“If you want to
make peace with your enemy, you have to work with your enemy. Then he becomes
your partner.” -- Nelson Mandela (South African Statesman First
democratically elected State President of South Africa (1994), 1993 Nobel Prize
for Peace, b.1918)
Strategy is an important, yet squishy, concept.
When discussing strategy, one is never quite sure how closely related
the discussion is to reality. That is
why it is useful to read an article like the one that follows. At worst, it provides the illusion of
control. At best, it offers true insight into the future. Read it and judge for yourself.
///////
Energy Strategy Reviews, 3 (2014) 21-29
Strategic partnering
in oil and gas: A capabilities perspective
Rodrigo Garcia, Donald Lessard, Aditya Singh
Technology and Public Policy Program, MIT, USA
MIT Sloan School of Management. 100 Main Street, Cambridge, MA 02142, USA
New Ventures and Asset Management, Total Exploration & Production, France
Abstract
A firm’s strategy typically is defined in terms of its position in the industry
or landscape in which it operates and the competitive advantage of the firm on
that landscape. This competitive advantage, in turn, derives from a combination
of assets (what the firm owns) and capabilities (how the firm does what it
does). While the image of the oil and gas industry is that it is all about
assets, competitive advantage generally results from a combination of tangible
assets, capabilities, and intangible assets such as reputation and intellectual
property (IP). The types of capabilities that are most likely to set one firm
apart from others in a highly competitive field like oil and gas are complex
bundles of complementary capabilities that are required to solve key challenges
and that are hard to develop and emulate, particularly when the challenges are
new and require new bundles of capabilities. Thus, the differentiating
capabilities may be integrative, dynamic, or both. This paper identifies a set
of integrative dynamic capabilities that are emerging as differentiators in the
oil and gas industry and discusses what these imply for partnering at the
company and asset levels.
Introduction
The petroleum industry faces challenges of intensifying demands for delivery of
both shareholder value and increased output to meet global demand for
hydrocarbons, while at the same time ameliorating its environmental and social
impact. While the image of the oil and gas industry is that competitive
advantage results from tangible assets, in fact it generally results from a
combination of tangible assets, capabilities, and intangible assets such as
reputation and intellectual property (IP). As chronicled by Zuckerman in The
Frackers, the latest chapter of extraction from shale formations with
horizontal drilling and hydraulic fracturing is the result of a combination of
assets – land acreage, which in some cases was inherited from earlier business
models but in many was the result of a capability of amassing acreage without
drawing undue attention and dynamic drilling and completion capabilities.
The types of capabilities that are most likely to set one firm apart from
others in a highly competitive field like oil and gas are complex bundles of
complementary capabilities that are required to solve key challenges and that
are hard to develop and emulate, particularly when the challenges are new and
require new bundles of capabilities.
Even without the specter of climate change, the oil and gas industry is highly
dynamic given the inexorable requirement to replace reserves, particularly as
the most accessible reserves are exploited first and new opportunities
typically involve greater technical challenges, institutional challenges, or
both. With increased environmental scrutiny, these challenges become even more
complex and dynamic, as resources must be extracted with an eye to both
economic efficiency and an environmental footprint that may include local
contamination, local social and economic displacement, water use, and
greenhouse gas emissions.
Taking the long view, most firms defined solely by extraction will eventually
become extinct, as exploitation of carbon producing fuels must ramp down.
Even before then, extractive firms may have to position themselves as clean(er)
energy service firms in order to maintain their public legitimacy and
sustainable competitiveness, even as they also continue to seek to effectively
identify and develop new reserves.
Even those firms whose central focus remains finding and extracting fossil
fuels are seeing old sets of capabilities – such as advanced exploration
techniques, complex drilling and completion, or processes for assuring safety
in operations and the health and safety of employees and adjoining communities
– becoming “qualifiers” and no longer differentiating, while new capabilities –
such as industrializing the production of hydrocarbons from distributed sources
while significantly reducing surface and environmental footprints, rapidly and
safely prototyping and proving new technologies at scale, diversifying into new
sources of energy, or creating inclusive supply and distribution
infrastructures in new regions that engage local talents and entrepreneurship
beyond the usual “local content” model are becoming the new differentiators.
Recognizing that the future is not predetermined, the purpose of this essay is
not to provide a crystal ball regarding exactly which suite of
capabilities-based strategies will be viable going forward, as this will result
from a complex and unpredictable interaction of technological progress,
innovation and collaboration in the oil and gas business, public policy,
markets, social opinion, the physical realities of climate change. Rather, it
is to define the types of capabilities required to meet the various technical
and institutional challenges to explore various bundles of capabilities that
are emerging and/or that may be called for and the resulting scope and type of
organization of firms that possess them, and the way that this will play out in
partnerships at the asset level.
As examples, authors explore six sets of challenges that oil and gas firms face
that differ in their technical and institutional complexity:
Extreme environments and reservoirs, which by and large represent primarily
technical challenges,
Unconventionals, which present a mix of technical and institutional challenges
and where both sets of challenges are evolving as the exploration, development
and operations of unconventional resources are still in a nascent stage,
Extended/enhanced production/recovery in well-established regions which again
present technical and institutional challenges,
Integrated gas transport networks that extend across national boundaries and
represent a complex combination of technical and particularly institutional
challenges,
Enhanced local economic and social engagement in new regions that present
primarily institutional challenges,
Reduced surface and environmental footprint including carbon capture &
storage facilities that involve highly complementary institutional and
technical challenges
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