oil and gas will encounter severe challenges.
Not surprisingly, consumers will enjoy tangential but measurable gains from the current state of pricing. The lower gas prices could mean increased spending in other areas, driving the economy forward in many countries.12 In particular, the U.S. middle class will benefit the most as billions of dollars free up for spending, including conspicuous consumption.13 However, though this will have certain positive economic results, there has been some speculation around the impact on efforts to reduce carbon emissions. With more disposable income and lower gas prices, consumers are more likely to increase their gasoline consumption. In addition, they may also be more likely to purchase larger SUVs, inherently inefficient vehicles.14
While end-users and consumers benefit from price drops, they have had deleterious effects on the energy sector and its adjacent industries. Those who did not expect the downturn, as well as governments and countries dependent on the industry, are struggling through the unforeseen consequences. American frackers borrowed considerable capital, relying on the expectation of continued high prices that were the norm last year. They are now left in a risky situation without
the proper return and cash flow to support their investments. Other Western oil companies are in a vulnerable state as well, due to high-cost projects and involvement in mature and expensive fields, namely in the North Sea region and Canadian oil sands. In particular, countries dependent on the price of oil to fund various projects and programs, such as Russia, Iran and Venezuela, are the most negatively impacted. While some believe that these countries may now be agreeable to measures urged through international pressures, others are concerned they may “lash out in desperation.”15
Gary Cohn, a Goldman Sachs executive, explains that the surplus of oil may create storage problems, further decreasing the price, and destabilization around the world could follow:
“I think the oil market is trying to figure out an equilibrium price. The danger here, as we try and find an equilibrium price, is that at some point we may end up in a situation where storage capacity gets very, very limited. We may have too much physical oil for the available storage in certain locations. And it may be a locational issue…You could see the price fall relatively quickly to make that storage work in the market.”
Due to the unpredictable challenges currently facing the industry, executives will be tasked with finding solutions to adequately manage costs. This may necessitate, for example, reducing supply-chain costs and inhibiting investment in new projects – especially those that are in early stages of engineering and design phases.16,17 In fact, oil and gas operators are already aggressively pushing for price concessions from their service providers.
Experts debate the future of the price of oil. Some say that “prices will recover as energy companies cut production investment, including U.S. shale production.” Some also believe that the Saudis could eventually decide to cut their production levels. Conversely, opponents of this theory claim that prices will remain low. Because of production using low-cost wells, technology improvements, and the sunken nature of many costs, they opine that production will remain steady.18
Shale oil production is relatively easy to ramp up or down, and companies may intentionally leave wells unfinished during the downturn. For example, “spudding” (to start drilling) a shale well can take just a few weeks, and closing down an operation can be done in a few days. Many companies announced plans to continue drilling wells in 2015, without actually completing (i.e. fracturing) them. This process is meant to conserve funds in the short term, while also positioning companies to re-enter the market quickly when the price environment improves.19 Executives are doing their best to remain strategic and focused on long-term goals, while hedging in the short term.
Experts also expect that liquefied natural gas (LNG) will “make its mark” this year. In Australia in particular, several LNG “megaprojects” began recently.20 A similar trend is taking form in Canada, specifically in British Columbia. The Minister of Natural Gas Development, Rich Coleman, released a statement explaining that after three years of planning, the LNG industry in British Columbia is expected to “take flight in 2015.” Many companies have invested in this area and are moving forward with big projects in the region. This diversification, Coleman says, will help to create as many as 100,000 new jobs.21 In particular, ExxonMobil is undertaking a large-scale project in the region.22 In the U.S., there are currently four LNG projects under construction in Maryland, Louisiana, and Texas. Between 2016 and 2019, these terminals are expected to begin exporting gas to Asia and Europe.23
Increased Consolidation and Merger & Acquisition Activity
The low price of oil is likely a reason for increased merger and acquisition (M&A) activity this year, both within the industry itself and ancillary sectors as well. “The use of a stock-for-stock format is likely to show up in other transactions going forward”, says Thomas Petrie, chairman of Petrie Partners, an energy investment banking firm. He expects that the largest drillers could target “depressed stock prices as an opportunity to boost their production and reserves.” In the past, downturns and decreased prices have driven M&A activity for large oil companies, due to their robust financials and “opportunistic CEOs.” 24
Consolidation is expected in the near future, particularly in the oilfield services sector. In late 2014, Halliburton acquired one of its main competitors, Baker Hughes (worth U.S. $35 billion). Experts surmise that this is likely to stimulate another “wave of consolidation.” The two companies will likely be required to sell off some of their assets, and both smaller companies and private equity (PE) investors will benefit. In addition, CEOs will feel pressure to “make their own deals in order to keep pace.”25
Consolidation has already begun, as is apparent with the forthcoming merger between Royal Dutch Shell and BG Group, a natural gas specialist. Shell is purchasing BG Group for approximately $70 billion in cash and stock. This is the largest merger in the industry in at least five years, since Exxon Mobil purchased XTO Energy. Some analysts have commented that the deal is occurring sooner than they expected. According to Dennis Cassidy, an energy expert, the merger suggests that the two companies believe oil prices have hit or are close to the bottom. The merged company will now possess 16% of the world’s LNG market, and will be the largest independent producer of LNG globally.26 Shell will gain approximately 25% in oil and gas reserves.27 The merger is also expected to spark more M&A activity in the sector.28
“The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world.”29 -Jorma Ollila, Shell Chairman
PE firms are taking advantage of the current opportunities in the energy industry. Investors see the downturn as the perfect time to buy, despite overall worry from the wider market. Notably, Blackstone Group has set aside $9 billion solely for energy investments. Other PE players, namely EnCap and Warburg Pincus, have set aside $5 billion and $4 billion respectively, with Kohlberg Kravis Roberts (KKR) potentially investing $3 billion in an oil and gas fund.30 Vincent Kaminski, Professor in the Practice of Energy Management at Rice University’s Jones Graduate School of Business, explains that strategists at these firms thrive on market uncertainty:
“Smart players with deep pockets cherry pick the best assets in the best locations. Highly leveraged fringe U.S. shale players are likely to be acquired. One avenue would be an acquisition by a bigger company, but there is more likely to be a clear PE-backed acquisition pattern, where the private equity buyer will assume debt and probably pay something [but not much] for equity. They’ll then sit it out, streamline the company, and hold on to it in anticipation of better times. In the oil and gas business, people who make money are those who buy at the bottom.”
Following the 2008-2009 financial crisis, PE firms “launched specialized vehicles focused on both debt and equity in the beaten-up financial services sector”, says Rice University’s Kaminski. They are enacting similar practices now, with a focus instead on the energy sector. The Chairman and CEO of Blackstone Group, Stephen Schwarzman, says “oil is the biggest investment opportunity in the world.” His company is expected to invest in U.S. shale and international oil, but not in ultra-deep water drilling or heavy oil. Apollo Global Management LLC, another PE firm that is investing in the industry, is expected to focus on illiquid (financially) energy assets. In addition, KKR is looking to set up a special situations fund that would help finance highly distressed oil companies.31
Another interesting development in PE is the presence of restructuring advisers. Samson Resources, an oil and natural gas producer backed by KKR, recently hired two restructuring advisers as it faced growing losses and debt.32 This could become more prevalent in other companies as CEOs look for new options and attempt to restructure their businesses.
“Where many expected to see an increase in consolidation with more realistic valuations, in fact, the prices haven’t reduced in line with the commodity prices. Instead the asking prices remain high, with only those with deep coffers or flexible capital options, particularly the private equity firms, emerging as successful bidders.” -Alicia K. Hasell, Managing Partner, Boyden Houston
Climate Change and the Rise of Renewable and Clean Energy
With the low price of oil on a global scale, concerns are being raised about the potential impact the market could have on climate change. While some experts believe that the effects of the price fluctuations will be significant, others say they will only be minimal and short-term.
According to Anthony Perl, a professor at Simon Fraser University in British Columbia, “lower oil prices could pose a challenge for the transition to post-carbon sustainability.”33 Furthermore, the decrease in oil prices could have two consequences: People may consume more gasoline and care less about cleaner alternatives and technologies. Over the last decade, high oil prices have been a driving factor behind the upward trend in eco-friendly alternatives. However, with lower prices, consumers could not only afford to drive to a greater extent but also be less incentivized to trade in their cars for more efficient vehicles. Alan J. Krupnick, Director of the Center for Energy Economics and Policy at the think tank Resources for the Future, states that in the short run, people might be “a little less careful about limiting [car] trips.” 34 On the automobile-production side, there may also be a risk that American automakers will no longer concern themselves as much about fuel economy in their models. Furthermore, renewable energy investment is likely to decline.
Conversely, some experts claim that the temporary price drop will not significantly impact greenhouse gas emissions. Peter Erickson, Senior Scientist at the Stockholm Environment Institute in Seattle, theorizes that investors and consumers make decisions based on low oil prices only when the oil price remains stable for a long time.35 Jason Furman, Chairman of the Council of Economic Advisers, opines that price fluctuations likely won’t affect carbon emissions as the Clean Power Plan – the Environmental Protection Agency’s (EPA) regulations to reduce electricity-sector CO2 emissions36– would counteract any increased carbon emissions due to change in prices: “You look all in at the Clean Power Plan, the fuel-efficiency standards for vehicles, and the range of other steps that the administration has taken on climate change, and they massively outweigh any change in carbon emissions that would result from changes in prices.”
Reacting to the possibility of increased consumption, government authorities and even oil producers themselves have begun to take the steps necessary to address the problem. California Governor Jerry Brown, for example, kicked off his fourth and final term last January by calling for cutting vehicle oil consumption by as much as 50% in the next 15 years.37 “Taking significant amounts of carbon out of our economy without harming its vibrancy is exactly the sort of challenge at which California excels”, Brown said. He went on to elaborate: “This is exciting, it is bold, and it is absolutely necessary if weare to have any chance of stopping potentially catastrophic changes to our climate system.” 38 In the private sector, even prominent figures at oil companies are vocal about the direction the oil industry needs to take in the face of the climate change debate. For instance, Shell CEO Ben Van Beurden said that instead of keeping a low profile on the topic of climate change, energy companies “have to make sure that our voice is heard by members of government, by civil society and the general public” and that they must inject “realism and practicality” into the debate.39 He also has publicly shared his belief that hybrid automobiles and greater use of natural gas instead of coal are the most practical and affordable responses to climate change for all.
It is expected that more and more companies will make investments in renewable energy through this year, with some striving to reach 100% renewable energy in the near future. In 2014, this trend took off – Apple made the switch from fossil fuels to 100% renewables, and Amazon, Facebook and Google announced plans to achieve 100% renewables as well. In addition, NextEra acquired Hawaiian Electric, a company that has committed to reaching two-thirds of its electricity sales coming from renewable resources by the year 2030.40
Vehicle mileage standards in place in the U.S. and other countries will ensure that overall efficiency will still continue to improve in the coming years, despite cheaper gas. In addition, there has been a state-wide ban on fracking in New York. Other communities in the U.S. have followed New York’s lead. France also has a ban on fracking, and Germany currently has restrictions in place with the possibility for a broader ban to follow.41 On the other end of the spectrum, California’s Governor Brown has shown measured support for the technology and has not put any bans in place in the state. He has spoken publicly on the issue and explained that the vertical fracking that takes place in California is different from the kind of fracking done on the East Coast and uses much less water. He says that rather than put a ban on fracking,“we need to…move to electric cars, more efficient buildings, and more renewable energy.” 42
To sustain their companies’ financial well-being in the long term, executives in the industry must acknowledge irreversible environmental trends that could potentially disrupt their current business models.
“The story should not be how falling oil prices will impact the shift to clean energy. It should be how the shift to clean energy is impacting the oil price.” -Michael Liebreich, Bloomberg New Energy Finance Chairman
Energy executives must adapt as the regulatory and economic landscape rapidly evolves in important regions such as the United States, Mexico, and Canada. In addition, a deal with Iran could put more crude on the market, prolonging the depressed oil prices and delaying a recovery of oil prices.
With the upcoming 2016 presidential election in the U.S., political parties will potentially move on energy policy this year. While most agree that “a strong energy industry equals jobs”, Democrats and Republicans have fundamentally different views regarding the highly contentious Keystone XL pipeline. The pipeline, which runs from Canada to the U.S., could be voted on again in 2015 despite the Senate’s failure to override President Obama’s recent veto.43, 44 There is also a possibility that “the Administration might change its stance on Keystone XL in exchange for Congressional support of the EPA’s proposed Clean Power Plan rule to limit carbon emissions.”45
One-third of Mexico’s energy industry is controlled by Petróleos Mexicanos (Pemex), Mexico’s state- owned petroleum company. A decline in state-owned oil production has impacted the government. Less production means decreases in revenue, which hurts the government’s ability to pay for public services and other vital expenditures. Production has dropped due to a variety of factors, including “insufficient operational capabilities, lack of capital, and maturation of the once abundant Cantarell field and Chicontepec basin.”46 There have been approximately 10,000 layoffs at the company already this year.47 Now, there is talk of opening up the energy industry to more private companies, and the country’s “first round of energy bidding is expected to close in early 2015.” A successful bid process would convince opponents that this could be a positive thing for the country, and the outcome will set the tone for the remainder of the privatization process.48
“In spite of the drop in oil and gas prices, energy reform in Mexico has been a positive development, although the results are not yet reflected in the numbers. In the next 18 months, growth and economic benefits are inevitable. In the nearer term, the downsizing of global oil servicers is providing an extraordinary opportunity to recruit top talent who will be in higher demand and more difficult to attract when the sector recovers.” -Luis Lezama Bracho, Partner, Boyden Mexico
The Canadian energy market has fared better than the U.S. for two primary reasons. First, the Canadian dollar has declined, helping to inflate profits of domestic oil producers. Second, experts believe that cuts will mostly be to shale producers in the U.S. rather than in Canada, where heavy oil producers are more prevalent. Because of these factors, investors are more optimistic about the country. However, Canada has not escaped the layoffs that are trending throughout the industry. Nexen, a Canadian oil and gas company recently acquired by China’s CNOOC Ltd., announced 400 job cuts. Of those, 340 will be in North America, including 300 in Canada. The rest are from the U.K.’s North Sea operations.49 In addition, most of Canada’s oil reserves are oil sands. These are generally very expensive to produce compared to other types of crude, and require approximately 17% more energy and water than conventional oil.50
“It’s a challenging time for the industry in Western Canada, but it’s a case where some in management are saying ‘let’s not let a good crisis go to waste.’ In fact, many industry leaders see the current low oil price environment as an opportunity to realign costs and continue to invest in technology. Major projects have slowed but oil sands are a long-term asset. One of the encouraging signs is that while expensive executives are retiring, younger executives are being hired and others are being offered promotions. In today’s market, there are solid prospects for talented financial and operational executives.” -Tim Hamilton, Partner, Boyden Canada
Chinese oil and gas firms are turning to Pakistan as a destination to invest in. In a meeting between the two countries, it was confirmed that Pakistan has approximately 160 Trillion Cubic Feet (TCF) of natural gas reserves. Accessing them requires a huge amount of investment that has previously been unfeasible, but China has expressed its eagerness to get involved and invest in the extraction of the vast resources from this country.51 Chinese firms, both public and private, are motivated by the growing demand for energy in their country.52 China will construct a natural gas pipeline that connects Pakistan and Iran. The pipeline, previously on hold because of U.S. sanctions on Iran, is now moving forward. There are many benefits to the pipeline, including opening up Iranian gas for export and increasing the much-needed Pakistani power supply. India will benefit as well, once sanctions are lifted, by increasing its imports of Iranian oil.53
According to PwC’s 18th Annual Global CEO survey, two-thirds of oil and gas CEOs claim that their company faces more threats to growth than it did three years ago. These pressures include an increasing tax burden, over-regulation in the industry, and geopolitical uncertainty. On par with what some companies have already announced, the survey found that many oil and gas companies cut their capital spending plans for 2015. EOG Resources and Marathon Oil Corporation are among them. Again in line with announcements, companies, in particular Schlumberger, Halliburton, FMC Technologies, Total, and US Steel, have decreased their headcounts significantly.54, 55
“People talk less today about a war for talent, but it continues in earnest and as a result compensation levels have remained high for the sector’s top-performing executives over the last year. Oil and gas extraction is transitioning to large-scale LNG production across the APAC region. In Australia, the industry expects higher growth rates as additional capacity comes on line through to 2017- 18, leading to growth in employment across the sector. The industry already has a large and highly skilled workforce that enjoys good wages and conditions in the sector which, although highly regulated, is an extremely capital-intensive business. The large increase forecasted in gas production will underpin the increase expected in industry revenues.” -Michael Catlow, Managing Partner, Boyden Australia & New Zealand
One in four oil and gas CEOs expects the economy to decline over the next year, up from just 10% last year, but 35% say they expect improvements. Approximately three in 10 express confidence in revenue growth over the next 12 months, down from last year, when nearly four in 10 felt the same. This figure is lower than the sentiment from CEOs in general, as 39% are very confident in revenue prospects over the next year. Oil and gas CEOs also see the value in digital technologies, especially with respect to data analysis and operational efficiency. CEOs are likely to invest in cybersecurity, battery and power technologies for energy storage, data mining and analysis technologies.57
Despite expectations for layoffs and cuts, stabilization is expected over the next year. Almost half (46%) of oil and gas CEOs surveyed by PwC said they expect headcounts to mostly remain the same over the next 12 months; 36% expect an increase and just 18% foresee a decrease. While this is less positive than overall CEOs - 50% of whom expect an increase in headcounts - it does suggest a belief that the energy landscape will stabilize.59
“Highly effective boards and CEOs are recognising that strategic executive skills are increasingly more critical in order to remain competitive in a globally challenging economic environment, within a complex and highly regulated industry. In Africa and other developing regions, challenges such as infrastructure development needs, power supply shortages, supply chain issues, governance and risk concerns, increasing demands from governments related to local ownership, localisation of skills, and potential nationalisation add exponentially to the suite of skills essential at the senior executive level.” -Fay Voysey-Smit, Managing Partner, Boyden Sub Saharan Africa
“Many executives in the oil and gas industry saw their careers accelerate with multiple promotions during the recent, extended positive business cycle. Some are not experienced and are untested in leading organizations during downturns. We are seeing a number of leadership transitions brought on by a slow reaction to the changed business environment, and we expect to see more occurring into the second half of the year.” -Jim Hertlein, Boyden Board Member and Managing Partner, Boyden Houston
Given the propensity for layoffs in a slower market, talent strategy may not be a priority as companies try to survive the downturn. However, forward-thinking companies will still seek talent at the senior level. Companies will look for new executives who have a fresh perspective on the industry, as well as executives who can attract and retain talent in their business. Interestingly, while the perception may differ, two-thirds of current CEOs do have some experience from the last major industry downturn in the 1980s.61
The job of the Chief Financial Officer (CFO) will be elemental due to the budget cuts and increased M&A activity in the sector. CFOs will be challenged in the coming months, and companies may look for this type of critical experience if they do not already possess it. In particular, CFOs with “transformative skills” and those who have experienced a similar situation will be sought after, both from within the oil and gas industry and from other sectors. There will also be a need for executives with expertise in business development. They will be tasked with directing growth initiatives and thinking strategically about asset reallocation. In addition, because of more PE activity in the sector, these executives will be required to have skills in “stakeholder and culture shift management.”63
Improving operational efficiency will be essential for companies navigating this sector. There is thus new demand for top talent in the role of Chief Supply Chain Officer (CSSO). The CSSO will also be vital when it comes to shale gas production, since this complicated process has led to significant waste and underutilized assets; in effect, supply chain practices have not kept up with the fast-paced technological advancements the industry has seen.64
Despite recent deep cuts at various companies, executives have not yet felt the impacts on their compensation. According to information from investors and compensation consultants, executives are likely to continue receiving the substantial packages they grew used to seeing during upturns. In many cases, this is justified by good performance in 2014 – many companies still finished strong despite the dip in prices towards the end of the year. However, executives might experience a negative impact in the value of their stocks and options, as these have dropped in the last few months. If oil prices stay low, executives may see a significant drop in overall compensation next year. 65
“Due to portfolio losses that near-retirees experienced in the last global recession, many executives signed up for additional assignments and delayed their exit to rebuild their retirement funds. After five years of economic growth in the oil patch, those individuals along with the group just reaching retirement are electing to hang it up. The ups and downs of the industry have taken their toll on people who are in the latter part of their careers, and they don’t have the will to fight through another negative cycle. Thus, the already growing shortage of executives is likely to become more acute with the wave of retirements expected over the next few years.” -Tom Zay, Global Leader of Boyden’s Energy Sector and Managing Partner, Boyden Houston
Noble Energy, a leading offshore E&P company, appointed David Stover as its new CEO last April. Stover had been President and COO of the company since 2009, and before joining Noble, held jobs at BP America, Vastar Resources, and Atlantic Richfield.66 He succeeded the retiring Charles Davidson, who served as CEO for over five years, on May 1. The lengthy leadership transition reflects a greater general trend in which executives co-manage a company to assure investors’ confidence, according to Fadel Gheit, a senior analyst at Oppenheimer & Co.67 Gheit says that this strategy will mitigate market and investor apprehensions. Additionally, Stover’s appointment falls in with the tradition of large firms hiring CEOs from within the company.
Last August, BP – one of the five largest full publicly traded oil companies – named David Lawler as the new CEO of its U.S.-based oil and gas business, which it is gearing up to spin off sometime in 2015.68, 69 Lawler was formerly at SandRidge Energy, where he served as Executive Vice President and Chief Operating Officer (COO). Lawler’s hire was designed to give BP the edge it needs to compete with smaller energy independents that spurred the U.S. shale boom. Furthermore, Lawler’s experience at companies such as SandRidge will help BP improve its profits on North American shale, an industry in which smaller oil and gas companies have made big profits but that larger companies such as Royal Dutch Shell and Exxon Mobile Corp. have had difficulties successfully navigating.70 Lamar McKay, Chief Executive of BP’s upstream segment as well as the main person to whom Lawler will report, said that he is “confident [Lawler] will create a competitive and sustainable operation that will be a key component of BP’s portfolio for many years.”71
As Halliburton and Baker Hughes prepare to integrate their businesses, a significant amount of reshuffling has taken place at the top. Halliburton’s Board of Directors announced in December that current Executive VP and CFO Mark McCollum had been appointed to the new role of Chief Integration Officer. In this role, McCollum leads the Joint Integration Team for the two companies. He continues to report to the Chairman and CEO of Halliburton, Dave Lesar, and remains on the Executive Committee. President of Global Products and Services for Baker Hughes, Belgacem Chariag, now also serves as a leader on the Joint Integration Team. In McCollum’s absence as CFO, Christian Garcia, current SVP and Chief Accounting Officer, has assumed the role of SVP of Finance and taken over CFO responsibilities until McCollum can resume his duties. Garcia joined Halliburton’s Executive Committee, also reporting to Lesar. All changes took effect on January 1, 2015.72
There will likely be additional job losses due to cost-cutting measures in the coming months throughout the industry. Many companies must compensate for the dip in oil. The Federal Reserve Bank of Dallas estimated that if the price of crude oil remains at approximately $55 per barrel, “Texas could lose 128,000 direct and indirect energy jobs by mid-2015.” Many companies have already begun to see the effects. BP stated that it will cut jobs, and Halliburton CEO David Lesar sent an email to all employees claiming that “2015 is going to be a tough year”. Prior to this email, the company announced 1,000 layoffs in the Eastern Hemisphere.73
Other companies, including Marathon, ConocoPhillips and Apache, slashed their capital budgets. While this does not necessarily mean job cuts, it is a sign of belt-tightening and cost-cutting wherever possible. Another emerging trend is that companies will potentially rely more on contract workers rather than full-time employees in order to give themselves flexibility as the prices fluctuate. However, despite budget cuts and significant layoffs, those with “technical skills and deep experience” have more job security. Companies will hold onto their employees with specific and unique skillsets.74
BP PLC announced 300 layoffs this January, focusing on the North Sea hub of Scotland. According to experts, this is the “biggest sign yet of the problems besetting the U.K.’s main oil-producing region.” The North Sea is a mature and high-cost field; these are the types of locations suffering the most from the downturn. BP expressed its commitment to the region, stating that layoffs are a part of a “company-wide cost-reduction program”. Other companies such as Chevron, BG Group and Statoil ASA are reassessing their capital spending decisions. Experts speculate that without continued investment in the North Sea region, the hydrocarbons there will be too expensive to extract, essentially becoming “stranded assets.” There are still approximately 15-16.5 billion barrels of oil and gas to extract in the region.75
“Given the well-documented challenges of operating in this maturing region and in toughening market conditions, we are taking specific steps to ensure our business remains competitive and robust.” -Trevor Garlick, BP’s Regional President for the North Sea
By April 2015, Schlumberger cut 15% of its workforce, or 20,000 jobs, by far the largest cut from an oil and gas company during the downturn.76 This decrease will have implications beyond just the workers who lost their jobs, and will “have far-reaching influence on the decisions of other companies in the oil patch.” Schlumberger is seen as the leading company in the oilfield services and drilling industry; therefore other companies will employ similar actions.77 The company’s official statement is as follows:
In response to lower commodity pricing and anticipated lower exploration and production spending in 2015, Schlumberger decided to reduce its overall headcount to better align with anticipated activity levels for 2015... In this uncertain environment, we continue to focus on what we can control. We have already taken a number of actions to restructure and resize our organization that has led us to record a number of charges in the fourth quarter. We are convinced that performance must now be driven by an accelerated change in the way we work through our transformation program.78
Because of the threat of further layoffs, some industry employees may opt for early retirement or start new ventures, according to Boyden partners around the globe.
“The oil service companies are not only laying off executives, but also offering attractive early retirement packages to executives. Many of these managers are accomplished and at the prime of their careers with a wealth of experience and knowledge and the ability to build new businesses, develop new technologies and organically reinvigorate the industry following the same pattern as in past cycles.” -Tom Zay, Global Leader of Boyden’s Energy Sector and Managing Partner, Boyden Houston
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