Utilizing the dynamic capabilities framework to capture opportunities and mitigate risk in the upstream oil and gas sector

Photo: Energy economist, Bismark Ameyaw

As Ghana is considered an emerging player in the oil and gas sector, the Petroleum Commission set up in 2011 was charged to regulate the upstream (exploration and production) industry after commercial production began in 2010.

Due to the strategic and effective regulatory policies implemented by the petroleum commission, many international companies like Aker Energy, Tullow Oil, Kosmos Energy, ENI, Springfield among others have established their presence in the upstream industry.

The upstream petroleum activities are composed of exploration, appraisal, determination of commerciality or relinquishment, and development/production stages. After a lease is obtained, exploration in the search for oil and gas takes effect. If found, the discovery necessitates development for drilling and extraction activities to take place. Drilling and extraction activities emerge when the resource is deemed viable to be commercially produced given current technological advances that allow the recovery of the cost of production and guarantees investor profit.

On an economic scale, as the company aims to maximize profit, Ghana will also want to ensure the maximization of revenues from its resources. Taking a clue from the far advanced countries, in some scenarios, there is an inaccurate nexus between the company’s profitability and revenue/royalties/taxes for the host nation.

However, it is worth noting that profitability always differs based on the geology, the use of technology, and the commodity price. Against this backdrop, although the petroleum commission continues to do exceptionally well in managing our upstream petroleum activities, the capturing of opportunities and the mitigation of risk in the upstream sector is a continuous process that demands attention from stakeholders in the oil and gas industry.

In an attempt to contribute my quota in managing upstream petroleum activities as an energy economist, the Dynamic Capabilities Framework (DCF) comes to play. The DCF was initially developed to improve the strategic agility in high-tech firms operating in a somewhat highly volatile market.

For companies operating in a more volatile market like the oil and gas industry, strategizing may not always be long-term because market and technological uncertainty require constant refocusing for the firm or commission to remain relevant. Therefore, to strategically man-up activities in the oil and gas industry, dynamic capabilities that support technological, organizational, operational, and business model innovations are essential.

Today, DCF is widely an accepted approach that captures opportunities and mitigates strategic risks in upstream oil and gas Exploration and Production (E&P). Managers with key strategic decision-making responsibilities employ this strategy to maintain sustainable value, to enhance safety and profitably, to increase reserves and production to meet the company’s share of the world’s energy needs and to maintain or advance a commissions competitive position. Therefore, this article delves deeper into how the DCF can be adopted and implemented by stakeholders to capture opportunities and meet the considerable challenges created by recent changes in the oil and gas industry.

In explicating the DCF approach, four key factors are highlighted to have triggered a climacteric for upstream oil and gas entities. These factors are listed and explained below.

Judging by the Reserve Replacement Ratio (RRR)

In one of my most recent journal manuscripts, I developed a framework for long-term energy demand and production forecasts for the oil and gas sector to the year 2050. In my analyses, I realized that Ghana’s consumption saw an increase of 23% against the base year consumption level. As consumption and production increases, investors use the RRR to measure the operating performance of an E&P company

Two options form a significant basis for improving RRR. First, reserves can be increased through acquisition strategies; purchasing proven reserves. Second, reserves can be increased through organic strategies, including partnerships that support the continued discovery of new resources. To expand reserves, key emphasis should be placed on dynamic capabilities.

The dynamic capability approach addresses some important exigencies such as the rapid integration of acquisitions; achieving efficiencies, quality, and safety; the ability to more effectively predict volumes and the subsurface reality (risk); the rapid deployment of technology, and people into potentially hostile environments.

 Ubiquitous learning for unconventional strategies

The scarcity of hydrocarbons has emanated the need to invest in unconventional oil and gas to augment RRR. A more unconventional approach is focusing on shale plays yielding natural gas, NGLs, gas condensates, and crude oil. Moving towards an unconventional approach necessitates the development and application of new technologies and new processes in new geographies. Attempting to invest in unconventional strategies allows managers to confront considerable challenges and better opportunities. This requires organizational change, learning, and a different set of managerial priorities.

Managing the human resource strategy

A fundamental challenge for most entities in the oil and gas industry is how to effectively manage a cluster of human resource activities that provide employees doing the right task in the right role with the right people at the right place and with the right supervision. Deficiencies in the ways people are managed, alone, and in their interactions, can undermine value creation, production, create disasters, and demolish a strategy. There should exist a dynamic capability that empowers employees strategic lead to better management of activities inside and outside the organization that recruits, train, and retain the talent required to create value.

Managing health, safety, security, and environmental risks

The management of health, safety, security, and environmental risk need significant attention and numerous asset orchestration activities in the wider business ecosystem. Management styles in most situations differ from other kinds of managing regulatory or compliance risk where point-of-risk solutions may be seemingly accurate. Since the management of this risk is somehow complex, involving partners of which key operations are outsourced requires the development and application of a comprehensive, systemic, cultural, and strategic capability by firms seeking longer-term survival, growth, and prosperity. This development and application procedure is important because, in the upstream oil and gas industry, the impact of risk simultaneously affect several drivers of economic value, not just for one company but for all E&P companies.

In conclusion, the DCF has evolved from an undergird agility in high-velocity markets, to a comprehensive strategic framework relevant for upstream oil and gas entities as they capture opportunities and mitigate risk in an ever-changing business ecosystem. Sturdier and robust dynamic capabilities can sharpen strategic agility and are the key to seizing and profiting from opportunities in the new business environment. Dynamic capabilities certainly empower upstream strategy.

The writer is an energy economist, data scientist, and policy analyst. Email: [email protected]

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