Robert Oushoorn – Vice President, Strategy& – Netherlands
Vice president and partner of Strategy&’s energy, chemicals, and utilities practice, Robert Oushoorn depicts the current competitive outlook for oil and gas companies operating here in the Netherlands and evaluates various “Fit for $50” strategies for effectively unlocking value in a weak pricing environment. He also lists several key domestic factors that are driving change in the industry including supply security and greenification, and how Strategy& can leverage its expertise and services to help its client facilitate success in the current climate.
What are the main challenges that oil and gas companies operating here in the Netherlands are facing today, and what role will Strategy& play in chartering success for these players?
The key issue that oil and gas companies are facing at the moment, not only in the Netherlands, but elsewhere in Europe and worldwide, is effectively dealing with the impact of lower oil prices, as well as their increased volatility. The oil price today is a lot lower than it used to be, and more importantly is a lot lower than the industry thought it would be for a long time. The lower revenue coming in has a direct impact on profitability and generates imperatives regarding efficiency of operations and cost reduction, among others.
The second issue is the increased volatility of oil prices. This is something that requires companies to be more flexible in the way they make their decisions about the future. In the past, oil prices have experienced periods of high volatility; however, many industry analysts believe this current period of volatility may last for longer. Companies must adopt the right processes to ensure that the decisions they make on for example investments and strategic deployment of resources are robust in a world with longer-term oil price volatility. Again, this is not specific to the Netherlands, but something oil and gas companies worldwide are having to deal with.
The way we help our clients is by supporting them think through the new imperatives that are created by this situation. To do this we organize around four major platforms. The first one is named Capabilities-driven Strategy and Growth. In a nutshell, the key premise here is that to achieve sustainable growth, companies should, in their strategy development, put true focus on the limited number of capabilities where they have true competitive advantage, and leverage this competitive advantage to the maximum extent. The second platform is in the area of operational efficiency, cost base improvement, and robustness of business processes, named “Fit for 50.” This is about operational and efficiency improvement and being smarter about adapting the cost-base in the right areas and aligning it with the strategic focus the company is trying to accomplish. The third platform is named Digitization. We help our clients think through the impact of digitization and digital developments in the industry. The fourth platform is named Deals. Here we support our clients with many of the services that are needed in M&A and divestment activities, such as for instance opportunity assessment or commercial due diligence.
Gas production has contributed greatly to the prosperity of the Netherlands, but further caps on Groningen production and declining indigenous reserves have sparked many discussions around the country’s inevitable dependence on imports to meet local consumption. What implications will this shifting dynamic have on the government’s priorities and strategic objectives?
Let’s put things into perspective. Yes, there are production cuts happening now, but at the same time, there will still be important production ongoing for many years. I have no doubt that the Netherlands will remain an important gas producing country for years to come. An eventual decline in production was always going to be inevitable at some point in time. It is now happening, perhaps a bit earlier than expected, and for different reasons than we had thought, but the inevitable decline in domestic gas production is something that has been on the minds of all the stakeholders of the Dutch gas value chain already for a long time. So the issue in itself is not new to politicians, people in the industry, and industry observers. One of the implications is that there will be less income from gas sales, and the country will have to deal with that. It is important to realize though that although in absolute terms the amount of lost revenue may seem large, in relative terms compared to the total size of the Dutch economy and the country’s budget, it is not enormous, as the Dutch economy is large, and diversified.
More at an industry level, we understand that some of the export sales contracts will not be renewed when they expire in due course. This has obvious implications for the buyers of Dutch gas, and it means that some of the relationships we had with foreign buyers will inevitably change. However, as this has now been announced well in advance, the impacted buyers know that they will have to find different solutions for the amount of volume that they purchase. Initially, the volumes of the expiring contracts will help in ensuring the security of supply to the Netherlands. However, should at a certain point production go below what the Netherlands actually needs, we will have to import more than we are importing today from other or new sources.
With multiple discussions around the nation’s supply security, the government’s energy agreement for sustainable growth has resulted in extensive investments within renewables such as offshore wind and tidal energy. Can sufficient materiality be reached quickly enough to actually make a difference in the market, and to warrant enough incentives for oil and gas players to diversify into this segment?
Renewables will definitely impact the oil and gas industry, and they already are. Increasing the amount of renewables in our energy mix is important. It is very clear that it’s important to transition to an economy that has a sustainable use of energy. At the same time, it is costly and will take time to reach levels that we, as a country, believe are needed and warranted. Gas has for many years now been promoted as the Transition Fuel, as it generates less CO2 than oil and coal when burnt. I think that the Netherlands can be in the forefront of this transition. We have a long established history of using gas as a fuel for heating, electricity generation, and for driving industrial processes. There is a lot of knowledge, infrastructure, and experience present in the country that can be leveraged in the transition to sustainability. For instance, there are now multiple initiatives on development of so-called “green gas” to produce biogas and process it to enable injection into the grid as a way of increasing the amount of biomass in the energy mix. Another example is the Gate LNG receiving terminal in Rotterdam, which has invested in break-bulk facilities and the installations enabling the use of LNG as transportation fuel for barges and trucks.
As a result of the agreement, the country is now experiencing an energy transition that enforces the ideas of environmental sustainability, reducing greenhouse gas emissions, and eco-friendly consumption—driving further demand destruction in an oversupplied market. Given these conditions, how are companies in this industry going to lock in demand and maintain profitability?
The transition to a sustainable energy value chain is a long-term process, and the world economy will still need hydrocarbons for a long time to come. There will be some demand destruction because of renewables, but the pace at which the demand destruction will happen will be different for different parts of the world and economies in different stages of development. They will therefore reach a “greenification” of their energy mixes at different points in time. I don’t think at all that the oil and gas industry is in panic mode because of these developments. If anything, I think what you see is that most, if not all, energy companies are very aware of the importance of the environmental sustainability of the energy value chain and of their operations.
There is no dichotomy in the sense that “green is against big oil and gas” and vice versa. Things have evolved quite a bit from that kind of thinking that may have existed decades ago. You see oil and gas companies investing research in this area, providing money to other research institutes or non-governmental organizations to promote thinking and everything that is needed to talk to governments about providing the right regulatory and legal frameworks to accompany the transition. In the end, we are all human beings and citizens of the world who want to pass a livable world onto our children.
In a competitive environment with constant price volatility and regulatory pressures, how can oil and gas companies structure their businesses to offset near-term risks while maintaining, or even increasing long-term capabilities?
First of all, health and safety are always maintained as the first priority on which oil and gas companies will never compromise. The key to dealing with the current dynamics in the industry for oil and gas companies is to have a robust cost-base. This has really come out into the open now with the current lower oil price environment. For a while the oil and gas industry had given less emphasis to cost-reduction and efficiency improvement than perhaps they should have in hindsight. Yet, industry players had been very aware this. However, in a high oil price environment, rational choice was perhaps to steer resources both in management time and capital resources towards developing new projects, rather than allocating those resources towards efficiency improvements. Now that we are in a much lower oil price environment, the urgency of efficiency improvement has come out into the open. So, yes, this is a challenge, but it has created the sense of urgency to actually really start tackling this problem.
How do you feel that Strategy& is best suited, given your over 100 years of experience in strategy consulting to really help these clients at this time of urgency in reducing cost base, improving efficiency and looking at competitive advantages? What really sets you apart as the partner of choice?
There are two key areas. The first is that we have been a partner of the oil and gas industry for decades. We know the industry, we know many of the different players in the industry, we know government stakeholders, and we understand the different point of view. We have been with our stakeholders and clients for decades, so we have that collective experience that we bring to bear. The second area is that in our combination with PwC, we can now help our clients from “Strategy to Execution”. We can be with and support our clients with a full suite of services, all the way from answering their most strategic questions to implementing and putting these answers into operation—truly setting us apart from our peers.