< Previous10 FACE TO FACE oilandgasmiddleeast.com MAY 2020 have traditionally been our focus areas. Lately, we have adopted the Fourth Industrial Revolution, which includes more on the digital side, non-metallics, and sustainability. These six verticals are now our focus areas. Sustainability is fairly new, but it is something that we are starting to see the startup community veering towards. We have invested into a company called Novomer, which captures CO2 and produces polyols, which is essentially plastics. So you are not just capturing CO2, but also using it to create products. Most of the discussions you hear surrounding CO2 capture are primarily about sequestration, but capturing CO2 and creating products is a better extension. What are your growth and development plans? We have made three deals in cyber security. We are looking at opportunities for smart contracts to help on the supply chain. We are looking at blockchain platforms. We invested into a company called Vakt, a blockchain platform for trading. Supply chain, trading, cyber security, and AI are more of the focus area for us now, and those cut across many different use case applications within the company. In terms of digital, a lot of it has to do with improving decision making. We have a company called Maana out of California that is an enterprise data search and analytics company. Take shipping as an example. An individual has a certain amount of information to make a decision about whether they will send a ship somewhere, or whether to charter a vessel. Maana brings in a host of additional information, which includes weather patterns, how many knots can a vessel move, and how fast the current is. These factors are difficult to comprehend in decision making, and when you put all of that information together, you start getting a lot more efficient in terms of decision making. Tell me more about your second $500 million fund. When we started the CVC programme, in 2012 or 2013, when we started our investment, upstream, downstream, and renew were the focus areas, and we continued that. So far, seven years in, we are going to continue our objectives and we have added those three other verticals that I mentioned earlier. It is a continuation of the same program with these additional verticals. We use an evergreen model. When we sell our stake in some of these “WE BRING OPPORTUNITIES FOR THESE COMPANIES TO PILOT THEIR TECHNOLOGIES. AND WHEN THEY DO, IT IS GREAT FOR THEM TO BE HITTING MILESTONES WITH A COMPANY THE SIZE OF ARAMCO, TO SAY THAT WE HAVE TRIED THIS TECHNOLOGY AND IT WORKS.”11 FACE TO FACE oilandgasmiddleeast.com MAY 2020 companies and make a return, a lot of that money continues to support the CVC programme. It is meant to be a perpetual fund, the returns of which are injected back into new opportunities. When we sell a company and make two or three times the money we invested, then that money is able to go into two or three additional companies. How long do you typically hold your investment in a company, and what are your typical ticket sizes? We are looking to exit most of our companies unless there is something pretty important to take on. We are not buyers, so we do not typically buy out companies. The first fund had a $500 million allocation. In our second iteration, we are looking at a similar fund size. The ticket sizes are between $5 million, $10 million, and sometimes $15 million for a first investment. Over the years, some of these companies require more funding or follow- on investments. So we maintain an allocation for eacch company to sustain our investments until exit. When you think about startups, Internet tech startups have a three to five year horizon, so investors will exit after three to five years. On the medical side, it takes even longer with FDA approval. In oil and gas, you have a holding period of six to seven years. We have invested in 40 companies over the years, so we are starting to move into our harvesting stage, and we are starting to see the startups that we invested in back in 2013 becoming ready and ripe for an exit. Emergency Mobile No: 00971 50 3752010 Plot No S-50807, Jebel Ali, Free Zone (South), P.O. BOX 17729, Dubai-United Arab Emirates Telephone: +9714-8865119 Fax: +9714-8865118 Email: sales@sso.ae | info@sso.ae www. shreesteeloverseas.com Branches: • SHREE OILFIELD SUPPLY LLC MUSAFFAH - ABUDHABI - UAE TEL: +971 2 6214290, FAX: +971 2 6214289 • STEEL PIPING SOLUTIONS LLC GHALA - MUSCAT - OMAN TEL: +968 24230900, MOBILE: +968 92292370NEWS ANALYSIS 12 oilandgasmiddleeast.com MAY 2020NEWS ANALYSIS 13 oilandgasmiddleeast.com MAY 2020 WHERE DO WE GO NOW? When the Organisation of Petroleum Exporting Countries and its allies (OPEC+) failed on 6 March to agree to further output cuts, starting a price war between Saudi Arabia and Russia, it magnifi ed existing pressure on the global economy—and oil prices—due to the coronavirus pandemic. Headlines were full of analysts saying that a new deal was essential. Global oil demand in 2020 is expected fall by 9.3 million barrels per day compared to 2019, the International Energy Agency (IEA) wrote in its monthly report for April 2020, “erasing almost a decade of growth.” OPEC+ reconvened in April (virtually, of course), and decided to cut 9.7 million barrels per day of production. The US and Canada have also agreed to curb their production—an indication of the severity of the situation, given the general reluctance of the US to cooperate with OPEC. The highly anticipated deal is done—but what is next? Analysts say that it will not completely eliminate oversupply, but could ease pressure on the storage sector, and allow the industry to absorb the crisis more easily until restrictions are lift ed and life returns to normal. In the next few pages, we have enlisted the aid of analysts and industry experts to explore the ramifi cations of the coronavirus pandemic on the oil and gas sector—how companies can build up their resilience, the few opportunities that it presents, and the outlook for the industry. OPEC+ has agreed to cut production. Now what?ANALYSIS 14 oilandgasmiddleeast.com MAY 2020 By: Bart Cornelissen, Energy, Resources, & Industrials Leader and Managing Partner, at Monitor Deloitte Middle East Adnan Fazli, Energy, Resources & Industrials Partner, Financial Advisory, Deloitte Middle East The oil price collapse triggered by the demand shock created by COVID 19 and exacerbated by the price war between Saudi Arabia and Russia, has led to a global oil and gas (O&G) industry- wide downturn. This has left companies wondering about the duration of and severity of the shock and the subsequent shape of the industry. Russia’s refusal to curb oil production at the OPEC+ meeting held early in March 2020 led to an oil price below $25 per barrel, its lowest level since 2003 (see Figure 1). Ending the weeks-long war for market share, OPEC+ agreed on a historic cut of 9.7 million bpd; although expecting a major rebound in the price, this cut impact was limited to reducing further price degradation. Concurrent to the oil political disputes, the governments have rolled-out a set of radical ‘stay-at-home’ and social distancing measures to tackle the highly contagious COVID-19 virus, these measures led to a drastic eff ect on the oil demand and the larger global economy (see Figure 2). The O&G industry has been exposed to several downturns in the recent past, and businesses have demonstrated adaptation and resilience. Oil prices are rarely stable for extended periods of time, and the industry has shown a remarkable ability to adapt and thrive as cycles change. Several price shocks have occurred over the past 50 years with major drops in the 1980s, 2008-09, and 2014-16, driven either by demand or supply shocks, however for the fi rst time in the history of the O&G industry, the market has been impacted by both simultaneously. These unique circumstances have resulted in O&G companies experiencing a period of acute uncertainty threatening their profi tability, with disruption to operations, and supply chains coming under pressure. In light of macroeconomic forces and an uncertain future, leaders are faced with the urgent need to respond and build resilience for their businesses. The question that remains centers on the specifi c actions to take in a crisis in the short term, and on the measures to future-proof organizations from further uncertainty impacting the industry in the long run. In the short term, O&G companies must maintain their focus on liquidity, cash preservation, continuity of operations, be proactive in assessing their risk and vulnerability from both an operational and a fi nancial standpoint. Instituting a framework that identifi es priorities, defi nes accountability, specifi es timeframes, followed by decisive action will provide a basis for controlling and mitigate issues. The practical immediate response measures to stabilize the business should involve liquidity management BUILDING RESILIENCE As the oil industry faces the biggest crisis in decades, how should leaders build resilient business in light of an uncertain future? Figure 1: Brent Spot Oil price (US$ per Barrel). Data: Thomson Reuters Figure 2: 2020 global oil demand analysis (million barrels per day). Data: Rystad EnergyANALYSIS 15 oilandgasmiddleeast.com MAY 2020 decisions today will have a longer-term impact given the nature of the O&G industry. For longer-term success, organizations will identify robust yet fl exible strategic options in line with the value maximization. This is achieved by anticipating the future business environment, assessing areas to focus their investment plans on (i.e. horizontal and/or integration across the value chain, renewable energy, chemicals, and retail), evaluating the lasting impact on areas such as the workforce, supply chains and innovation and identifying new skills needed to fulfi ll new strategies. Many measures for future-proofi ng organizations derail as leaders tend to extrapolate from the current context. In order to build a more resilient long- term approach, leaders need to detach themselves from the status quo. During troublesome times, leaders should not only focus on the core portfolios, but also use the momentum of the crisis as a catalyst for designing strategies that are in the adjacent and transformational space. These measures could help their organization thrive in the future. O&G companies must seek to future- proof their organizations by building resilience, and placing it at the core of their portfolio (see Figure 4). Ultimately, it boils down to addressing strategic drivers of various market environments, determining implications for industry dynamics, building optionality to gain fl exibility and thus being able to change strategic course depending on how critical near-term events unfold. More importantly, building resilience is required for the appropriate weighing of feasibility and risk against the long-term upside potential, and against the risk tolerance of the organization. through robust short-term cash fl ow forecasting, reduction in discretionary capex, optimization of working capital, ensuring continued availability of funding lines, and supply chain stabilization through active management and contingency planning. Heavily impacted businesses without adequate headroom or shareholder support will need to approach their lenders to arrange fi nancing solutions, covenant resets/ waivers or seek consensual restructuring solutions with their stakeholders to avoid insolvency by demonstrating robust fi nancial discipline and mitigating actions. Going forward, diff erent scenarios should be considered. While a possible best-case scenario may be the quick recovery of oil demand and supply (Figure 3, Scenario B), O&G organizations must respond by taking further measures to prepare for a possible worst-case scenario, in which demand recovery is slow and a low oil price level will continue for a longer period of time (Figure 3, Scenario C). According to many experts, it is possible that the COVID-19 pandemic may have a prolonged impact on the recovery in oil demand as international travel and road transport restrictions may continue for longer than currently anticipated, and as companies adapt successfully to home working arrangements. In response, besides addressing the short-term future (coming weeks to 6 months), O&G companies must gear towards medium-term (2-3 years) tactical responses and longer-term (5-10 years) strategic options to accommodate for any future scenario. For the O&G industry, these strategic options become particularly important as oilfi elds cannot be turned on and off overnight. That is due to the costs and risks associated with shutting down production, and the relatively long-term nature of agreements. In the medium term, emphasis will be placed on profi tability, in particular through savings on low-yield projects capital expenditure and maintaining fl at dividends. This is also important for the medium-and longer-term as Figure 3: Scenario analysis for the O&G Industry Figure 4: The Resilient Portfolio CharacteristicsANALYSIS 16 oilandgasmiddleeast.com MAY 2020 that are mandatory for success, and options dynamic in nature; off erings that are defi ned as “no-regrets” qualify as part of the future-proof of the portfolio. In the face of certain challenges and perceived risks, resilience must start with leadership, who are rightly concerned about how their companies will be aff ected and what measures they have to take next. There are fundamental qualities of resilient leadership that distinguish successful executives as they guide their enterprises through crises. Leaders should simultaneously design from the heart and the head by empathizing with their employees, customers and their broader ecosystems, yet simultaneously adopting a rational line to protect fi nancial performance from disruptions. They should typically be able to stabilize their organizations to meet the crisis at hand, while fi nding opportunities amid diffi cult constraints, and painting a compelling picture of the future that inspires others to persevere. Resilient leaders should remain focused on the longer-term horizon, anticipating the new business models that are likely to emerge and sparking the innovations of tomorrow. Crises with deeply intertwined challenges off er learning opportunities and increased trust among all stakeholders involved, particularly as more value is created for society as a whole. It equips organizations to adapt quickly in the midst of an ever-changing global economy. Players in the O&G industry now have the opportunity to, not only address today’s challenges, but to address future ones by taking the right approach today. Additional credits Yasmin Fansa, Manager at Monitor Deloitte Middle East Yousef Iskandarani, Manager at Monitor Deloitte Middle East Evgeniya Vlasova, Assistance Director at Deloitte Financial Advisory Middle East While designing a corporate portfolio resiliently may come at a certain price, portfolios that are future-proofed off er inherent value to businesses. To maximize return on investment and minimize external interference from macroeconomic forces, leaders should not only develop portfolio optionality to deal with diff erent scenarios, but also identify the highest performing option and the risks in your portfolio (see Figure 5). The question remains: how should organizations be future-proofed to achieve portfolio resilience? It begins with the evaluation of the market and the O&G industry trends and drivers. Thus, understanding what the market and the landscape of the industry will look like in the next two decades, and identifying the main elements that have the potential to impact the future (e.g. price volatility, competition for talent, political disputes, oil reserves depletion, and the energy transition). Evaluating the possible direction of the market and the industry, and providing narratives to assess the respective implications on development, investment plans, supply chains, capabilities, geographical footprint, etc., further facilitates the understanding of strategic responses from consumers, market conditions and players. A wider lens perspective of the industry must then be followed by zooming-in on the organization’s internal portfolio through a structured process of twelve stages (see Figure 6). This process will enable decision makers to determine the internal portfolio vulnerability and the exposure of its exploration, development, and production business units among others on the critical uncertainties impacting the business. The success rates of all portfolio components across scenarios must be assessed, and synergies between business units should be considered to identify spillover eff ects, and value-adding components. Non-core portfolio components should be identifi ed and divested to free-up capital for deployment on value-accretive projects. A projection into the future can ultimately be determined by deciding on off erings Figure 5: Scenario Analysis of Portfolio Options Figure 6: How to Achieve Portfolio ResilienceNEWS ANALYSIS 17 oilandgasmiddleeast.com MAY 2020 RENEWED UNCERTAINTY In the midst of the current crisis, the only certainty for oil and gas is uncertainty By: Rob Thissen, Energy sector Leader Middle East, Mercer The global oil and gas sector is in yet another crisis. However, this time we are facing a double threat featuring a steep decline in demand and the added downward pressure on oil prices on the back of disagreements between Saudi Arabia and Russia. When this article was written on the 12th of April 2020, both countries, as part of OPEC+ agreed to reduce supply by 10%, however doubts still remain about whether current oil prices can be maintained in the midst of a pandemic. The only certainty we see ahead is a renewed period of uncertainty. Many industry players as well as governments across the region have already started implementing measures and budget cuts. Mercer’s COVID-19 & Oil Price Decline poll, run with 193 companies across the energy sector in the second half of March, found that on average, companies’ budgets for 2020 were based on $53.42 per barrel of Brent crude. More than 60% of participating companies expected the crisis to have a substantial to high impact on their 2020 corporate performance, with Middle East and Africa participants less optimistic, with over 80% expecting a substantial to high impact. Major oil companies have already announced drastic capex cuts, shift ing focus to operational expenses. The survey also captured the types of measures companies have already implemented as well as ones under discussion. Roughly half of global and MEA participants are considering options such as reducing headcount, salary freezes and hiring pauses which have been implemented by 38% of companies in MEA compared to 34% globally. In an ever-changing environment, these fi gures are likely to be higher at the moment of the publication of this article, and since the end of March many companies, particularly in the US but also in our region, have publicly announced their response to the crisis. These oft en consist of a combination of headcount and pay related measures, with companies frequently mentioning a reduction in executive packages. While a clear majority of our oilfi eld services clients are considering, or have already implemented, reductions in workforce such as lay-off s and furloughs, the downstream and petrochemical sectors are less impacted, with the only measure considered by a large proportion of participants being headcount freezes. Although these fi gures do not paint a positive picture, most companies in the Middle East’s oil and gas industry have business continuity as their top priority. HR leaders are involved in companies’ crisis management, while their teams focus on ensuring operations continue to run smoothly. Challenges faced by the industry include the administration of permits to be able to keep operations from grinding to a halt, while ensuring they are COVID-19 free. To curb the latter, 63% of companies in the Middle East have implemented voluntary testing or have studied the potential exposure of essential employees. In addition, several companies are forced to fi nd creative solutions with regards to their employees’ work schedules and pay practices, with employees oft en unable to travel across borders or between states and provinces. This situation mainly aff ects the upstream and oilfi eld services sectors that rely on internationally rotating staff . As the industry adjusts to the new normal for operations, some companies have already adjusted their focus to the engagement of employees able to work remotely. According to Mercer’s poll, 43% of energy companies around the world have established regularly scheduled videoconferencing “hang outs” to give employees a sense of community, while 27% have established virtual wellness moments, such as meditation and exercise classes, and 21% have encouraged employee-led communications on how to thrive in quarantine. The coming period will not be easy for an industry which has been struggling to uphold an attractive employer brand since the 2014 oil price decline and due to growing environmental concerns. In order to succeed during and aft er COVID-19, oil and gas companies will need to go the extra mile to retain critical staff while ensuring their wellbeing and engagement. NEWS ANALYSIS 18 oilandgasmiddleeast.com MAY 2020 last month. SNOC now plans to implement the project in phases with surface facilities to be commissioned by the end of this year and drilling to commence in 2023. Sharjah’s gas plans are very much part and parcel of the UAE’s gas strategy and its storage ambitions should prove to be a natural enhancement. The main impetus for gas storage, both globally and regionally, is not to produce volumes for export, but rather to smooth out variations in seasonal demand, which in the UAE triples in the summer months. Gas storage can also act as a safe strategic reserve for any production supply disruptions or as a gas harbor during demand erosion such as what is happening during this Covid-19 pandemic. To get the maximum effi ciency of utilization of gas storage and gas pipeline system, an open access system to capacity needs to be established. Such system already works effi ciently in Europe and North America markets. While the UAE is not there yet, looking forward in a decade or so, it is realistic to assume that the UAE could materialize into such an advanced market. New Era of Exploration Successful and continuous exploration for new gas is a critical piece to this ambition in the UAE. The country has set a target to be self-suffi cient by 2030; ideally, this means being able to have a diversity of abilities to produce, export, import and use domestic gas when needed. It is already in good shape with a diverse portfolio of gas sources – importing through the Dolphin pipeline, producing domestically and with an ability to export LNG from Abu Dhabi. The fi rst onshore Sharjah discovery of gas in 37 years in January of this year – via a partnership between SNOC and ENI – and the projected exploration phases will enhance this drive to self-suffi ciency and demonstrate a true new cycle in exploration and production in the emirate. The Mahani natural gas and condensate fi eld is expected to be on stream by the end of 2020 with an initial production of 50 million cubic feet a day. This recent success will lead to additional drilling and upstream exploration of both onshore and off shore areas, some of which are complex and require state-of-the- art seismic technology and interpretation methods, which we are now privileged to have at our disposal. Driving all this investment in gas exploration of course is the continuous growth in demand for power generation, which has averaged around 5% a year in the UAE and, in times of stronger economic growth has reached 10%. As gas continues to be available and abundant, nascent demand from the industrial sector will continue to expand and add to the overall call on gas. The time is right for ramping up gas storage capacity in the region and the UAE is no exception. The concept is certainly not new to the country – Dubai already has a signifi cant gas storage business and Sharjah National Oil Corporation (SNOC) has been considering building a facility at the Sajaa asset for many years. So why now? Plentiful supply and attractive pricing. A few years ago, gas was in shortage and what was available was very expensive at rates reaching $20 per million BTU in some instances. But that has all changed, with the commodity in abundance today worldwide and prices in a range of $4.00-$8.00 per million btu. At the end of 2017, there were 671 underground gas storage facilities in operation around the world. Only three new facilities were commissioned in that same year however - in China, Turkey and the US. In fact, since 2015, and despite the continued increase in natural gas production and demand worldwide, there has been a relative decline in the growth of storage facilities in mature markets like North America and the EU, where capacity has been stagnating and even declining in certain countries. By contrast, the storage market is expanding in the Middle East (predominantly in Iran so far) and Asia-Oceania. It is armed with this knowledge and the established indigenous gas production capability in the emirate of Sharjah, that SNOC commissioned a pilot test for a gas storage facility in 2017. This was promptly followed with a technical feasibility study and front end engineering design (FEED) in 2019, enabling the company to award a $40 million contract for the Moveyeid gas storage surface facility project to Petrofac By:Hatem Al Mosa, CEO, Sharjah National Oil Corporation With abundant global supply, now is the time to invest in gas storage capacity GAS STORAGE OPPORTUNITIES RIPENEWS ANALYSIS 19 oilandgasmiddleeast.com MAY 2020 By Vinodkumar Raghothamarao, Director Consulting, Energy Wide Perspectives & Strategy, IHS Markit EMEA Supply chain mapping can mitigate risks especially if there is over dependence on one country or concentration of souring from one country or geography. Supply chain mapping involves thorough understanding of suppliers including their global sites, local sites and subcontractors, as well as knowing which components or part originate or pass through them. Companies who are ahead in supply chain mapping benefi t when disruptions happen, because they can deduce quickly how their supply chain could be impacted in the short to midterm. When companies have advance knowledge of where the disruption will come from and which equipment or parts will be impacted, they have lead time to execute avoidance and mitigation strategies — like alternative sourcing, strategic inventory allocation and debottlenecking critical supply chain. Oil companies looking to improve and deploy best in class supply chain risk mitigation practices can adapt or implement some of the practical measures listed below: • Understand the critical supply chain of major spend categories. This requires thoroughly identifying costs and sourcing options across the supply chain for each category and determining appropriate interventions (e.g., seeking new supplier, changing specifi cations, altering contract terms) • Undertake critical and non-critical supply chain bottlenecking assessment. Target for paradigm shift in the supply chain that could mean identifying alternative suppliers • Build custom fi t procurement processes that provide better clarity, engage suppliers early in the process. Moreover follow through to execution and into operations • Manage risks across the entire spending portfolio—not just within individual projects or commodities, or splitting capital from operations spend • Proactively manage supply base, select relevant suppliers, focus on alignment and sustainability, ensure company ownership and accountability is clear to suppliers • Institutionalize capabilities required to support procurement and supply chain Rethinking supply chain strategy has already begun for many companies but Covid-19 will accelerate the need to have a decentralized global supply chain. Improved supply chain resilience and collaborative supplier relationship management is the way forward for oil and gas companies to reduce costs in this era of low oil prices and to focus on optimized oil and gas production and exploration. It will be interesting to see how oil and gas companies can eff ectively manage robust supplier monitoring system coupled with the adoption of best in class supply chain practice in 2020. Oil and Gas companies operate in dynamic and complex environments, where they face constant challenges especially in terms of supply and demand. With oil prices at historic lows and CoVID 19 supply chain disruptions, the time has come to evaluate supply chain and procurement strategies, sourcing techniques and costs. Major pandemics can create signifi cant disruption to the reliable supply of oil and gas equipment/parts such as valves, turbines, compressors ...etc. The COVID-19 pandemic is a wakeup call for C-level executives to develop new business strategies in their future supply chain designs. Procurement and supply chain strategies are set to be in the forefront of critical issues plaguing oil and gas companies especially with the current downward spiral of oil prices and CoVID-19. Many oil and gas companies worldwide realized that either their suppliers or sub- suppliers (tier 2/tier 3 suppliers) are based in the aff ected regions such as China, Italy, South Korea and Spain. Single sourcing or sourcing everything from one geography or country has led to the current disruption. Even though some companies don’t source directly from China, their tier 2/tier 3 suppliers down the line do so. Oil and Gas companies should be proactive in developing robust supply chain resilience and having adequate supply chain risk intelligence. Supplier risk intelligence is the process of acquiring and analysing supplier risks in order to understand present and future risks; support current and future sourcing and market sector strategy execution; and to enable the business to better anticipate changes in the external marketplace and react before others do. SUPPLY CHAIN MANAGEMENTNext >