THE OIL & GAS INDUSTRY stories from the field

By Andrew Inkpen, Micha el H. Moffett, a nd Ka nna n Ramaswamy

The world’s attention seems to be focused on reducing carbon emissions through renewable energy, electric cars, and the harnessing solar and wind power. The head lines might well be foretelling darker days ahead for the oil and gas industry but, in our opinion, the predicted rapid obsolescence of the oil and gas industry is prema ture and ignores a variety of other short to medium term challenges faced by the industry. How the industry responds to these challenges will in turn determine how the larger issues of renewable energy and climate change are addressed.

The energy industry is one of the most complex and globally consequential industries. Within this industry, the oil and gas segment occupies a dominant position as the major source of the world’s energy. According to the American Petroleum Institute (API), T

this segment of the energy industry directly and indirectly accounts for 5.6% of U.S. labor employment, 6.7% of labor income, and 7.6% of value added in the U.S. economy 1 . Despite its prominence, much of what the general public knows about oil and gas is limited to discrete pockets of knowledge - the price of gasoline, the gyrations in the price of crude oil, the latest refinery accident or pipeline controversy. This fragmented and shallow understanding robs us of an integrated and comprehensive view of the industry and minimizes the immensity of the challenges in transitioning to a renewables future. While much has been written about how oil and gas firms ought to operate, there is little on how they actually do operate. How do they create strategies, manage multiple stakeholders, and develop complex projects in countries and regions across the globe, within an industry that constantly challenges received wisdom?

Andrew Inkpen, Ph.D.

Michael H. Moffet, Ph.D.

We set out to examine these important questions with the objective of shifting away from the press headlines to develop a more nuanced understanding of the realities of the oil and gas business. We used an idiographic analysis approach that builds on in-depth case studies of companies and countries central to the industry. Building on extensive examinations of source documents, company reports, industry analyses, and expert opinion, we developed a series of case studies covering a wide spectrum of countries, owners, strategies, and challenges. These studies formed the basis for distilling answers to the questions that drove our study. Resulting from our analysis of both successful and unsuccessful business decisions in the industry, we identified four key themes that characterize the current state of the industry and its future prospects:

Kannan Ramaswamy, Ph.D.

1) In broad terms, the oil and gas industry is quite similar to other industries where change, innovation, and disruption are central to long term success. De spite the relatively long arc of their success, even estab lished oil and gas rivals are challenged by an emerging class of competitors who have the capital access and the willingness to ques tion received wisdom. Many of the central tenets of the business ranging from costs and economics, access to resources, con nectedness of markets, and product substitutability are being rewritten by the disrupters.

2) Success in business means taking and managing risk. In the oil and gas industry there is every conceivable risk: environmental, political, safety, geologic, financial, and commercial. Despite these risks the industry has built business models that ensure the risks are properly managed and mitigated. These experiences can be valuable to other firms both within and beyond the domain of extraction businesses as they battle similar issues.

3) National oil companies are no longer “national”. They have rapidly globalized and consequently behave much like international oil companies, although their corporate objectives are different than their for-profit oriented competitors. Governments see national oil companies as guarantors of energy security and often the engines of domestic social and economic change. The road to reserves in many resource rich countries runs through these national oil companies and hence the ability to build and sustain collaborative partnerships will become more central than sheer economics alone. And as is always the case in global business, this must play out on a playing field of multicultural, politi cal and economic interests – a foundation perpetually in flux.

4) Megaprojects in remote and technically challenging regions has been a hall mark of the industry since its early years. Hitting home runs through successfully executing megaprojects is extremely difficult, as consortia of companies, governments, interests, and technology – and markets -- frequently change over their development. Thus, project execution skills attracted a premium especially in megaprojects. However, it is debatable whether such projects that have formed the staple of the industry in recent years will continue to pay rich dividends in the future given the tectonic shifts in cost economics, energy supply, and climate change considerations.

In providing easy access and insights to these themes, we authored a book titled “The Global oil and Gas Industry: Stories from the Field” published by Pennwell in June 2017. The book is a compendium of “stories” that illustrate, define, and analyze the key challenges facing the industry. Because of the complexity of the industry, we have chosen to stay away from generic frameworks or simplifying mechanisms. Such approaches can diminish the complexity associated with the industry and force readers to subscribe to a generalized view of best practice. Instead, we let the subtleties and complexities play out in the stories presented. Having worked with companies from across the globe, we have seen that some of the sources of complexity present in this industry defy easy solutions. Our goal is to present the stories objectively and allow readers to learn from the experiences of the various companies involved.

Andrew Inkpen, J. Kenneth and Jeannette Seward Chair in Global Strategy & Professor of Management

Michael H. Moffett Continental Grain Professor in Finance and Associate Professor of Finance

Kannan Ramaswamy, William D. Hacker Chair in Global Strategy and Professor of Management