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Sellers of oil will be rescued by revolution. The large oil companies for a survival should change a business model considerably
Material posted: Publication date: 17-02-2016
The international consulting company Boston Consulting Group let out the research devoted to that the large oil companies need to carry out radical reorganization of the business urgently. According to konsalter, large producers of oil faced not with cyclic, and structural crisis which began even before falling of prices of oil. In research under the name "The Large Oil Companies on the Way to Reorganization" of Boston Consulting Group notes that profitability of business of the large oil companies started decreasing even to falling of prices of oil. So, for example, "in 1999-2004 the large oil companies provided annual cumulative profitability of shareholders of 6,7% in comparison with an average value of-2,3% on all other market. Similarly, during 2004-2009 which includes sharp reduction of prices of oil in 2008-2009, the large oil companies brought to owners profitability of 7,3% a year whereas the S&P 500 index showed only 0,4%.

But soon the picture started changing: from 2009 to October of the 2015th the large oil companies showed annual profitability of 2,9%, and the companies of the S&P 500 — 13,6 index of %. Even before falling of prices of oil in 2014 in the course of restoration of the market after crisis in 2009 profitability of the large oil companies lagged behind the general profitability of S&P more than for 10% a year. Experts of BCG note that "even at the high prices of oil profitability of the companies decreased. In 2012-2014 the average annual margin of net profit of the large oil companies was reduced from 8% to 5,2%, and by October, 2015 it decreased to 0,5% for the last 12 months". Authors of research explain it in particular to that "in 1999-2015 $0,97 from each new dollar of cash flows on balance of the companies were invested in capital expenses and was used for replenishment of stocks. At the same time it became more difficult to follow rates of exhaustion.

In 2009-2014 for each dollar of the exhausted fields $1,80 of investments for maintenance of resource base in comparison with $1,60 in 2008-2010 were required".

Speaking about a situation soon, researchers consider that within the next three years "the companies will be self-financed if prices of oil lie in the range from $50 up to $80 for barrel that is much higher than the current level". Thus "the majority of the companies plan capital expenses on the basis of the prices of oil of $40-60 for barrel in 2017 which don't reflect the redemption of stocks and dividends making $10–15 for barrel".

Proceeding from it, BCG considers that "revolution is necessary for the large oil companies. Release from negative consequences of a present situation demands radical change of culture of business of the companies, operational strategy and approach to the competition". Researchers noted drastic measures of oil industry workers on cut in expenditure, but consider that only it will be insufficiently. First of all it is necessary "to change internal culture for gradual introduction of cost and continuous improvements in quality of priorities" that means constant, but not depending on the current prices, the analysis of each item of expenditure and performance level. Here researchers urge oil industry workers to equal on car makers who pay it special attention. Besides, the companies need to introduce more actively changes in development of projects on the basis of advanced standardization and cooperation with suppliers. Researchers note that recently implementation of projects has excessively difficult structure which needs to be simplified or standardized, choosing the corresponding contractors who can offer more flexible models of implementation of projects. Also the companies need to change radically the operational models, giving more autonomy in decision-making to the specialized divisions which are engaged in such difficult projects as production, deep-water production or slate oil. BCG believes that such change of system of decision-making at the level of all company will allow to optimize organizational processes and considerably to increase productivity.

Evgeny Hvostik

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Tags: assessment , oil

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