CERAWeek Day 1: Operators' novel approaches to adapt upstream business models
As CERAWeek cranked up its first day on Monday, one of the early sessions providing some compelling thought about the future for E&P operations was the online discussion entitled “Evolution of the Upstream Business Model.” And, reflecting the varied composition of the companies participating in the discussion, there were significant variations in the way these firms are looking to reconfigure their upstream business models.
Among the executives lending their thoughts were Al Cook, Executive Vice President for International Development and Production at Equinor; Adokiye Tombomieye, COO for the Upstream business unit at Nigerian National Petroleum Corporation; and Armando Zamora, President of ANH, the national hydrocarbons agency in Colombia. Dan Pratt, Vice President of Upstream at IHS Markit, moderated the panel, and set the discussion by noting that upstream oil and gas are “in an extraordinary time,” one year into the Covid pandemic and its impact on global demand. He also noted additional factors, such as
“the changing dynamics” that can be seen within OPEC and its partners, as well as the changing landscape of energy transition, and “an uncertain future calling for lower carbon emissions.”
“I think what our viewers really want to understand today, is how are all these changes are impacting the upstream business model, and how is the upstream business model going to evolve, to tackle these issues going forward,” analyzed Pratt. He proceeded to ask Equinor’s Cook about the firm “developing what is called a broad energy company. What does this broad energy company mean for Equinor’s business overall, and what does it mean for Equinor’s upstream business?”
A broad Norwegian perspective. “Well, I certainly agree with you,” responded Cook. “This is a time of enormous transition. And if we’d had this conference a year-and-a-half ago, we’d have talked about digitalization, and climate change, and now we’re also talking about how businesses manage their way through a pandemic. So, the level of transition is extraordinary at the moment. And, in a sense, I think it was Warren Buffett, who said that in a transition like this, it’s often easier to pick out the losers, than pick out the winners. We certainly believe that this is all about high value and low carbon. And the businesses that lose will be those that focus purely on value without considering carbon, and those that lose will be purely those that focus on carbon but forget about value.”
Expanding on the topic further, Cook noted that “we’re reshaping the organization for Equinor, and part of that is also reshaping the portfolio. And I think very much in line with the direction that our industry is going. We’re focusing on narrowing our portfolio, narrowing the amount of countries that we’re in, the amount of smaller operations that we have, but really deepening in some key core areas. Moving forward, you will see that we’ve done things like trim the scale of the business in areas where we lack expertise, such as the onshore operated business in the United States, and you’ll see that we are deepening our investments in areas that we believe we have expertise. And, that would be offshore—for instance, Brazil, the Gulf of Mexico, and of course off Nigeria, with our good friend, Mr. Tombomieye. So, that’s the direction we see the industry going.”
NNPC employs pragmatism. Pratt brought NNPC’s Tombomieye into the discussion by pointing out that the company’s managing director is quoted as saying, “There’s nowhere in this world, where a less cost-efficient operator can survive today.” “So,” enquired Pratt, “is that the business model of the future, a focus on optimization, portfolio resilience, the kind of value that Al (of Equinor) was talking about?”
“Well, I certainly agree with our managing director,” replied Tombomieye. “As you recall, the oil and gas industry was really impacted by Covid events, which created a plunge in oil revenues. So, we at NNPC are strategizing to reduce our net operating costs. As part of our cost reduction initiative, we have identified the main cost drivers. For us to do (work on lowering) these, we are committed to ensuring (that we adhere to the practices that will bring lower costs).”
The view from Colombia. Pratt asked ANH’s Zamora how the hydrocarbon regulatory agency sees the evolution of the upstream business from its particular angle. “Where do we go from here?”, enquired Pratt.
“Well, Colombia is very determined to engage in the energy transition, and the government policy has been designed about that transition. The role of hydrocarbons in that transition is extremely important, because hydrocarbons are the main source of revenue for the government, and the main source of exports for the country. So, while engaging in a very fast and well-designed energy transition, we still have the mandate, to satisfy the need for self-sufficiency in energy. But, also, we have an opportunity to provide the hydrocarbons that the world will need.”
Zamora continued, “We will play our part in exporting this source of income to the world, which will still rely on hydrocarbons—on fossil fuels—for the next three or four decades. Even in the most pressing scenarios, the world needs to replace the reserves, and the world needs the hydrocarbons, even in this very important energy transition that we are living. So, we see that what we have is a window of opportunity; what we need to do is take advantage of this potential for development, for generating income, otherwise our endowment will remain in the ground forever. And the society will not benefit from that opportunity.”
A digital angle? Pratt followed up by asking Zamora whether Ecopetrol’s bid for Colombian electricity transmission utility ISA is a bid to bring more of a digital transformation into the operator’s business model.
“Well, it’s hard for me to comment on this transaction,” responded Zamora, “because we are not involved, and it is a very fundamental business orientation that Ecopetrol is engaging in. Based on what Ecopetrol has said, it makes a lot of sense to engage in a transaction by balancing a business which is related to energy, but which provides more stability and income to offset all of this volatility that we are seeing in oil prices. It’s a proposal by Ecopetrol that’s so far non-binding, but it also has to do with the government balancing the books, given the very difficult fiscal conditions that we are living in. And I cannot go further than that, because it is really outside my remit to comment on those very fundamental shifts in the national oil company’s business model.”
Equinor’s unconventionals exit explained. Turning back to Equinor’s Cook, Pratt asked him what the firm’s recent sale of its Bakken shale position and exit, as operator, from U.S. unconventional plays might signal. He also asked Cook what the drivers were behind that decision.
“So, I think what we’re trying to do here is be very honest and modest about what we’re good at, and also ambitious about the right things,” explained Cook. “So, we believe that we don’t have the strengths of some other companies as an operator of onshore unconventionals in the U.S., so we are moving away from our operated positions, but we will continue to have a large, non-operated position and, indeed, we’ll continue to grow in areas of unconventionals alongside really great operators. So, in the U.S., we work with Chesapeake and Southwestern and other great American companies. In Argentina, we work with YPF, in Russia with Rosneft, and so forth. And where we will focus our operations, where we really believe we have competitive strengths, is in the offshore and that will really enable us to focus ourselves in places like the UK, Brazil, Canada, the Gulf of Mexico, and places beyond that as an operator, So, this is about focusing our operated capabilities where we believe we are the best in the world, and be humble about areas where other companies can operate better, albeit with a lot of support from Equinor.”
More on Equinor’s movements forward. Not completely satisfied with that answer, Pratt pushed the point further: “And how do you see that balance going forward,” he quizzed Cook. “As you’re focusing on your core expertise, is that going to be a focus mostly around existing areas, or do you see new venture opportunities out there, as well?”
“We do, we do,” insisted Cook. “Unlike some companies, we’re not saying, look, we’re going to limit where we explore going forward. We’re going to be ambitious, with our exploration, but we’re going to make sure that the barrels lead to revenues. So, Brazil is a nice example. In the first half of this year, we’ll be taking a final investment decision on Bacalhau, the biggest property, internationally, we’ve operated in our history. We’ll also be doing three exploration wells in the course of this year in Brazil.”
Cook continued, “We’ll be looking for the best basins in the world to explore in. But what we will be focusing on is payback time and making sure that we recognize that there is a finite demand for oil and gas. We need to make sure that we create the returns for our shareholders in the time when people have great oil and gas demand. But just like Mr. Zamora said earlier, we do believe that there is going to continue to be high levels—growing levels—of oil and gas demand, and there is a real role for responsible oil and gas companies, in terms of meeting that demand going forward through the 2020s and into the 2030s.”
