Break your business CIA style

So Ian Stewart at Deloitte comes to my rescue today with a pointer to an excellent piece of research.

During the Second World War the CIA published a how-to-guide for citizen saboteurs living in occupied countries. Among various ways to disrupt machinery etc. were some excellent examples of how people were advised to prevent the smooth running of business and stopping progress. Many of the pieces of advice remind me of the practices I have witnessed first-hand being business as usual at oil and gas operators.

Including advice for Strategic Management:

(1): Insist on doing everything through “channels”. Never permit short-cuts to be taken in order to expedite decisions.

(2): Make “speeches”. Talk as frequently as possible and at great length. Illustrate your “points” by long anecdotes and accounts of personal experiences. Never hesitate to make a few appropriate “patriotic” comments.

(3): When possible, refer all matters to committees, for “further study and consideration”. Attempt to make the committees as large as possible – never less than five.

…..

(5): Haggle of precise wordings of communications, minutes and resolutions.

….

(7): Advocate “caution”. Be “reasonable” and urge fellow conferees to be” reasonable” and advoid haste which might result in embarrassments or difficulties later on.

And Advice for Operations

(1): Demand written orders

….

(4): Don’t order new materials until your current stocks have been virtually exhausted, so that the slightest delay in filling your order will mean a shutdown.

(5): Order high quality materials which are hard to get. If you don’t get them argue about it. Warn that inferior materials will mean inferior work.

….

See more and gasp in admiration of the foresight here: [Link] – the full manual is available direct from the CIA here: [Link]

Working Hours Vary by Country

An interesting update came my way today courtesy of the Deloitte Monday briefing from Ian Stewart.  In my post about starting your own consultancy  [Link] I said that a consultancy would normally expect you to account for 2000 hours a year.  Below are some of the average worker stats by country. Just interesting I thought, I must work too hard !

In 2014 the average Mexican worker put in 2,228 hours, equivalent to a 43-hour working week with no holidays. The average German worked 1,371 hours in 2014, 39% less than the average Mexican. French workers worked 1,473 hours. Contrary to popular perceptions, Greece features among the countries where people work long hours (2,042 hours). By-and-large people in nations with higher levels of productivity work fewer hours, enabling Germans – who have among the highest productivity in the world – to produce more in a relatively short working week.

Collaboration reduces costs?

There has been a lot of hand-wringing around collaboration recently. For instance Paul Goodfellow Manager of UK Upstream at Shell said companies working in the North Sea need to learn from other industries on how to work together [Link]. Quite which industries he is talking about I’m not sure, also I am not sure what type of collaboration he’s looking for.

Worryingly for me there seems to be a focus on input costs. For instance one quote in the article stands out: “work with the supply chain on how to collaborate and get common purpose whilst driving waste from the system and driving unit costs down”.

When I analyse situations like this with clients I encourage them to take a view on both industry and supply chain, and be clear about the distinction. In Shell’s case their industry consists of other oil and gas operators. MMO companies, Scaffolding providers, helicopter operators and a myriad of other companies are part of the supply chain. They belong their own set of industries. Of course many companies supply services in more than one industry – so I need to consider them both in relation to their “competitors” and their own internal structure.

Here are three ways that cost can be removed:

  1. Industry collaboration between operators – to increase standardisation or share resources
  2. Adoption of new technology and methods
  3. Drive new processes to reduce unnecessary steps

These actions can increase efficiency which I define as the ratio of units of output to units of input. Assuming that output remains constant then efficiency comes from reducing system costs by removing labour or materials. This will increase the profit available for distribution among companies within the supply chain.

Reducing costs within the supply chain does not necessarily mean that Shell will see their input prices reduce – the location in the value-chain where profits are captured is subject to other factors. One model to explain how profit is captured was described by Michael Porter [Link]. Supply chain collaboration is, of course, important to organisations such as Achilles backed by my friends at Hg Capital [Link]. They set out some of their views on the issue here [Link].

In a commodity industry – like crude Oil and Gas production – there is little that producers such as Shell can do to change the selling price of their product (of course OPEC might have a different opinion [Link]). To protect profits producers need to reduce cost. At the moment operators seem to be forming committees to squeeze the supply chain. They are also laying off employees to cut overhead. I don’t see any action from Operators to collaborate with each other to reduce their own structural costs. Claims that they are seem to be a joint-ganging-up to encourage the supply chain to collaborate and reduce prices. That’s different.

Oil and Gas UK have stated that the North Sea needs to reduce costs by 40% within 5 Years or face very tough times indeed. Stephen Marcos Jones, Oil & Gas UK’s business development director, said: “Companies are having to make tough decisions on their capacity during the downturn and are individually taking measures to improve efficiency. However, co-operative working across the industry … can also help deliver the cost and efficiency improvements required to secure a long-term future for the UKCS.” [Link]

This quote from the Shell article highlights the inefficiency in buying within a single operator:

One very enterprising supplier came forward and said we’ve got a great piece of quick erecting scaffolding, but we don’t understand why you haven’t been picking it up. The reason was because they were trying to work at various front-line levels of the organisation and it wasn’t important to one individual, because they didn’t know the totality of what we were spending on that service. When they came in through the strategic contracting team and demonstrated to the facility managers and made the decision there and then and we’re in the process of deploying it across every facility and rig we have in the UK sector.”

I feel this is an example of an operator missing new technologies due to their internal bureaucracy and inefficiency. My clients can tell me about literally hundreds of examples of this type of behaviour. The reality of course is more complex. When I ran the technology investment process at a major operator I found that the cost (and risk) of scaled change was such that it can easily outweigh the demonstrable benefits delivered from a new technology. Therefore this type of change can be slow and the results can be counter intuitive.

So in summary to drive out costs we must answer the following:

  1. What time scale and magnitude do we need to work to (some are long-term structural and will take many years to deliver, other are tactical and can reduce Op-Costs quickly)
  2. What can we do to reduce the cost within the supply chain, and how will we ensure that those costs flow to the prices we are charged?
  3. What can we do to reduce costs within our industry by collaboration and standardisation
  4. What can we do to reduce our individual costs by simplifying what we do, eliminate unneeded activity and increase work-rates?

Of course, as you would expect, the professional services firms have opinions on this. Their approach and advice is nuanced and reflects many of the same themes. Some of what they are thinking can be found here: PWC [Link], Deloitte [Link] and [Link], EY [Link], Bain [Link] and KPMG [Link].

Incidentally the word-cloud image at the top of this post contains many of the words I’d expect to elicit from a group of oil executives. It comes from VOTE – an organisation based in New Orleans – the Voice of the Ex-Offender. It is a grassroots, membership based organization founded and run by Formerly Incarcerated Persons (FIPs) in partnership with allies dedicated to ending the disenfranchisement and discrimination against of FIPs. [Link]. Goes to show that many of the issues that surround collaboration are human ones and not things specific to our industry.

Want to be a consultant?

Introduction

A bit of a topic departure today, rather than write about the Oil and Gas industry I thought I would share some more insights about how I work and why I do it this way – I intend to expand on this topic in future articles. This is quite a long article but there are a lot of points to introduce, so please stick with me. Please let me know what you think either by commenting here or emailing me directly.

So you want to be a consultant, do you?

I have been an independent consultant and an entrepreneur for around 7 years on-and-off and I find that, while  It’s not perfect it works for me.

Many people are curious about what I do, and often will tell me that they are considering becoming an independent consultant. The next question is normally “what’s it like” or “why do you do it?” Most of the people who ask me are disappointed with the position they find themselves in. Many are employees who feel frustrated with their role, some are disillusioned senior staff or partners in consulting firms. Increasingly I get the question from friends in the Oil and Gas industry who feel that their jobs are at risk, or are already seeking new opportunities.

Well the short answer is that a career as an independent consultant is not for everyone. There are some questions that I recommend exploring to see if it’s for you:

  • What’s motivating your research?
  • Is the world of work changing?
  • What is a consultant, really?
  • What skills are needed to be make a living?
  • What will it be like?
  • What does success look like for you?

What’s motivating your research?

If your questions are only from curiosity that’s great – but if you don’t want to become a consultant (or a client) please consider that time is my product. If you are considering becoming one then here is something to consider:

I don’t have a wage, I essentially sell my time. There are 8500 hours in a year. I’ll be asleep for 3000 of them and I’ll spend 1,500, eating, buying groceries, showering, driving places, doing laundry and generally faffing about. That gives me 4000 hours to do things that really matter to me (including work). Traditional consulting firms expect you to account for 2000 billable hours. (They do this because that’s what they have bought this from you in return for a wage).

So if it’s just curiosity that makes you ask about consulting then perhaps we’re wasting time that we could do something more interesting together with instead – like go for a cycle, cook dinner or swap stories.

If, however, you’re seriously interested in this and we enjoy each other’s company then I am delighted spend time with you.

My first advice is – that if you are considering independent consulting as a “stop-gap” until something else comes along – you’d be better looking for a contract position (see later) and spend time tracking down what you really want instead. Consulting is hard and time consuming. It is a profession and requires dedication and a willingness to hone your craft. Don’t start unless you really want to make it work.

Is the world of work changing?

Well of course it is. It always changes. When was the last time you saw a typing pool or an elevator operator. Perhaps this time it really is fundamentally different. I don’t know.

There’s this phenomenon called confirmation bias. This refers to our tendency to instinctively seek out information that supports our view of the world rather than challenge it. You will have experienced comments like “It’s not only me that thinks this – look so does [fill in name of authority figure here]”. So while risking confirmation bias, here are number of articles that I’ve read, most recently in the Economist, exploring how the world of work and how the idea of a company may be changing. Lynda Gratton writes a lot about this and so does Charles Handy and Rob Goffee. My favourite book of the last couple of years “The Second Machine Age” has some views on this too.

But there is a counter argument – if you are building and operating large capital assets then a freelance model is unlikely to work. For some people the psychological strain (not to mention the difficulty in getting a mortgage these days) means they’d rather be an employee. Some people really want someone else to order their day for them. Too much choice in what to do in a day can be overwhelming just as too much choice in a super market can be. Joining a company can (if it is a well-run one) be a way to minimise the decisions needed. Limiting them to just the ones that matter for a role adds clarity. Often an employee can go home at 5 O’Clock. Top that off with an argument around public participation in stock markets that really require a joint enterprise to function, then I think we’re seeing a rise of alternatives not a wholesale destruction of the traditional company and place of work.

In short then – there will be plenty of “jobs” available if you want one, and you can convince someone to choose you to do it. You don’t have to be independent – but, if you choose to be – things have never been better. I am also often approached by organisations claiming that they are “Disrupting the consulting model” and would like me to be part of their new model, in a networked mode I have nothing against this but I don’t go exclusive and certainly am not willing to sell my time as an employee of one.

What is a consultant really?

In my simple view of the world (short of winning the lottery) there are only three ways to make an income. I don’t know about you, but I need an income, so here are the methods I know of.

  1. Own shares in a business or other income producing asset
  2. Lend money to someone who then pays you back with interest
  3. Sell your endeavours by becoming:
    1. an employee;
    2. a contractor;
    3. a freelancer; or
    4. a consultant

I’m only going to deal with 3.

Employees’ time is sold by contract by their employer. Employees do as they are told and the fruits of their labour are owned by their employer. Often banned from working for other people, they can be expected to be loyal to their employer. They may have security of tenure for the length of their notice period and there are laws that stipulate fairness in their treatment.

Contractors are more convenient employees. Hired on a fixed-period basis, usually to fill a temporary gap or provide additional short-term labour. Staffing agencies help broker deals and some consulting companies will hire in temporary contract workers as a way to deliver projects that require additional resources. Tend to work for only one customer at a time. Responsible for making own arrangements and sorting out the interface with the government. Contractors normally assigned specific work to undertake and will have some relationship to line management.

Freelancers undertake specialist work in which they are experts. Tend to deliver a specific piece of work and under their own direction, often building on their prior work. Ownership of output is negotiable, tend to work for more than one client at any one time. Tend not to work under the management control from their clients.

An independent consultant never takes a line-role, and does not perform tasks that should be taken care of within the line. Work is more complex and consists of being paid for opinions, advice and influence. Results through influence (internal and external) and not control. Success comes from coaching an organisation to perform better by itself after you are gone. Work is transitory and comes to a natural conclusion once you are successful –don’t get too attached to a client or expect to stay. It’s worth noting that an independent consultant is not an employee of a firm – in this case income of the firm may be generated from consulting-like activities but he “consultant’s” income won’ be.

What skills are needed to make a living?

Consultants need to achieve results through influence. That means you need to build opportunities and develop the skills to add value for your client.

Creating opportunity relies on building a powerful network, the ability to identify opportunities to help and the wherewithal to generate an invitation to help on a commercial basis.

Influencing relies on persuasion, establishing trust and the ability to work outside normal line management constraints.

In addition to client-facings skills there is an important set of internally focussed skills which relate to structuring your work, maintaining motivation, developing new skills and coping with the psychological pressure of the independent consultant life-style.

I find that the most important action for me is to spend my time with people who make a positive difference. People who create time for me, and people who energise me. This relies on a skill of knowing who these people are and the inner strength to maintain discipline in who I choose to spend time with.

What will it be like?

In short it will be a roller-coaster. The greatest highs and the greatest lows of your working life can be found in this approach. What successful consultants find is that – though they cannot control many of the circumstances in which they operate – they can influence them and they can control their reaction to them. It’s a subtle distinction bear it in mind and it will continue to make more and more sense as your consulting career develops.

What does success look like for you?

This is the most complex of all. Knowing what success is for you – is it to spend more time with your family, to do more cycling (a favourite of mine at the moment), to think deep thoughts, to live in a location you select, choose how much you travel and to where. In short will money make you happy, or will being happy make you money [Link]?

This is complex because as an employee it is a question rarely asked, so you may have little experience answering it. Employees tend to be told what good looks like and rewarded with money, perks or praise when they achieve it (I realise that often the goal-reward structure is misaligned in some companies, but that’s how it should work). As an employee you are, by definition, not meant to consider what time you commit to activities. You are expected to apply your time effectively to the goals of your employer. If you are senior you are expected to spend your time thinking of goals that your employer should consider and then direct others to achieve those that were selected. In none of the normal employee situations is your working identity explicitly tied to your own personal goals.

One exercise I undertake with people who are considering a change is to point them to the definition of wealth proffered by Buckminster Fuller, and then ask them what they would do if money were not a constraint. Start from there and define your own definition of success – until you have it you can’t value anything and therefore you can’t price your work in a meaningful way.

Private Equity Buying O&G Assets

With the INEOS deal completing I cast my mind back to 2014. It was rumoured then that over 75% of North Sea assets were for sale, but questions around ability to shoulder decommissioning liabilities and inability to agree on an oil price stifled deal making. Prices are depressed but major operators wish to raise cash and stifle outflows the interest for private equity investment is increasing. Managers such as Bluewater Energy [Link], Riverstone[Link] and many others are said to be considering deals.

The Financial times reports that this month’s redetermination of reserves in relation to asset-based lending is unlikely to cause havoc [Link] but it may accelerate deal making.

I recently asked a senior partner at a well-known advisory firm what he thought would be different with private equity arriving. He pointed out that the PE players backed management teams – such as Siccar Point, Fairfield and others. He thought that these management teams might be surprised about the amount of data and “proof-points” that the PE backers would require, he also reflected that some management teams would be used to working within large corporates with in-house teams they can mobilise. They will now have to find providers they can trust and who are credible in-front of investors.

The known model of exploration and farm-down during development is now giving way to a new world where valuations are determined using a DCF model and a decommissioning cost. There are no proven rules-of-thumb here now. This means that investors are more cautious doing deals in this context than before. It does appear odd that in a business known for taking investment risk on exploration there is almost no appetite for assuming risk or unknown in this investment stage.

Another advisor at a large accountancy firm noted that very few companies operating in the North Sea were likely to make a profit any time soon (not only because of tough trading conditions, but also because they have various offsets and other tax-shields). This means that decommissioning offsets and other tax-carry forwards are of little interest to them – this might suggest that either a change in the rules is required or that sale to a profitable entity could provide differential value and hence facilitate win-win deals.

Shell recently announced its opinion that oil prices may spike upwards soon [Link], that may be music to the ears of financial buyers. If this is the start of deal-making season it will be interesting to see who the players looking at acquiring assets are. Will it be PE backed new Co’s, will it be established late-life operators like Enquest, or will assets be acquired into existing profitable entities to enable tax optimisation.

INEOS, Small Fields, Politics and Tie-backs

Political intervention can swing both ways.  Political intervention in the L1 acquisition of DEA assets has enabled the INEOS deal announced today [Link]. This sees Jim Ratcliffe enter into the Upstream business with an opportunistic deal to buy assets reluctantly removed from the DEA portfolio [Link]. INEOS previously looked to be moving into shale developments in Scotland [Link] – the logic of vertical integration to supply his other assets is compelling. The shale move was stalled by the Scottish Government [Link]. Plus Ca Change, Plus C’est la meme chose as they say in the French Speaking regions around Lake Geneva where Jim’s HQ is located.

Perhaps Jim may consider lending his political influence to influence the debate over offshore developments – an area which is controlled by the UK goverment not the whims of the Scottish Parliament.

Perhaps he will point out the difficulty faced by new developments of  a small offshore oil-field which must find a way to process and transport the fluids to where they can be used. One way is to hook up to old platforms – many of which are now operating below their design capacity. As fields age production rates decline and this means platforms and pipelines built to support them become underutilised.

However, oil price declines means pressure has mounted to decommission the infrastructure that supports some of this production in the North Sea. For example Alex Mitchel [Link] says that he believes that the current fundamentals will lead to significant growth in decommissioning activity on the UKCS. He adds that operators are under increasing pressure to reduce exposure to high-cost regions, and remove decommissioning liabilities from balance sheets. Without traditional sale routes, operators will increasingly make strategic decisions to push forward with asset decommissioning. Advantages for first movers are evident, with the opportunity to avoid constraints in the supply chain, and take advantage of suppressed rig rates for P&A.

I asked a member of the Bestem Network who negotiated the commercial terms of some of the recent marginal developments what he thought. He told me that an FPSO option is often chosen not because it’s best, but because it increases control and reduces uncertainty. Tie-backs would be better but the modest initial tariffs can quickly change to become uncontrollable cost-sharing agreements.

FPSO’s require a certain volume to work effectively so they will inevitably not drain fields as fully as other options. Other fields will never produce enough to make an FPSO a viable option.

Once key infrastructure is gone, it is gone for ever. It will never be replaced. We have to act now if we are going to save this national asset.

Tax relief is not the answer – subsidy might be

As I was driving to Aberdeen last week I wondered what would happen if I considered the export and processing infrastructure in the North Sea was a road network on land.

Why would anyone build a factory in a remote area if they did not have access to roads? The same could be said of remote field developments that hook back into export and distribution systems.

Taking the analogy further, what if there was a road outside your proposed factory but it only led to the M6 Toll Motorway. What if that toll booth could raise its prices whenever it liked and there’s nothing you could do? What if sometimes when you turned up at the toll-booth it was broken, and no-one knew how long it would take to fix. What if, one day, you received a letter to say that they were digging up the motorway and restoring the land back to farming?

As a business man, I would find that unacceptable. I’d be a fool to build my factory at that location. And that, friends, is the situation we have currently have in the UK North Sea.

Not only is that the situation but – because oil prices are down – the probability of bad things happening has increased. Despite this Oil voice reports that MPs do not favour support of the oil and gas industry [Link] their report says that:

‘Tax reliefs and allowances can never fully offset the operational challenges posed by the falling oil price […] Whilst the majority of Government MPs appear to have made up their mind about their position, the latest developments could prompt a rethink. There is a potential opportunity for the industry to engage with undecided Labour MPs to make the case for additional support at this challenging time.’

I agree with the position that this is not about Tax relief. To address this will require restructuring the way that the industry operates. If not outright nationalisation of parts of the network, this – at least – requires more control and probably limited subsidies. For goodness sake – we subsidise the tracks that our trains run on, I can’t see any argument for the creation of economic value there that does not apply to our North Sea processing and export network.

When I talked about this at a networking event, an experienced member of the Bestem Network informed me that decommissioning must be sanctioned by the government. So, in a sense, because you need to apply for permission the assets are indirectly controlled by the government. But, as he then said, there are really no sanctions if you fail to operate assets productively or if they’re closed for maintenance. And, apparently, declaring a safety critical event before shutting in is something no-one has the balls to question. Apparently there is a voluntary “infrastructure code of conduct” [Link] that defines principles for access to other companies infrastructure but how effective this is in practice is something some members of the Bestem Network question.

The oil industry is in a down cycle – now is the time to be investing as a nation to maintain the capability to produce.

I am sure there are macro-economic arguments regarding the value of extracting assets under our control for any price (including opportunity costs for displaced workers and spending within the economy) vs. the export of national treasure in exchange for the import of similar from overseas. I am not qualified to make those arguments – if you are, please comment.