​Why smaller oil and gas producers might have the edge in $50 oil

Big Oil might find itself struggling to compete with more nimble, smaller producers, according to a new report from Clareo, a strategy consulting firm.

To stand a chance in the new normal, oil and gas companies will need to ramp up their pace of innovation and rethink their business models.

“Most people have finally come to accept that oil is going to be in the $45–$60 range for a fairly long time,” says Peter Bryant, managing partner at Clareo and lead co-author of the report, The Oil & Gas Industry’s New Normal: Rethinking Innovation Priorities in the Age of Low Prices.

“This oil price expectation is very recent, and it’s fundamentally changing the economics of companies, particularly the IOCs [international oil companies]. The IOCs recognize they will have to do things much faster because it’s a survival issue for them.”

Producers have been scrambling to cut costs and improve efficiencies for the last couple years, and recently, that effort has led to a lot more experimentation with partnerships and innovation, especially of the digital variety.

“I call them the Silicon Valley–type companies. They don’t always exist in Silicon Valley, but there is a bunch of these, from venture capital to big data companies such as IBM and Palantir, entering the space,” Bryant says.

Palantir Technologies, a large Palo Alto–based data analysis company, has been working with BP on a number of projects to drive efficiencies.

“They make no assumptions about what’s going on,” Bryant says.

“They do this teardown process over a number of problem areas using a Silicon Valley business approach. They rapidly build digital solutions to tackle those problem areas. It’s a unique approach.”

Companies are also finding space to cut costs by standardizing and simplifying equipment in U.S. oil plays. “The industry has thrived on complexity to date,” Bryant says.

“There are umpteen varieties of subsurface pump. For every item that you need, there are so many varieties with different specs. That just drives costs up. So the industry wants great simplification, common specs.”

Also being left behind? One-stop service providers like Schlumberger, Halliburton and Baker Hughes. “In the U.S. conventional space now, producers are turning to local companies because they are much more flexible. They know the basin more deeply in some cases and are more competitive on price,” Bryant says.

The industry is shifting to plug-and-play solutions and smaller service providers, which means a shift in business model. Bryant predicts IOCs will struggle with this shift, and the little guy might have a better shot.

“You have these business that are optimized for big fields now trying to do small fields, and I’m not sure that they can do it successfully,” Bryant says.

“At one level, it’s just oil and gas, but underneath, it requires a whole different culture, set of processes and the way you think about business.”

Bryant likens it to the battle between Amazon and Walmart. Walmart moves pallets; Amazon moves single bottles. Both have their systems and warehouses, but they’re different beasts. If Amazon’s $13.7-billion purchase of Whole Foods in June is anything to go by, though, IOCs might want to look out.

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