Trends in place by 2000 spawned dramatic changes in oil and gas corporate culture

by Bob Williams

The corporate cultures of oil and gas companies promised to undergo dramatic transformation in the first decade of the 2000s.

The drivers of this change were already gathering momentum as the millennium began. They included accelerating short-term market volatility, increasing shareholder pressure regarding financial performance, continuing corporate consolidation, shrinking institutional knowledge, spreading globalization, and growing accountability to society. Looming over all of these was internet-based work. The drivers of change were intertwined—and not necessarily in a way that would make strategic planning any easier.

Corporate cultures weren't the only things adapting to a fluid business environment in 2000; company identities changed as well. One bold move during the year was that of BP, which introduced a logo redefining corporate identity with a design that suggested ecological benevolence coupled with the slogan "Beyond Petroleum."

BP's corporate makeover drew skeptical comments from competitors and traditional critics alike, who noted that the company continued to spend billions to boost its production of oil and gas beyond the 2000 level of 3 million boe/d. The move was, nevertheless, emblematic of an industry that would continue struggling to reshape its identity in order to fashion a more competitive culture.

Market volatility

Volatility of oil and gas prices had driven change in petroleum firms' corporate cultures ever since futures markets developed in the 1980s to make prices instantly reactive and very visible.

Price uncertainty complicated risk management in exploration and production asset portfolios. Integrated companies traditionally used downstream operations to counterbalance crude price slumps—but still cut E&P spending when prices fell. The biggest major oil companies, before the oil price bust of the 1980s, used the spurt in cash flow from previous years' high oil prices to diversify into nonpetroleum businesses. But when oil prices crashed, the majors, challenged by accelerating depletion, quickly sold noncore businesses and used the proceeds to shore up E&P spending. Some independent E&P companies dabbled in hedging price risk with financial derivatives, but most simply whacked away at budgets and staffs, hunkering down until the storm passed. All companies slashed operating costs to the bone, and upstream employment and capital spending collapsed (Fig. 1).

When oil prices rebounded, companies ramped up spending again and scrambled to rebuild staff and portfolios ahead of the next cycle. Planning focused on projecting price scenarios, and decisions were based on prices companies felt they could live with—irrespective of whether the market might actually leave them at that level. And petroleum industry corporate cultures became imbued with the notion that "lean and mean" was the ideal.

Oil prices became increasingly volatile during the 1990s (Fig. 2). But the gyrations of oil prices during 1998-2000 had no modern peacetime parallel. From November 1997 to December 1998, the average price of crude oil in the US (refiner acquisition cost of imported crude) fell by more than 50% to less than $10/bbl. The average US price recovered moderately in 1999, and by fourth quarter 1999 had rebounded to about $23/bbl. In the fourth quarter a year later, the average US price was $28/bbl—down from a third quarter 2000 peak of $36/bbl. Analysts' predictions at the start of the year had oil prices swinging back and forth at $20-30/bbl for all of 2001.

Natural gas prices also tracked a roller-coaster route in 1999-2000, with US spot and futures prices at one point in winter 2000 shooting up to $10/Mcf from the roughly $2/Mcf level that was the average for the good years of the 1990s. As the end of the winter heating season approached in 2001, analysts were projecting natural gas prices at $5-7/Mcf.

The US Energy Information Administration in 2000 noted, in reviewing the 1999 financial results of the petroleum companies that report them to the agency, "Reflecting the volatility of petroleum markets, overall corporate profitability swung from a 15-year high in 1996-97 to its third lowest level in 1998, rising in 1999 to a level somewhat below the companies' long-run average."

However, EIA in early 2001 cited the 27 FRS (Financial Reporting System) companies' 128% jump in fourth quarter 2000 earnings from the same period in 1999. For the full year, many oil and gas companies reported record earnings.

Capital availability

Simple price-case scenario planning no longer seems adequate in the face of such extremes. As Houston analyst Matt Simmons noted in early 2001, even though high oil and gas prices were expected to prevail for several years, there remained tight constraints on capital availability, and energy companies complained of low stock prices despite record earnings reports.

"Do the capital markets know something energy producers do not?" Simmons asked. "Can sound energy projects only be funded by external capital as long as they are based on historical energy prices?

"Should energy companies even try to rely on external capital to fund growth, or instead, should prudent energy companies adopt the financial discipline to live within the means of their own internally generated cash flows? Is the volatility of energy pricing now so certain that any significant use of meaningful debt ought to be avoided as too risky? What is the proper level of debt and equity in today's volatile energy markets."

This uncertainty may actually be a blessing in disguise for the oil and gas industry, Simmons suggested: "One could argue that such uncertainty might be a positive event, as history has shown that once capital begins flocking to any area, it soon fuels marginal projects and ultimately leads to excesses that often sow the seeds for a subsequent bust."

There are a number of reasons that capital providers kept a tight hold on their purse strings with regard to energy projects, despite the robust earnings the industry enjoyed in 2000—a trend expected to continue in 2001. Leading the list were the generally poor returns almost all petroleum industry sectors had earned in the preceding 2 decades, Simmons noted. "Despite almost 20 years of consolidation and downsizing, few industry participants were able to get their cost structures in line with low energy prices."

Even with the rebound in prices bolstering returns to attractive levels, there was no sense that prices would stay at those levels, and most oil and gas companies shaped their plans around a presumption that energy prices would return to historical norms (Fig. 3).

The industry continues to rely on prices and margins close to historic averages, BP Chief Economist Peter Davies told a Baker Botts energy symposium in London in November 2000: "It is seen to be unwise to rely on prices and margins above long-term averages. Thus, both existing operations and new investments need to be profitable at lower prices and margins than those prevailing today. This reinforces the focus on costs."

But Simmons contended, "From the standpoint of an outside lender or potential equity investor, this merely influences them to step aside until prices do fall and then make sure the historical norm is a basement, not a next-cycle ceiling," Simmons said. "Moreover, when many new energy projects are subjected to historical-norm pricing, the attractive returns evaporate."

Extreme volatility of oil and gas prices, coupled with dismal returns during the low-price spans, thus had created a high hurdle for anything but high-risk capital to fund one of the world's most capital-intensive businesses.

The solution was either to find a way to break the pattern of price cyclicality or for oil and gas companies to get so lean that further price collapses no longer created marginal returns.

Simmons thought the latter solution was impossible.

"After a decade of downsizing, is it even possible for energy companies to unlock massive new layers of cost redundancies so they can tolerate almost any price downturn?" he asked. "I would strenuously argue such a future is merely a fantasy."

A critical emphasis should be placed on finding ways to manage price cycles for oil and gas, Simmons contended. Returning to the days of long-term contracts for energy supply with prices set high enough to provide realistic if not exorbitant returns was one approach he proposed. Using available financial instruments to moderate out the effects of price swings was another.

"The energy industry needs to also begin using the various financial risk management tools for hedging as true risk management tools, instead of letting speculators be the primary recipients of these instruments to further fuel added 'liquidity' and volatility to what has now become an energy 'casino' investment game," Simmons said.

"Too many energy companies have avoided using the risk management tools to smooth out steady profits on an argument that 'our shareholders want the exposure to upside risk.' Unfortunately, over the past few years, fewer and fewer possible shareholders wanted to play such a risky game."

Such efforts to flatten out the effects of the price roller-coaster would mean an oil and gas company corporate culture more attuned to the long term in assembling E&P portfolios and in undertaking new downstream projects. That alone would restore a sense of stability and security to the executives and staff of oil and gas companies who had to endure past swings. While the prospect of long-term energy supply contracts might be more viable for natural gas than for oil, there was ample evidence of growth in the use of financial instruments to hedge both oil and gas price risk.

Bottom-line obsession

Another force shaping corporate cultures in 2000 was intensifying pressure to relate all activity to the bottom line.

The reasoning was simple: Wall Street analysts demanded it. Banks demanded it. Shareholders demanded it. A glance at the upstream industry's record since the early 1980s shows why: substandard return on investment (Fig. 4).

Effects of that record became evident in 1999. Oil prices were up 50% from the year before, cash flow from oil and gas production rose proportionately, oil and gas finding costs were down for the first time since 1994, and a spate of attractive new deepwater opportunities opened in South America and Africa. Despite these favorable developments, EIA's FRS companies slashed global outlays for oil and gas exploration and development in 1999 by 38%, or $19 billion, vs. 1998. This was a dramatic departure from the customary relationship in the business between investment and expected profitability. And another round of layoffs hit the upstream industry, with the largest number of jobs coming at a time when oil and gas prices had rebounded to comfortable levels (Fig. 5).

Furthermore, the cuts in oil and gas E&D were part of a bigger reduction in overall capital outlays, as the FRS companies slashed total capital expenditures by 23% in 1999 vs. the slump year of 1998.

EIA noted that the FRS companies' reduction in capital outlays in 1999 was the major part of their effort to repair the damage to their balance sheets incurred in 1998.

"In 1998, their capital expenditures exceeded their cash flow by an unprecedented $27 billion, or by 56%," the agency said. "To close this $27 billion gap in 1998, the FRS companies increased their debt, resorted to issuing more stock, sold a record amount of assets, reduced cash payouts to shareholders, and drew down their cash balances by $4 billion.

"The adverse effects of these actions included more debt and higher interest expenses. Issuance of more stock tended to dilute the value of existing common shares, which together with reduced dividends and share repurchases, tended to increase shareholder discontent.

"To repair the damage done in 1998, the FRS companies increased their cash outlays for debt reduction in 1999 while cutting dividends and share repurchases as well as slashing capital expenditures."

While capital spending rebounded in 2000 and 2001, the new trend was clear: Volume growth for its own sake would no longer be rewarded by capital markets even in an up cycle. The deeply ingrained fear of self-liquidation—as production outpaces reserves additions—had traditionally ensured oil and gas companies would spend most of the surge in cash flow from higher prices on acquiring or finding more reserves. But this reflex was yielding to the maximization of earnings per share or return on capital employed (ROCE).

E&P companies became particularly cautious in a market environment like that of 1998, noted analyst Raymond James & Associates. "Although, traditionally, [E&P companies] have tried to increase production volumes by spending to their level of earnings [and sometimes more]," RJA said that during 1998-2000 they exercised more discipline. They were beginning to trade volume growth—at often marginal returns—for a stronger concentration on project economics and internal rates of return.

While an upstream oil and gas company exists to find, develop, and produce hydrocarbons, this mission was becoming undergirded with fanatical attention to return on investment. Increasingly, oil and gas companies were becoming commanded by executives with primarily financial backgrounds, while populations of senior executives from primarily petroleum science backgrounds dwindled. The cultures of oil and gas companies were becoming more oriented than ever to financial concerns, with every project imbued with the overriding assessment of its return on investment.

This shift was part of a larger evolution in how oil and gas companies were perceived by capital markets, according to Luis Giusti, former president of Venezuelan state oil company Petroleos de Venezuela SA, and a senior adviser to the Washington, DC-based Center for Strategic and International Studies.

"Until just a few years ago, the market would value oil companies on the basis of large volumes and deep pockets," Giusti said. "However, in recent times, a major shift has taken place, with the market looking closely at performance, a balanced portfolio, and return on capital employed.

"Emphasis is shifting from revenues to profits, from market share to volume share, from assets to people, from operations to customers, and, in general, from the inside to the outside. These changes reflect the search for a new business design, as in recent years, the performance of the oil sector and the energy sector in general has been lackluster compared with other industries.

"Oil companies face the challenge of competing with those other industries for needed growth and consolidation capital. This trend, coupled with expansion and privatization trends by oil-producing countries, bolsters the prediction of a future oil world more integrated and efficient, as well as much more competitive."

Meeting this challenge would entail a reassessment of what a petroleum company's business design should be. The task was complicated by a market more attuned than ever to ROCE.

As BP's Davies put it, "Financial markets also create their own pressures on company performance and behaviors. The market is currently focusing its attention on earnings or cash per share and also returns on capital employed. ButUit is also looking for growth. It wants everything."

He cited a then-projected capital spending increase of more than 20% in 2000 that he contended was driven not by higher oil prices and not, in most cases, even by cash flow. Instead, the jump in spending reflected more the move to a growth agenda.

"Financial markets expect petroleum companies to grow—and, in fact, current [November 2000] share prices discount sector growth of around 7-8%/year," Davies said. "It is fully appreciated that this cannot come from cost savings alone in the future. Rising investment is thus required to meet these goals.

"The challenge, of course, will be delivery—and at competitive levels of profitability."

In 2000, it appeared that two trends were leading the way in petroleum companies' efforts to fashion new business designs that would show the way toward improvements in both growth and profitability: consolidation and reinvention.

Consolidation

Consolidation through mergers and acquisitions was the most dramatic response to the new market environment for oil and gas companies.

A.T. Kearney Inc. estimated that, during 1996-2000, the oil and gas industry realized more than $500 billion in global merger transactions.

"The transaction volume during this 5-year period surpassed the cumulative total of all oil and gas M&A activity over the previous 95 years," it said.

The result was a new core of larger—albeit fewer—major international companies, all but one the product of a string of megamergers that began in the late 1990s: ExxonMobil Corp., BP PLC, TotalFinaElf SA, Chevron Texaco Corp., Repsol-YPF SA, and the holdout Royal Dutch/Shell.

Why had the scramble to combine the assets of the world's biggest nonstate-owned petroleum companies come about?

As Davies noted, "Most of the major oil companies had been intact for the best part of 70 years despite the world changing dramatically and the nationalizations of the 1970s. A few names changed—Socal became Chevron, for example—but not the list of companies and even their relative size and performances."

The BP executive cited a growing urgency within the industry—faced with increasingly competitive and transparent financial markets—to bolster its profitability to internationally competitive levels in order to be able to attract, retain, and reward capital.

"Profitability had weakened over a period of time as key strategic assets had matured, especially in the upstream," Davies said. "At the same time, in the face of deregulation, privatization, market disintegration, and rapid economic development in a number of emerging markets, a range of new players entered the international petroleum industry with adequate financing and ambitious investment plans.

"In total, the aspirations of all the players exceeded the sum of the opportunities. Inevitably, prices and margins fell [incidentally, because of the industrial pressures, not vice versa. Low prices and margins were not the cause of the industrial change]."

Davies noted that the 1990s saw many corporate initiatives—mainly to cut costs, strengthen balance sheets, and improve portfolios.

"But, in total, they were not enough. The mergers aimed to reverse the trend [of eroding profitability] by stripping out costs and taking advantage of synergies."

Beyond the gradual disappearance of the Seven Sisters, there were scores of other, smaller combinations that sought to accomplish the same goals, as many large independent E&P companies merged to form a new species in parallel with the supermajor: the superindependent.

Other consolidations peppered the ranks of the downstream industries, especially in European and Japanese refining and petrochemicals.

But these often took the shape of joint ventures into which major refiners and petrochemical producers contributed assets and closed suddenly redundant facilities in a persistently low-margin business.

Accordingly, the process of assimilation became important in the corporate culture of an ever-more consolidated petroleum industry. It also became critical to the success of mergers, A.T. Kearney noted.

The analyst pointed to the critical need for building a new corporate culture in a merged company.

"Cultural differences are often the most frequently quoted reason for merger failure," it said.

"It is often more suitable, especially in mergers of equals to combine the cultures, creating a 'new' culture rather than imposing the culture of the dominant company on the acquired."

This challenge was compounded when the merger cut across geographic and social culture lines, as in BP's merger with Amoco Corp. and acquisition of ARCO, French giant Total SA's merger with Belgian major Petrofina SA and then acquisition of French rival Elf Aquitaine SA, and Spain-based Repsol SA's acquisition of Argentina's YPF SA.

Beyond geographic and cultural differences, assimilation emerged as an often-cumbersome process in which the complexity of merger integration consumed resources that might have gone elsewhere.

With integration periods of 6-12 months typical and closing periods long, mergers often kept companies focused internally for as much as 2 years, according to A.T. Kearney.

"During this period, there is the potential for company drift, resulting from a lack of focus and crisp decision-making, while employee morale drops due to personal anxiety and uncertainty," the analyst said. "As a result, most growth initiatives are stalled, waiting for the merger and integration to be completed, as the focus of senior and middle management is consumed on integration and realizing synergy cost savings."

Mergers and growth

And while the top goals of these and other mergers were largely cutting costs and gaining efficiency synergies, the emphasis should be on growth in order to bolster shareholder value, A.T. Kearney contended.

"While almost all mergers provide an opportunity to save money, the primary reason for the merger decision should be top-line growth. This should be accomplished by leveraging the new assets obtained in the merger to create growth synergies and unlock the 'merger value added,'" it said.

The reduced operating costs and new efficiencies nevertheless enabled the new supermajors to achieve cost advantages over their competitors.

In an early 2001 comparison of oil and gas majors' performance, A.T. Kearney found that supermajors BP, ExxonMobil, and TotalFinaElf outperformed the others in the peer group studied: Shell, Marathon Oil Co., Phillips Petroleum Co., Chevron Corp., and Texaco Inc. (the Chevron-Texaco merger was announced late in 2000).

Overall, BP, ExxonMobil, and TotalFinaElf realized merger synergies exceeding a combined $9.8 billion/year. A.T. Kearney estimated the upstream savings at more than $4.9 billion/year, or $1.45/boe of production. This translated to a cost advantage over their peers of almost 19%.

"The newly formed 'Super Three's' reduction in operating costs is reflected in the performance of their shares over the past 2 years," A.T. Kearney said in early 2001. "From June 1998 through September 2000, BP, ExxonMobil, and TotalFinaElf, on average, outperformed their peers in total shareholder return by 19.4%. This is understandable, as their cost-effectiveness makes them able to realize improved E&P productivity and margins, a key driver in oil company valuations, relative to the industry."

Capital markets rewarded the merged majors. EIA noted that the share prices of BP Amoco and ExxonMobil grew at rate of 20%/year during 1995-99. While other majors' share prices generally kept pace with BP and ExxonMobil through 1997, they were flat during 1997-99, when oil prices slumped.

Nevertheless, even these companies' total shareholder returns lagged that of the S&P 500, A.T. Kearney noted. The analyst also cited the merged firms' estimated production growth targets of 3-5% for 2000, not a significant improvement relative to their historical independent, internal growth rates.

"Research has shown that it is the commitment to long-term growth that generates sustainable, superior shareholder wealth creation," it said.

A.T. Kearney contended that the merged companies' ability to grow had not been significantly enhanced by the mergers.

"These firms will not realize the uplift seen in other industries until they can demonstrate, through improved execution, that they can grow from leveraging or creating new competencies and assets acquired through the acquisition," the analyst said. "While management has been successful in reducing costs, an opportunity to focus on growth opportunities now exists. Growth can come in many forms—from geographic expansion, entry into new markets, the introduction of new products and services, or diversification into new technologies and innovations."

Reinvention

As A.T. Kearney noted, growth in the energy industry can come about from new directions as well as from creating critical mass.

A catalyst for corporate reinvention in the global petroleum industry in the late 1990s was the explosive growth and evolving convergence of the natural gas and power industries.

This trend had roots in a series of mergers, mainly in the US, between traditional electric gas and power utilities and gas pipeline-E&P operating companies that got under way in earnest in the mid-1990s.

By 2000, "btu convergence" had become worn out as a catch-phrase in the energy industry, but the accompanying trends were thriving. That can be seen in the changing makeup of the EIA's FRS companies.

The conventional image of the major energy company had been that of a large, vertically integrated petroleum company combining the functions of oil and gas exploration and production with petroleum transportation, refining, and marketing.

When the FRS started up in the late 1970s, 24 of the 26 companies selected were vertically integrated; they accounted for 97% of the FRS companies' total assets, EIA noted. Based on 1999 data, EIA in 2000 estimated that vertically integrated companies accounted for 70% of the FRS companies' total assets. But during 1974-99, no major energy company had become vertically integrated.

As the vertically integrated firms' number and scope declined, other corporate structures grew in prominence, EIA noted.

The most rapidly growing companies in the FRS group were three that identified themselves in 1999 not as pipelines or gas companies or E&D companies but simply as energy services companies: Enron Corp., El Paso Corp., and Williams. They provided natural gas transmission and distribution; electricity generation and distribution; trading, wholesaling, and marketing of natural gas and electricity; and associated customer services, such as risk management.

The growth track records for these companies far outstripped those of the vertically integrated oil and gas majors.

During 1995-99, the energy services companies in EIA's FRS universe nearly tripled in size, in terms of total assets, while the supermajors grew a collective 65%. However, the other vertically integrated majors grew only 9% during the same period.

Capital markets also rewarded the energy services companies. During 1995-99, the weighted average share price of the energy services companies grew at a rate of 23%/year, EIA said.

"Thus, based on corporate growth and share price appreciation as indicators of strategic success, the energy services companies' presence among the ranks of US-based major energy companies is likely to increase, and vertically integrated majors should grow larger but fewer in number."

Globalization

The spread of free-market principles, deregulation, privatization, economic progress, and international trade and investment meant an increasingly interconnected world with poor nations increasingly pursuing development. While this opened an array of opportunities, it also introduced daunting challenges for oil and gas companies seeking to invest in opportunities outside their national borders.

"UWe are living and operating in a progressively more open and globalized world," BP's Davies said. "This is a world with few barriers, transparency, and the wide availability of low-cost information. This is all imposing a new set of operating behaviors on all companies.

"The forces of technology, economics, and sociopolitics have already begun to create a new world, one that is characterized by openness and the free flow of knowledge and information.

"The petroleum industry was arguably the first 'global industry' more than a century ago. It is now an integral part of the new globalized world."

One transformation of the cultures of oil and gas companies involved globalization's spawning a new class of competitors: the state oil companies.

State-owned oil companies in 2000 dominated worldwide oil and gas reserves and benefited from the spread of technology to developing countries.

It was in large part the emergence of these giant new competitors in opening markets, coupled with the growing scarcity of opportunities in mature, low-cost areas, that led to the creation of the supermajors. E&P companies also had to compete with an expanding roster of privatized state oil companies.

As the dominance of US, Canada, and Europe-based oil and gas companies gave way to the newly privatized firms or restructured state firms in Russia, China, India, and South America, the transfer of technology to the developing world accelerated in a trend that in 2000 seemed likely to continue. By the same token, the pressure to fill the gap in qualified staff in the resurgent energy markets of the developed world meant unprecedented internationalization of oil and gas company personnel.

Multinational oil companies were likely increasingly to find themselves in the position of nonoperating partners, even to the point of acting essentially as service contractors in the quest for viable projects. At the same time, as the state entities gained clout, more of the traditional service-supply companies would find themselves partnered with state-owned enterprises, acting as facilitators of technology transfer and, in some instances, de facto operators.

These were humbling changes for the companies and personnel that had formed the bedrock of the global petroleum industry throughout the modern petroleum era. As competitive pressures intensified with the proliferation of new players in new corners of the world, however, new roles were inevitable.

Globalization increased competition wherever an oil and gas company operated because the desire for increased competition was one of the key drivers of competition—and new competition authorities, such as Brazil's National Petroleum Agency (ANP), were springing up to enforce the trend. The demonopolization of Brazil's state energy sector not only created a wealth of opportunities for foreign investors in that country's oil, gas, and power sectors, it also created a competitor in the form of state oil company Petroleos Brasileiro SA (Petrobras).

Rather than dig in its heels in opposition to Brazil's rapid demonopolization push and seek to hinder an aggressive effort by ANP to throw open Brazil's petroleum sector to private investment, Petrobras revitalized itself. The state company participated aggressively but without special advantage in Brazil's licensing rounds, eagerly sought multinational partners in newly available exploration and production opportunities, and took the initial steps toward a public listing of its stock. And its international upstream arm, Braspetro, launched a program of expansion of E&P investments abroad. This was part of its parent's overall plan to spend as much as $13 billion over 10 years to make Petrobras self-sufficient in oil.

With the emergence of strong new players around the world, globalization became a driver of the megamerger wave. It was the critical mass of such combinations that gave the new supermajors the global reach to lead and fund petroleum megaprojects around the world.

Another impact of globalization was the result of its uplift of developing economies: brightening prospects for natural gas markets worldwide. The push to deregulate energy markets placed competitive pressures on oil and gas prices and established an integration of energy commodities—notably electricity with gas. Natural gas and power demand growth together were riding the crest of the globalization wave in 2000, as surging third world economies coupled with environmental concerns expanded regional electricity grids fired by natural gas. Accordingly, BP estimated that international gas trade in 2000 was growing by 7-8%/year.

Social accountability

Globalization was doing more than boosting gas markets in 2000.

Globalization had its flip side: mounting pressure on companies' accountability to society and the environment.

Davies noted the corollary effect of globalization in corporate social actions.

"Any large company is required to behave and to be seen to be behaving acceptably by all its diverse stakeholders wherever it operates," he said. "It needs to be regarded as such at a local, national, and international level. Most companies would wish to operate in this manner instinctively.

"However, today, the free flow of information, especially through internet technologies, makes such behaviors a requirement. The challenge for companies is to ensure that all parties are aligned and that policies and actions are fully transparent."

Another BP official, James Krupka, general manager, competitor and industry analysis, contended that, in a globalized world where nations can compare companies, oil and gas firms must earn the right to work anywhere.

Addressing a meeting of the US Catholic Bishops' Conference in early 2001, Krupka said, "We are granted a license do what we are good at, which means attending to local relationships and progress. No multinational, however big, can afford to ignore the communities in which it operates. We believe business works best and that investments are most secure when they are founded on mutual advantage—when they bring something positive to everyone involved and when everyone has a stake in their success.

"How do companies respond to all of that, especially companies in the energy business? First, we recognize that we work in a global society where what happens in one part of the world will impact, or at least be visible, everywhere. This creates a special connection of all elements of our business that we sometimes describe as interconnectednessUWe also recognize the ticket to a positive impact from our business means investing in communitiesUFor business, this means creating wealth locally, transferring skills and technology, and creating jobs."

Many companies espoused similar views, but BP and Royal Dutch/Shell took pains to set themselves apart from other multinational oil and gas companies in embedding the concept of sustainable development throughout their corporate cultures. Both embarked on aggressive programs of investment in renewable resources, notably alternative energy, as part of that effort. (It was no coincidence that the corporate logo BP adopted in 2000 for "Beyond Petroleum" incorporated a symbol representing Helios, the Greek god of the sun.)

Companies coupled that commitment to renewable energy with a massive program of investment in natural gas.

As Jeroen van der Veer, president of Royal Dutch Petroleum Co. and vice-chairman of the Royal Dutch/Shell Group's managing directors, told a Cambridge Energy Research Associates' (CERA) energy conference in Houston in early 2001, "We are witnessing a historic shift from oil to natural gas and a growing business commitment to sustainable development."

By 2050, gas and renewable energy could provide half of the energy requirements among the most developed nations, he said.

Further demonstrating that commitment, Shell had been on the cutting edge of efforts to establish a methodology for quantifying its performance on sustainable development. It was the first major oil company to issue a separate annual report, in 1998, that kept score of its performance across a wide spectrum of environmental, social, and safety parameters.

Following its embarrassing debacles in the mid-1990s surrounding the attempted scuttling of the Brent spar in the deepwater Atlantic and Nigeria's execution of activists critical of the company's operations in that country, Shell undertook an initiative to focus on sustainable development. With its roots in outreach roundtables involving stakeholder groups and subsequent workshops with staff and consultants, Shell developed the Sustainable Development Management Framework (SDMF) to embed contributions to sustainable development in its decision-making.

This framework entailed:

• Identifying stakeholders, risks, and opportunities.
• Setting objectives.
• Defining strategies, targets, and plans.
• Taking action.
• Monitoring and measuring the results.
• Reporting performance.
• Incorporating learning.

Shell Managing Director Phil Watts, in a mid-2000 speech at England's Oxford University, said the SDMF started with management leadership offering a vision, defining aspirations, and providing supporting policies and systems. He also noted that the commitment was supported by the company's appraisal and reward systems.

But Watts dismissed any suggestion that such efforts amounted to mere corporate public relations and instead contended that they represented a key element of the giant company's business strategy.

"Talking about sustainable development may sound defensive to some in business—the preoccupations of a sunset industry. Our perspective is very different," he said. "Energy systems must evolve to meet changing needs and respond to environmental concerns, particularly the threat of global warming.

"Shell companies are contributing to this evolution, helping expand the use of clean, efficient gas; pursuing the possibilities of hydrogen for transportation and power; and building commercial renewable energy businesses."

Therein lay a genuine difference between the changing corporate cultures of BP and Shell and their counterparts. Both companies resigned from the Climate Coalition, a group of industrial associations opposed to the Kyoto Protocol on climate change. The moves were hailed by environmental lobby groups as a commitment by two of the world's biggest oil and gas companies to eventually disengage from the business of finding and developing fossil fuel resources.

But ExxonMobil, which had been in the forefront of industry criticism of the Kyoto Protocol, offered an outlook for continued robust growth in oil and gas demand during 2000-20.

Jon L. Thompson, president of ExxonMobil Exploration Co., unveiled the company's global oil and gas outlook at the Rio Oil & Gas Conference in Rio de Janeiro in late 2000.

Noting that the company's outlook "is not well-accepted in some circles" because it assumes that "the age of petroleum is far from over," Thompson said his company's internal supply-demand forecast called for oil to essentially maintain its share of the energy mix, while natural gas increased its share at the expense of coal. The category dubbed "Other," covering biomass, renewables, hydro, and the like, would see the slowest relative demand growth at only 1%/year.

This pointed to a sharp differentiation on Kyoto and renewable energy between the US-based oil and gas companies and their counterparts in Europe that was likely to grow. A possible explanation for the apparent rift was the foothold that "green" factions had developed in European politics, a phenomenon not nearly so strong in the US.

Kyoto thus seemed destined to remain a sharp dividing line between the respective corporate cultures of US and European petroleum companies.

Shrinking institutional knowledge

In 2000, oil and gas companies faced a crisis largely of their own making: disappearing institutional knowledge in tandem with the shrinking pool of qualified personnel.

During 1982-2000, more than 60% of the US petroleum industry's peak workforce—about 1 million employees—left the business because of mergers and cost-cutting. Much of the losses resulted from outsourcing, which some in the industry thought had gone too far.

Vittorio Mincato, CEO of Italy's ENI SPA, told the CERA Houston conference that the oil and gas industry lost its "frontier spirit" in the 1990s "when it ceded too much to the outsourcing theorists and too readily eliminated people with specialized abilities" in engineering and project management.

"In an industry as unique as ours, even today, project management, technological ability, and financial strength cannot be disassociated from geopolitical sensibilities, cultural adaptability, and global vision. The importance of adequately trained human resources is a must," he said.

Not only was there a dearth of qualified personnel in the industry in 2000, but survivors constituted a pool of talent that had never been older. According to the Department of Labor, about two thirds of oil and gas industry workers in the US in 1999 were aged 35-54.

To ensure that the talent pool was replaced and that remaining institutional knowledge was not lost, oil and gas companies were trying to recruit, train, and retain employees. It wasn't easy, with the reputation the industry had earned for volatility and cycles of massive layoffs. So even in an up-cycle market in 2000, personnel limitations reined companies' ambitious oil and gas E&P spending plans—perhaps contributing to market tightness.

"Knowledge management" (KM) became a buzzword in the petroleum industry, but many observers believed the key to success in the new corporate culture was finding ways to preserve and spread the vast human "databank" of institutional knowledge that had sustained the industry for 2 decades. KM also was intended to find ways to leverage the value of the knowledge in oil and gas companies.

One example was BP's Group Induction Program (GIP), aimed at bolstering the role of new recruits in the organization. The program targeted college graduates with 2-5 years of experience in BP and attempted to create a growing network of talented and ambitious employees aspiring to some form of leadership within the company. It entailed an intensive, interactive 2-week training course held six times a year in the UK, US, Singapore, Malaysia, Australia, and South Africa. Taking about 24 participants, the course introduced paricipants to broader group strategies and perspectives, facilitated cross-business learning and networking, and based the learning format on personal experience rather than on lectures.

A GIP course covered all BP businesses—upstream, downstream, and chemicals—and combined team exercises, site visits, and question-and-answer sessions with operations staff and senior management, and discussions with specialists in local and international subjects.

Internet's role

At every level, from corporate governance to individual work styles, nothing else would have more impact on oil and gas company cultures than the explosion of information technology (IT) and the internet.

IT advances facilitated the rise of integrated team management of projects in the upstream sector, which revolutionized the business and changed corporate cultures of oil and gas companies by doing away with the "assembly line" approach to E&P projects. Coupled with the internet's limitless scope, IT-powered integrated team approaches proliferated and helped companies boost efficiencies, reduce downtime, cut costs, and plan everything from seismic surveys to individual well sidetracks to multiple-platform offshore field developments.

IT also fostered the preservation and dissemination of institutional knowledge and optimized individual and team work flows in ways that in 2000 were only beginning to be recognized.

An important offshoot was electronic commerce, which some said was already remolding the culture of the upstream oil and gas industry.

Especially in 1999-2000, the oil and gas industry sought ways to leverage the power of the internet to streamline decision-making and commercial transactions. To that end, a host of new business-to-business (B2B) partnerships appeared.

What began as a flurry of start-ups of electronic procurement marketplaces that matched buyer and seller evolved into a network of B2B links that enabled the most complicated transactions while managing vast amounts of data. Nothing else would go so far as to dramatically transform the upstream oil and gas industry's workflow processes.

E-commerce held the potential to provide the kind of step-change in oil and gas workflows that the explosion of computer technology and power helped bring about in cutting finding and lifting costs during the 1990s.

Banc of America Securities LLC thought that full application of e-commerce and other electronic business initiatives would slice 15% of costs out of the upstream oil and gas business.

This could lead someday to what Landmark Graphics Corp. Pres. and CEO Bob Peebler termed the capstone of integration: the "virtual" oil company. This might prove to be the most profound of all corporate culture changes in the petroleum industry, as oil companies shift their focus on E&P primarily to exploration and early exploitation while sevice and supply companies begin to take over the reins more on full development and production operations.

"Oil companies that attempt to do business in areas where the economies of knowledge are against them will have a built-in competitive disadvantage," Peebler said. "On the other hand, oil companies that leverage the expertise of their service providers by way of more-collaborative business models will gain the best of both centers of gravity."

Peebler contended that the virtual enterprise of the future would be more dynamic and sensitive to fine-tuning the business's operating parameters—including maximizing capital spending decisions by operating and service companies alike and optimizing the entire oil and gas value chain.

"This future world will be characterized by knowledge management and collaborative decision-making by way of virtual teams," Peebler said. "Virtual enterprises will be empowered by a willingness to do business in more-productive ways and by information technologies that elminate barriers between stakeholders and radically improve work processes."

No one in 2000 could say with certainty exactly how the internet revolution would change the corporate culture of the modern oil and gas company. But its influence on the corporate culture of oil and gas companies would be dramatic, significant, and pervasive.

Bob Williams is Executive Editor of Oil & Gas Journal and author of US Petroleum Strategies in the Decade of the Environment (PennWell Books, 1991).

Consultant and former PDVSA Pres. Luis Giusti

The emphasis in petroleum industry corporate culture is shifting from revenues to profits, from market share to volume share, from assets to people, from operations to customers, and, in general, from the inside to the outside. These changes reflect the search for a new business design, as in recent years, the performance of the oil sector and the energy sector in general has been lackluster compared with other industries.

Corporate culture key to oil, gas company profitability, growth, overall success

Having the right kind of corporate culture is one of the most important determinants of an oil and gas company's profitability, growth, and overall success.

The rewards for adopting a constructive company culture most often include improved internal processes, reduced operational costs, and increased sales and market share, contended Gerry Clarke, president of Human Synergistics International (HIS), Plymouth, Mass.

Culture categories

Clarke divided company cultures into three categories: constructive, passive-defensive, and aggressive-defensive.

The constructive, or adaptive, culture is the most desired, albeit the rarest, Clarke said.

"It is typified by an achievement motive in which individuals believe their efforts make a difference. It is an environment where creativity is rewarded, where employees continually learn, grow, and develop. It has a social base in which individuals genuinely enjoy working with each other."

If a company has a passive-defensive culture, management will find it difficult to move forward with new products and services, let alone existing ones, Clarke said. "That's because this culture is filled with dissatisfaction that leads employees to channel their energies toward identifying ways to avoid work. Extended breaks, tardiness, numerous sick days typify this culture.

"Finding themselves in a work environment in which they must implement procedures created by others leaves them feeling little responsibility for their work."

In an aggressive-defensive culture, management puts its own interests above its key constituents, such as employees, stockholders, suppliers, and customers. In this situation, management encourages employees to approach tasks in forceful ways to protect their status and security, Clarke noted.

"Employees who seek assistance in this type of culture, admit shortcomings, or concede their position are viewed as weak or even incompetent," he said. "An aggressive-defensive culture encourages people to appear confident, in control and superior, even though they may lack the experience, knowledge, and attitude. The constant pressure to maintain that kind of facade comes at the expense of employee health, motivation, teamwork and customer service. The result is a very competitive, cutthroat environment.

"This environment is populated with people who maintain job security by keeping a knowledge base and not sharing it with others. Knowledge is power to them. Self-survival prevents them from cooperating with management in any meaningful way."

Changing culture

If an assessment of a company's culture reveals a nonconstructive culture bent, management needs to know the ramifications immediately, Clarke said, followed by a period of examining and working on changing culture.

"This can be painful, because it means close examination of top management's behavior that is filtering down the corporation and creating a nonconstructive cultureU"

The assessment should entail conducting an inventory of a cross-section of the company that essentially defines its culture. If found to be nonconstructive, a second assessment is conducted that ascertains norms and expectations—most notably clarifying what the company wants to become and what characteristics would comprise that new role. Other ways to change a company's culture include goal-setting, job design, motivation, interunit coordination, downward and upward communication, and quality.

The payoff

Developing a constructive culture can provide a big payoff. Clarke and his collaborators, in a book on the subject of changing corporate culture, tracked the financial indicators of 207 companies for 11 years, finding that constructive-culture companies returned 756% more in net income than companies with nonconstructive cultures, grew by 282% vs. 36%, enjoyed stock price increases of 901% vs. 74%, and boosted revenues 682% vs. 166%.

Clarke cited an example of a high-tech Fortune 50 company manufacturing plant that was losting $11 million/ year. HIS identified a nonconstructive culture that encouraged worker boredom, dissatisfaction, and work avoidance. After instituting process and culture changes over a 9-month span, cycle times fell by 68%, work-in-progress was cut by 38%, the backlog of scheduled orders fell to 91 from 2,100, and the plant posted a $24 million profit that year.