Making agile work in the upstream business

If you are familiar with Agile, then you know that it isn’t a framework like Scrum or SAFe. It’s more focused on values and principles. In that regard, it’s less about shifting processes and more about shifting mindsets. Rather than focusing on “left-brained,” logical tasks, the Agile mindset zooms into the “right-brained,” emotional/social aspects of change. So, what mindset shift(s) need to occur to enhance upstream business agility?

With practical steps for implementation, I believe these three shifts can help upstream companies step-change their way forward during and after today’s uncertainty.

Volume to Value

The oil and gas industry has been focused on volume growth for a century. A company could increase output by roughly 3 to 5 percent annually and be confident that global demand would keep pace. But producing towards volume targets doesn’t allow for the nimbleness needed in today’s volatile, uncertain, complex, and ambiguous (VUCA) environment. As supply and demand shocks continue to roil the industry, pivoting to a value-based mindset is key.

This means that upstream companies need to shift their focus from producing to recalibrating production profiles and maximizing margins as fluctuations occur. Fluctuations can be seen in things like “takeaway capacity,” where the ability to transport hydrocarbons is limited due to infrastructure and/or logistics constraints, or refinery demand for various and sundry lubricants/fuels. By focusing on which levers to pull (and when) to optimize profit, upstream companies can move closer to business agility.

Silos to Symbiosis

It’s no secret that functional silos are inherently independent. They were designed to be. And they’ve worked well in the Industrial Era, facilitating hierarchical organizations’ abilities to develop deep pockets of expertise.

Upstream companies should shift their mindsets to consider the advantages of a more entrepreneurial, dual operating system. That sort of system would allow them to tap pockets of expertise that are needed company-wide.

By shifting their mindset from silo-focused to value-stream-focused, companies can start to think about the people in their organization as symbiotic partners, all working toward the same goal. This does not only include support functions like HR, finance, supply chain, or IT. For upstream players, specifically, it’s easy to take the value-stream mapping leap and start identifying how to break down silos.

This reflects a more tactical way of implementing a change. But it all starts with a mindset shift. Without the desire to break down silos to deliver higher-level, end-to-end value chain products, there’s no reason to carry out this exercise. Business agility can only happen if leaders push work to their people rather than people to the work.

Fixed to Flexible

The last item is all about variable OPEX spending. CAPEX (in general) is spent on one-time investments in the business, as well as associated maintenance fees. Project managers amortize and depreciate over time and hope to get a long useful life from their investment. CAPEX is helpful for long-term forecasting and stability.

OPEX (in general) is spent on the day-to-day running of the business. The expense is fully tax-deductible and will generally increase profit margins. OPEX is helpful for flexibility and agility since it allows a point-in-time payment and then the opportunity to shift to something else, if needed.

In IT, the old world saw a lot of CAPEX spending for servers, printers, cooling systems, etc. The resulting physical data centers were often under-utilized, over-staffed, and became a haven for ramping delays. Moving to the cloud and spending OPEX mitigates these risks. You pay as you go for the capacity you need. You don’t directly hire people to manage the infrastructure. And you can spin up environments in minutes.

How does this apply to upstream? Again, focusing on the mindset shift from CAPEX to OPEX and coming up with creative ways to build that flexibility into upstream spend is key. Some options could include:

• Focusing on a well with good economics, but bottle-necked on takeaway capacity
• Reprioritizing contract negotiations with midstream partners
• Moving toward an activity-based allocation of infrastructure costs
• Taking margin-based operational views (artificial intelligence-forecasted variable costs) for real-time contribution margin calculation