The Oil and Gas Organization Of The Future. —————– McKinsey & Company Oil & Energy Report

Five ideas can help organizations adapt as technological and political trends reshape the industry,
Today’s oil and gas organizations were developed in a time of resource scarcity. Ta get at those hard-to-tind, difficult-to-develop resources, companies built large, complex organizations with strong cantralized tunctions_ This rnodcl allowed them to tackle terrific technical challenges, manage great political and operational risks, and deploy scarce talent across the world as needed.
While these reasons were all valid during a decade at high growth, this organizational journey also led to substantial tar large players—adding cost, stifling innovation, and slowing down decision making

(Exhibit At the sarne time, independents like BG Group, Devon Energy, and EC)G Resources grew increasingly successtul in exploration ant: unconventional plays, Out they still struggled to scale operations without copying the bureaucratic operating models ar the rnajors.
Three game-changing trends are reshaping the industry
This organizational model is ro longer sustainable with ail prices below $50 a barrel. Vote important, though. it is no longer necessary. We are now entering a time af great change, with major societal, technological. and political trends reshaping the environment in which oil and gas companies operate. We see three potentially game-changing disruptions that will Icad ail and gas companies to rethink their operating models fundamentally:
A worlr_l ct resource fftxundarce is leading to sustained lower oil prices and a tocus on cost, efficiency, and speed. Talent is no longer scarce, exploration capability is less afa differontiatar, megaprajects are nat tho only way to grow, and market opportunities may only be econornical for the earliest movers in a basin. Mearp.vhile. conventional, deepwater, unconventional, and renewable assets each require a distinct operating model that cannot be delivered optimally trom a single corporate center.

  1. *ratourd technologicaa advances are disrupting old of•warking and enabling step changes in productivity. Jobs, including knav/edge work, are being by automation on a large scale, and those that remain require incraased humarvnachine interaction. Data generation continues to grow exponentially, as every’ physical piece of equipment wants to connect with the cloud, This explosion of data—combined with advanced analytics and machine learning to harness it— creates opportunities ta fundamentally reimagine how and where work gets done.
    Exhibit 1
    The corporate center has grown in size and complexity over the past 20 years.
    Median general and administrative (G&A)
    per barrel
    — WTI spot p•rice

of oil equivalent (BCE) and price of oil

G&A expenses

WTII spot price,

Median Q&A,’

Technical and operating
Finar,ce. HI Corc activities central to success legal. business of company In competitive systems upstream marketplace
Median COStg Top performers in accounts
increased by from have a S’ -Sa per barrel 1995 to 2010 as of advantage over their corporate centers growing counterparts in size and complexity
exploration and productilM
Source: IHS LIS Energy Administration

  1. Demogr:plnic s17itts mean that employees are demanding changes in the working environment and expressing concerns about tha role af oil and gas companies in society Millennia’s will constitute a majority of the US workforce by the early 2020s and nave already started their climb into management and rwen executive roles. “Digital natives” in the driver’s seat will bring their own expectations of technology, collaboration, pace, and accountability. Oil and gas companies may need more profound changes to meet demands tar meaningful work and social responsibility to attract the next generation of tog engineering and leadership talent
    Five big ideas for the oil and gas organization of the future
    In response to these disruptions. we see five big ideas tor how organizations can adapt:
  2. Organizational agilty The relentless pace of change puts a premium on the abiltyto adapt quickly:o changing conditions—in other words, ta be agile. In our view, agilty combines t%•.«) distinct conccpts: dynamic capab’h*ües, such as the ability ta rapidly farm cross-functional teams and reprioritize tasks la adapt quickly, and a stable backbone at core value-adding processes and cultural norms that provide resilience, reliability, and relentless efficiency.
    While many companies tend to think they must make a trade-off between dynamism and stability, our research snovts that agile organirations rnastor bath at the same time. This is nat a simple transition, however, The agile oil and gas organization will look and feel very different fram today (Exhibit 2):
    Flut teemin’J Teams may form and dissolva on a weekly basis, coming together ta achieve quick success before moving on; individuals may work across many teams over the course of a year.
    Exhibit 2
    Agile organizations will differ in several dimensions.
    Stable backbone

Dynamic capabilities

• Simple structure as backbone, • Everyone reports to asset consistent over time manager/businggs
Clear expectations and with ability’ to form and &ssolve teams on weekly basis
Leadership as role, not title: people contribute and makg decisions based on expertise and expenenos, not g.%ition in IWarchy

Process • Indusü-y Standards used as default. • Up-to-the-minute perfonnance application tailcæd by asset type data wit’ immediate interventiorw

One source Of truth: easy data access for all employees, paired With and standardized reporting
Daily work built around instant access to full Company knowledge base and all experts
Shared culture and values as foundation of trust-based, decentralized decision making
Decisions made once by people
•n room
Rapid prototyping of new designs, strong “test and learn”

ernplOyee reviews • Entrepreneurial “Can do” mindwt equally as important as cal ard lea±rship *ills in

hiwarchics, The organization will be built around tasks and projects, rather than rigid hierarchies; teams may have na formal leader, instead leaving decision making to whocver has the relevant expertise.
Rapiä prototyping. Teams will develop prototypes ot new designs with a rapid, iterative
“test and learn” mind-set, rather than going through cascading layers of review
Instant tæäbac:k. Performance management may become crowdsourced in real time rather than conducted through an annual conversation with a single manager.
While other industries are tutther along the agility curve, many oil and gas companies already have packets of agility, Ono ail and gas company, tar instance, took inspiration fram thc softvrare-development world and used a “scrum” approach to simplify drilling standards from 1 ,OOO pages lc fev.’er than 100. The company completed this exercise in a matter of weeks and cut drilling cast by 30 percent. Similarly, Statoil gave an engineering team tull treedom to manage their awn hours and working locations. This not only resulted in fun experiments like a remotely controlled submarine built trom an empty beer casc but also the prototype of Statoil’s new Cap-X subsea system, which outs development and operating casts by up to 30 percent.
At the same time, agility is not meant to be chaos. For the dynamic elements to succeed, they must be linked 10 a stable backbone. This will include a small number of simple but mandatory processes that are universally followed. a common culture to allow taster collaboration, and instant access to reliable data and the full company’s knowledge base. Aggressively standardizing and simplifying processes can allow companies to react quickly to unforeseen events while improving safety and productivity. For example, Schlumberger identified tha relocation af its people as one ot its central processes. as It ensures the company can deploy talent as rapidly as possible anywhere in Iha world, ay rigorously standardizing the process. deployment time was reduced trom two to three months to two to three weeks.
Perhaps the biggest change required in the backbone is to repackage ard structure work to enable small teams to farm, take a defined task, and execute quickly. An example hora is the default use at industry standards—with applications tailored asset type—to create and enforce a simple but strong backbone. Such ideas are gaining traction in the industry, with 17 international oil companies OCCs) and national oil companies (NOCs) currently working together, through the World Economic Forum, to agroc on standardized procurement specifications and pilots for bat’ valves, subsea trees, and low-voltage svilchgear_
Digilzl o •garnization. Organizations have been digitizing for decades. but the digital revolution is still only just beginning Within a few years. the Internet otThings will consist of more than trillian sensors that gcncrato and share data, Artificial intolligcnca and machine learning are no longer science fiction, and human—machine interaction is becoming ever
more trequent_ These innovations are about to change the way oil and gas companies work in Ihrce substantial wave
A step charvgc ir safety and prohL:ctAity Will result from digitizing both technical and nontechnical work in a way that automates 60 to 90 percent af routine manual activity
v.hle identifying true best practices, This means better safety bath because fewer people will be at risk and because automation is reducing lhe risk af human error. It also means great improvements in workforce productivty For instance, one engineering, procurement, and construction {LPC) firm was; able to use advanced ansNtics to sift through thousands of capital projects and discovered a few simple practices that imprcwed ongineering productivity by more than ’20 percent. Digital is also an important enabler ot organizational agility, far example, through instant access to information tor trontline decision makers or via the real time deployment of maintenance teams linked 10 proiictive-maintenance algorithrns«tn Uber model tor the oil field.
New joh and capaöi’itv grotiles will riss. and many of those (such as data scientists, statisticians, and machine-learning specialists) simply dan’t exist in ail and gas compsnies today. Within ten years. ail and gas companies could employ more PhD-level data scientists than geologists, either in-house ar through partnerships with increasingly sophisticated vendors. Meanwhile, existing roes will be redefined. Fo instance, the automation of repetitive technical decisions will free up engineers to tocus on more difficult analyses.
There wil be rcv.’ ways ot managing people and Many human-resources functions ara already investing in advanced analytics to mine large data sets about their workforce—training history, productivity, calendar and email, surveys, social media profiles, and so on—ta identity the dhvers of employee performance. recruitment, retention, and employee engagcment.

The rnilltnnia’-manaqsci organization Millennials arc no longer a small group ot new university graduates: in many oil and gas companies, they occupy managerial roles and are starting to climb into the executive ranks As they rise through the organization, millennials Will bring their own ideas about callatoratian, accountabilty, and the use of technology. Leading companies will dosign an environment that meets tho expectations at millennial leaders:
Mr,re [laxitSc employr-er,t strcctvesm These could include technology-enabled remote working and tlexible working hours allowed by a results-oriented mind-set. Another trend is on-domand sabbaticals to supporl personal development via education, leisure, or time with tamily. Moreover, an attractive workplace will include alternative Garcer paths with more rapid progress cycles (40 percent of millennia’s expect a promotion cuery one to two years), hari;onlal career moves, and a flexible take on career progress, with temporary step-downs.
A naw working environment This could include the application at social media tools in the corporate setting. For examp’e, NASA, the Royal Bank of Scotland, and Virgin, among others, already use social netv.’orks such as Vacaöook, Slack, and Yammer ins1aHd or Iraditional intranet and tile-sharing tools.
A ;nsitivr,’ external toctptnt Millennials don’t just want personal grov,th; they expect to make a positive cartribution to society. However, 14 percent ot millennia’s say they would not want to work in the oil and gas industry because of its negative image—the highest percentage of any industry. if companies want to attract the best and brightest, they,’ must design ways tar employees to make an impact beyond the *Als ot the company,
4. decentråizæ± Over the past 15 years. the corporate centers af rnost oil

and gas; carnpanics grew significantly, as a way to manage risk, 1B..age scale. and share scarce technical talent. However, many of the forces underpinning the drive to centralize have now eroded. The collapse in crude prices has rnadc large overhead costs unaffordable, and slow decision rnaking has become a threat to long-term viability.
In parallel, the rise of louver-risk asset types. such as tight Oil, hag thangad tha thinking about rolo of the corporate center In particular, success; in unconventional and late-lite operations requires local coordination and integrated decision making at the front line—not layers of review from corporate.
As a result, we expect some oil and gas companies to reverse the 15-vsar trend by decentralizing business and technical creating a corporate core that is radical* smaller than today’s. For example, IOCs have already learned that they must capy successful LIS independents to profitably exploit unconventional resources and have set up separate units to operate these assets.
However, this will nol be consistently felt across assets. Managing risk—technical, commercial. and operational—is still a compelling reason to centralize and is particularly evident tar high-complexity plays such as deepwater. trantier, and liquefied-natural-gas (LNG) assets. We will likely see two dominant models arise: lower-risk assets employing a very lean carparate center highty autonomous asset teams, and higher-risk, morecapital-intensive assets employing a much stronger conter with deep functional capabilities and a strang emphasis on risk management (Exhibit 8).
Consequently, firms with a broad portfolio will feel the tension as they try to accommodate fast-paced, risktaking operating models alongside slower, more risk-averse ones. We expect to see continued experimentation with models that recognize the differences, including separate business units or holding-company structures. To succeed, this requires truly differentiated governance and performance metrics. In extreme cases. we may even see total separations or spin-offs as the best way to manage the complexity—much as we have seen the Ong-term separation of downstream trom upstream.
Exhibit 3
The value of a corporate center will vary, depending on the level of risk involved.

A redefinition of what’s Companies are thinking again about what activities they need to control in-house versus those they manage via partnerships and supply-chain relationships. Wc heliG”.’e the future Oil and gas company will mare closely resemble today’s industrial manufacturers, with a move away trom tactical contractual arrangements and tryuard longftrm strategic partnerships with a network ottier-one and tier-two suppliers. Far example. prior to its acquisition by Shell, RO Croup signed a long •term strategic alliance far front-end project engineering wt17 KEPI, an EPC company. Similarly, in a world oi plentiful resources.
accegs is no longer key strategic differentiator, and large Oil companies increasingly rely an specialized explorers rather than in-nousa exploration teams for reserve replacement,
These developments are driven in pan b’/ cost and market pressure, as costs have risen ta unsustainable levels and operators; musl find chcapor ways of uvking. Moreover, the current market is pushing ail-field-services-and-equipment (OFSE) players to aggressively market integrated service packages, resulting in new partnerships formed out Ot mutual necessity. Last. breakthrough digital technologies are being deployed in core upstream operations, disrupting the business model and creating entry paints; along the value chain tor original-equipment manufacturers and C)FSEs. As a result. oil and gas companies must take a much closer look at their relative value drivers ta determine where to play.

Any one of these ideas would nave tar-reaching implications for oil and gas organizations. Howaven many at these ideas could de selfieinfarcing. Far instance, as oil and gas campanios adopt a more agile way of working, they could become magnets for top millennial talent; millennials will accelerate the adoption ar digital technologies, which could tacilitate the dismantling of large corporate centers, which in turn allows for an even more agile workplace.
The pace of change is increasing on many fronts. Although it’s hard to predict where the industry will land, one thing is Clear: oil and gas companies that are quick to equip their organizations for a new world will tind themselves well ahead of their peers.
Christopher Handscomb iYÆ a in Lardor attice. Scott Sharabura is an associa-.e partner Calgary office, and Jannik Woxholth is a consulter,z in lh?, nfiicc,

It should read,

McKinsey & Company Oil & Energy Report