The lessons of history - Price Volatility and Community Communiction Jan2015

Crisis Response on two fronts – the lessons of history:

  •  Oil Price Volatility impacts on industry solvency
  •  Community Communication in the wake of a serious incident

1. Oil price volatility impacts on a company’s solvency

Perspective
The oil and gas industry is currently in a period of volatile market pricing resulting from changes in exploitation technology and lower than expected global consumer demand growth for oil—all set against geopolitical strategies.

These factors have generated material changes in the supply-demand equationthat began to emerge in mid-2014. The Brent crude price at that time slipped below $US 100/bbl. The decline gathered momentum from October 2014 to a price now hovering below US$50/bbl. The pace of global oil market dynamics has been stunning and, initially, largely unnoticed. In barely 6 months these dynamics have materially changed the business conditions for the foreseeable future. Their consequences are far-reaching and unpredictable. Unfortunately, they are also beyond a company’s management to control or alter.

For many companies, these factors have seriously impacted the “bottom line” as well as expenditure budgets for 2015 and beyond. In the short term, the oil price plunge has put pressure on cash flow, forcing businesses to make hard choices between the funding of exploitation and maintenance programs and the competing needs of shareholders. The situation demands executive action to protect the business’s solvency through reductions in expenditure and resources. The vital questions are: what should be done, when should it be done and how should it be done? Nobody knows with any certainty when the commercial conditions in the energy markets will change to provide a level of confidence to re-commence major project expansions. The capabilities of each participant to react to these macro market issues differ widely. But, in general, there is a natural conservatism to “wait and see” resulting in a slowness to act decisively. There is often an expectation that the market will stabilise and that revenues will return to more normal levels without the need for painful resource and budget adjustments.

However, to wait on certainty in the direction of oil pricing is not sustainable. The management emphasis should be on the commercial and technical factors that the company can influence and change to protect the solvency of its business.

History repeats
In 1986, the industry went through a similar “roller coaster ride” after massive capex spends in the previous 4 or so years on new energy projects. These had to completed at all costs (even with “crashed” project schedules) but there were significant delays in the completion dates, material cost overruns and then a collapsing oil price; profitability and solvency were at risk!

Participants in the industry had lost the internal discipline to commercially prioritise projects and manage their completion. The mentality to complete projects at all costs resulted in minimal attention to the consequences of multiple scope changes and lax cost control. It was built on a perception that the oil pricing and netbacks would likely rise to offset the capital cost increases. The bloated commercial and business conditions became the norm, but it was unsustainable.

The question then, as now, was this: Why take the re-adjustment pain when rising oil prices are likely to return and save us from drastic action?
The answer: Business solvency!

Business Focus
In times of falling oil prices, there is plenty for a company to do. I learnt from past experience that the companies that came out the other side with a strong commercial position did so by rapidly going back to technical and economic basics to conserve resources and redefine their business strategy to ensure there were tight cost control and a focus only on essential projects. In other words, they weathered the storm with careful husbandry of their resources.
Executives made the tough decisions on the factors they could influence. This resulted in improved margins and a critical assessment of what were the basic drivers of sustained development and profitability!

These business factors were:

1. Project scopes were redefined with tighter engineering and more rigorous tendering and cost control; critical assessments of AFEs for technical risks/rewards by responsible executives.

2. A focus on prioritising projects with consistent economics parameters

  • Using flat energy pricing and high cost escalation (capex and opex) to test project economic viability and sensitivity.
  • Cash flow projections for development projects focussed on real cost savings as the basis of the expenditure justification—not cash flows masked by rising price forecasts.
  • Ranking project AFEs according to the present value profit per invested dollar to optimise the budget resources and rapid capital returns or “payouts” within a year.

3. Rigorous cost control of all expenditure (project and corporate) and, above all, timely accountability and completion of the projects through a dynamic budget process.

 When these principles were followed, executives then started to position their businesses for improved commercial returns from better risk/reward
outcomes. Industry learnt from these times and grew into new areas in the subsequent decades. Interestingly many from this era have faded from the
industry and the corporate DNA has been lost……
Palliser is always ready to offer collaborative advice on the use of these basic business tools to steer the company during challenging times. Check the web pages www.palliser.com.au on Palliser’s capabilities and alliances.

2. Leadership lessons for crisis management in serious incidents

In December 2014, I had the opportunity to listen to a presentation at the AICD luncheon by the Mr Tony Heywood the former BP CEO during the Macondo Oil spill in the GOM in April 2010.

Some key “take-outs” are below on lessons that can be applied to the management of a communications strategy. These form part of the requirements that are needed to limit the risk exposure to the business in such an event:-

  • Realistic Time Frame for Resolution.
    From the outset of a crisis, plan to create the “right” community expectation based on a realistic time frame to resolve the technical problem. Effectively communicate the process and time table for problem resolution that will permit different technical strategies to be used, but also provide time to generate a degree of trust and confidence, in other words, show that the business knows how to handle the problem.

    Be available, because if you are not, the media will drive the agenda with falsehoods/personalities to feed their “story” (I think “story” would be a better word).

    Don’t be stampeded by 24/7 media to have an instant, or even a quick, solution. Failure to deliver on short-term deadlines leads to catastrophic
    failure in community confidence which, in turn, hinders the ability to resolve the problem. Media is then focussed on personalities, not problem resolution, and the ability to craft the message is lost. Scapegoats are the new focus!

    With longer deadlines the business has time to address any unanticipated delay in a considered way, whereas with short deadlines there is less time to resolve unanticipated problems. The short fuse can lead to a failure to deliver and heightened community mistrust. If the problem is resolved in the middle time frame, then some of the community heat in the management of the problem is dissipated. It is a difficult issue, but
    companies need to focus on it at the outset to have a reasonable chance of success.
  • Spokesperson
    Ensure the spokesperson is available immediately. The person must have outstanding communication skills with technical competence and, above all, connectivity and rapport with the community in the region affected by the problem. The communication style should reflect an understanding of the importance of the local culture. In other words “talk their language”. The best spokesperson may not be the CEO!

  • The Politics of the Problem
    The community response may also be a “lightening rod” for other local issues that community members may have with different levels of Government. Your problem may be the one issue that is used and amplified by them to rail against both Federal and State governments. If this is not understood, then your company and your perceived management of the problem are likely to bear the brunt of the resultant political backlash. This could have devastating impacts on the Board/Executives’ ability to show that the company is capable of resolving the problem.

    In other words, understand the broader politics of the local problem and the implications at a national level. Use your business/government
    networks to maintain a credible position in the community and in your responses.

  • The issue is bigger than the person!
    If the above points are not implemented for whatever reason(s) and the community backlash is growing, then the Board needs to think carefully
    and bring in the right people to lead the business through the crisis. The Board should also carefully consider the timing of these changes. Leadership is about adjusting the team and the forward plan and making sure everyone works together.
    Companies must recognise that the needs of the communication strategy will change as the technical problem is resolved. There is also a need to
    address the longer term management of the potential liabilities because companies could be facing and operating in a hostile legal and community environment.

    In reality, for the directors of businesses operating in technically challenging and environmentally sensitive areas near local communities, long-term survival of the company revolves around the governance issues supporting an effective communication strategy for critical response and disaster recovery policies.

 

Geoffrey R Widmer
Palliser Group
61-3-9819-3995(p)
www.palliser.com.au
20th January 2015

 

Disclaimer: The preceding commentary is a compilation of views and data from participation in industry forums for over 30 years. The Palliser Group has not verified these facts as presented in these forums and has not made independent enquiries as to the validity of the statements made or of the data presented.