The stunning oil price crash of 2014 – from $115 per barrel to $35 per barrel over 20 months – posed unprecedented challenges to the upstream oil & gas industry. Large projects were postponed or canceled outright; operators reduced capital investment to eliminate all but the most essential activities. At the same time, growing popularity of ride-sharing and electric vehicles was accelerating the timing of peak gasoline demand.
For one upstream oil & gas joint venture, the threat of prolonged low oil prices was further exacerbated by a shifting political climate. The JV was facing an in-country risk profile never before seen in its history, as it anticipated the possibility of increased delays in regulatory approvals, heavy greenhouse gas costs, or outright loss of license to operate. The JV operating company sought to chart the best course of action in light of unprecedented uncertainty about the future.
Discovery and Solutions
Working with the operating company’s executive team, Strategic Decisions Group (SDG) facilitated the process of developing the joint venture’s long-term business strategy. Beginning with an SDG-developed scenarios approach, SDG helped the client frame the problem and develop a diverse and compelling set of strategic alternatives. Developing several extreme yet credible scenarios helped the client avoid framing the decision too narrowly and led to the generation of several new strategy alternatives that had not been previously under serious consideration, such as entering adjacent businesses in power generation and carbon capture and storage. Other alternatives under consideration were mergers, acquisitions, asset swaps, and divestiture. At this point in the process, the best strategy among the alternatives was not clear.
To identify the best strategy and build alignment among the venture’s partners, SDG evaluated the alternatives, comparing each using the same set of value measures. The evaluation quantified the key drivers of risk, such as commodity price, reserves, regulation, and legislation, reflecting assessments from internal and external subject matter experts and incorporating the wide-ranging uncertainty in each.
Results and Impact
Insights and recommendations from the work were sufficiently compelling to garner the immediate support of the executive leadership team—an important and significant outcome that the CEO firmly believed would not have been possible without the full scope of effort and analysis. The recommended strategy was expected to increase the value of the venture by more than 20 percent, but further, the strategy process fostered alignment among the ownership partners, making it easier to move forward with the chosen alternative. Moreover, the evaluation assigned dollar values to key risks the organization faced, facilitating the process of prioritizing risk mitigation efforts.