Nearly all energy companies expect to flourish as Donald Trump frees them from regulatory and economic headwinds, a leading consultant said at Stanford University, but those headwinds made them stronger.
“Everyone in the industry seems to think that they’re going to be a winner under this administration. The wind and solar guys and gals, the coal folks, the gas, the upstream, the downstream, everyone believes that they’re going to win,” said Regina Mayor, leader of energy and natural resources for the consulting firm KPMG. “And where I come from, you always know that that can’t be the case. Logic tells you that can’t be the case. But I do find the level of optimism quite fascinating.”
The optimism might be an emotional reaction, Mayor suggested, to years “of foreboding from all these disruptive headwinds.” Nonetheless, the disruptive headwinds better positioned many companies to succeed.
In a 2016 KPMG survey, 94 percent of energy company executives conceded they expect their organization’s operating model to be disrupted in the next three to five years. Two-thirds have already launched an initiative to transform their business.
“Everyone is radically changing how they go to work, how they manage their processes, how they organize their teams and employees,” Mayor said in a seminar hosted by the Stanford Precourt Institute for Energy. Stanford released video of the seminar last week.
The executives identified renewable energy as the biggest disruptor, followed by a suite of Obama-era regulations designed to encourage transformation: renewable portfolio standards, emissions standards and Clean Power Plan requirements. But oil companies have been transformed as much by the staggering and unexpected drop in oil prices they have endured since 2008.
While energy executives welcome Trump’s promises of relief from regulation, most don’t seem to share Trump’s outlook on climate change. Some are getting into the solar and wind business, while others are trying to reorganize themselves, Mayor said, to be as flexible as the younger renewables companies.
“Fossil-fuel companies in particular are starting to come to grips with the notion that we are not going to extract all the hydrocarbons that are underground today,” Mayor said. “There is going to be oil that’s left in the ground. There will be hydrocarbons all around the world that we do not tap.”
But Mayor and her executives expect oil to continue to play an important role for the foreseeable future, so oil companies have learned, amidst all the headwinds, how to extract it more efficiently.
To make deepwater drilling viable, oil companies needed the price of oil to be around $75 or $80 per barrel as recently as 2015. According to Mayor, Statoil, Chevron and BP have since figured out how to do it for $60. (Prices were $48-$51 early this week).
“They figured out ways to reengineer the platforms to break even at $60,” Mayor said. “That is rethinking how you design and build.”
Companies are also rethinking the ways they manage personnel, encouraging more radical innovation, and standardizing drilling equipment. For example, shale-oil facilities in the Eagle Ford and Permian Basin were often custom-built, making repairs and replacements more costly. Amid the headwinds, companies learned to standardize valve sizes and other equipment.
“It seems a little obvious to us in the room, but it wasn’t being done because a lot of the engineers in the industry love to create something new and solve new problems,” Mayor said.