Oil and natural gas touch our lives in countless ways every day. Together, they supply more than 60 percent of our nation’s energy. They fuel our cars, heat our homes and cook our food. But did you know that oil and natural gas also help generate the electricity that powers our daily lives? Or that crude oil supplies the building blocks for everything from dent-resistant car fenders to soft drink bottles to camping equipment? The oil and gas is truly a global industry. But with time this industry is finding various difficulties in sustaining to its fullest. Yes, it is amidst crisis. The present business environment has posed enormous challenges to the management of businesses in this industry. The basic problems are:• Workforce challenges • Effect of global recession • Cultural challenges


WORKFORCE CHALLENGES The workforce challenges faced by the oil and gas industry are well documented and a frequent topic of discussion both within and outside of industry circles. They include an aging global population with many experienced employees recently retired or planning soon to do so, fewer new engineers seeking jobs in the industry, and a geographic shift in where employees are needed. In describing the scope of the workforce shortage in their industry, most of the oil and gas HR executives surveyed acknowledged difficulties in recruiting executives, management personnel, and, especially, engineers. In fact, more than one-quarter of the executives found it “extremely difficult” to hire qualified engineers. The effects of the shortage of qualified workers have begun to ripple throughout the oil and gas industry. More than half of the executives surveyed feel the talent void could affect corporate growth as a result of an inability to staff projects. Workforce shortages can affect many other aspects of corporate performance. When a workforce is stretched thin, there are fewer resources available for research and development. Forty percent of the HR executives thought the talent void could hamper innovation. Another 40% cited concern that this industry issue could negatively affect safety and operations.

According to the findings, the greatest threat to recruiting and retention is industry competition. Respondents ranked competition from peer companies an eight out of 10, with 10 representing a major challenge. Also nearly unanimous was the industry’s response to the problem of increased compensation. Almost half of the HR executives worried that rising labor costs would pose problems for the financial performance of their companies. Although the issue of compensation is important, survey results show there is a real opportunity to do something different, stand out from the competition, lure new recruits, and create loyalty among existing employees. The first company with a unique, step-out strategy could position itself as the leader in a highly competitive recruiting and retention environment.


As the global economy resets nervously, the only certainty is that crude oil prices will remain volatile. After dipping to a low $33/barrel last December, oil prices strengthened dramatically in the second quarter of 2009, peaking at just over $73/barrel in June-faster than many in the industry expected. While higher prices led to much lower but still reasonable earnings in the first six months of 2009, oil companies have cause for concern: if prices rise too fast they could slow the global recovery and stall progress on resetting industry costs. In addition, they face hard investment decisions. On the one hand, they must continue to cut costs without compromising on important areas like maintenance, technology and people development. On the other, they must invest in large-scale capital projects to replace declining assets and increase future revenue growth. The scale and scope of the 2008-2009 global recessions has already affected some projects. In the US, drilling activity has dropped rapidly in Texas and Louisiana. In unconventional Oil & Gas exploration, areas such as tight natural gas extraction and shale oil production remain depressed, and gas prices continue to show signs of decoupling from the trend in oil prices. The stalling of some expansion plans in conventional Oil & Gas and the slowdown in the hunt for new reserves could mean that oil production capacity declines from historic highs by about 3 million to 5 million barrels by the end of 2010. That in turn will further add to the volatility in oil prices when demand in major markets eventually picks up in North America, China and India. In these circumstances, oil company leaders face tough choices making the right decision at the right time will have huge pay-off for the winners. Get the timing wrong and a company could miss the window of opportunity to secure or improve its industry ranking. Those companies that have built up reserves and have a strong projects pipeline will be in a prime position to capture new opportunities-others will either watch from the sidelines or be swallowed up in the industry churn. In practical terms, Oil & Gas industry leaders must address three questions in the next few months: At what point do we switch the emphasis from cutting costs to ramping up investing in the future? Bain estimates that in the first six months of 2009, the Oil & Gas industry cut expenses by 20 per cent compared with 2008,

mostly by reducing activity, putting pressure on suppliers and squeezing operational costs. Looking ahead, as companies review plans and budgets for 2010, they must find the balance between managing costs and sustaining-even expanding-activity levels. In a volatile price environment, what should we assume about the future of oil prices to make investment decisions? Some companies reckon oil prices will stabilise in the $40-$50/barrel range; others expect prices to rise to $70-$80/barrel. Bain estimates that for upstream oil projects, the tipping point is around $65/barrel-at that point the industry's need to contain costs is overtaken by the desire to expand and grow. Making the right call is essential in the second half of 2009 while planning new exploration, development and production expansion projects for 2010. If oil prices do indeed settle at around $60-$70/barrel for the rest of 2009 and into 2010, the multi-billion-dollar question will be: how should we deploy the additional gross revenues? The upstream Oil & Gas industry is a strong cash generator when prices climb above marginal production cost. If oil prices remain above $60/barrel over the next two quarters, by early 2010, the industry could be looking at additional cash income in excess of $100 billion. In recent years windfall profits were generally returned to shareholders in the form of dividends and buybacks. The last twelve months have made the decision on how to spend the money much more complex: invest for the long term, invest in a strategic acquisition, or abdicate the decision to shareholders? For service companies, there is an added twist: How do we handle the pressure from Oil & Gas customers? After a rough ride-where oil majors used every technique for cutting costs, from hard-talk to renegotiating contracts for equipments and services-some in the service sector may be breathing a collective sigh of relief as oil prices recover. However, Bain's research shows that oil companies are determined to extract even more savings from suppliers and in fact, most plan to lock in new terms and conditions before the industry's fortunes turn for the better. For example, western service companies will have to find lower cost, inventive and fresh ways to serve the needs of demanding Oil & Gas customers if they are not to lose market share to eastern suppliers.

Professionals in the international oil and gas business are naturally endowed with a range of human emotions and now have their roots in an

increasing diversity of cultures. Therefore, the interaction between social groups and proper management of human emotions must be continually optimized in an industry dominated by formidable technical challenges that relies on a multicultural workforce to solve those challenges. The impact of cultural diversity on business efficiency is certainly not new to this business, but has steeply intensified due to globalization. The increase in energy demand and unequal access to reserves has led to a situation where International Oil Companies (IOCs) struggle for access to hydrocarbon reserves, controlled by National Oil Companies (NOCs). As a result, energy negotiations and relation management now involve stakes higher than ever before. Consequently, any flaw in effective communication between stakeholders may have an adverse impact on the outcome of the business cooperation-causing loss of future business value. We suggest that only those energy organizations that know how to skillfully handle Emotional Intelligence-and are prepared to invest in it-will be successful. The oil and gas industry traditionally places much focus on the management of technical, financial and political uncertainties and associated risks. Incorporating a coherent view on the management of cultural and emotional risks adds a dimension that can help to avoid negative outcomes in negotiations and relation management. Organizational learning at NOCs, IOCs and service companies will benefit from intensified programs that muster respect for the goals, expertise, culture and feelings of business partners in a competitive, multicultural business environment.

International Oil Companies (IOCs) traditionally work together with National Oil Companies (NOCs) to secure mutually beneficial partnerships, although in some cases, the distinction between IOCs and NOCs can be transitional, as NOCs are diversifying to become IOCs. Securing access to reserves is a strategy driver in the energy business. NOCs are attractive strategic partners in the oil industry because they hold more than 90% of the world’s oil reserves. In these partnerships, the IOCs have access to equity and can bring in their carefully developed, cutting-edge technology. And most NOCs have limited access to equity markets-because they are not listed as shareholding companies. Strategic cooperation between NOCs and IOCs is needed to meet the required production targets and to bridge an impending oil and gas supply gap. The large, multi-discipline Service Companies (SCs) increasingly facilitate production optimization by providing NOCs with


horizontally integrated management solutions and vertically integrated technology solutions, trying to cut out the need to involve IOCs. ig. 1 . The majority of the reserves of the supermajors lie The strategic relationships among NOCs, IOCs and SCs are governed by the following questions: _ Is there enough mutual trust _ Is there sufficient knowledge sharing _ Where can they improve their joint efficiencies _ Should any of these stakeholders change their policies? Obviously, the solutions to these strategic issues need to be settled by people coming from an increasing range of professional backgrounds, a diversity of company cultures, ethnic cultures and national cultures. Attention for technological innovation, the speeding up of reserve growth and production growth remains important, but the human factor should not be overlooked. Modern business management must address cultural diversity and requires trans-cultural competence, using communication, empathy and creativity. As human actions are, in part, based on emotions rather than rational consideration, it is legitimate to highlight the role of emotions and cultural barriers and quantify the potential impact on international oil and gas business.

The global oil and gas business is driven by speed: speed in gaining access to new prospects, speed in discovering new reserves and speed in deciding whether it is profitable to pump up hydrocarbon volumes subject to multiple subsurface and operational risks. All these activities are executed by professionals, who must communicate and share their expertise to make rapid and balanced decisions on the risk and opportunities in E&P operations. The hiring of a multicultural workforce from a range of countries, distinct company cultures and different age groups poses a challenge in itself through the increased risk of communication barriers or gaps. Global companies must now integrate their knowledge across different disciplines, in teams with experiential differences and cultural diversity. We map out the common traps and pitfalls in communication-at interpersonal and inter-organizational scales-and make recommendations for avoiding unproductive and costly mistakes. The principal barriers that obstruct effective interpersonal communication between professionals in complex engineering organizations are:

Experiential Technical Gaps: When junior and senior professionals interact, the receiver and sender may lack some common language, slang, jargon, vocabulary or symbols. For example, junior reservoir engineers lack the experience of a field asset manager. Integration of their knowledge base requires continual effort to bridge the interaction gap. Establishing Communities of Practice, mentoring and career planning play a major role. Interdisciplinal Technical Gaps: Oil operations require experienced professionals to interact coming from a range of different specializations. For example, the static-reservoir model built by G&G professionals is handed over to reservoir engineers for dynamic modeling and then forwarded for economic appraisal. Because the receivers and senders frequently lack common understanding of vocabulary and symbols, this requires mutual effort to bridge the interaction gap by broadening their inter-disciplinal technical knowledge. Organizational Gaps : In large organizations, the chain of command may have too many layers that a message passes through between sender and receiver. A large number of receivers will require clear, concise and consistent message-sending methods. Strategic goals must be understood at all organizational levels. Increasing the learning speed-as well as the quality of communication-is a major contributor to the success of an organization. For example, integration of subsurface, economic evaluation and facilities development teams can reduce the average lead time from discovery to production to four years or less. Cultural Gaps: Different cultural customs and beliefs may profoundly interfere with mutual understanding. Spending time abroad in different cultures and in different companies is very beneficial-if not essential-for bridging Cultural Gaps. The ultimate secret behind effective cooperation between professionals is to avoid lack of trust. Professionals working within newly merged IOCs (e.g., ExxonMobil, ConocoPhillips, ChevronTexaco, BP, Total), or newly merged NOCs (e.g., StatoilHydro), or within diversified NOCs and IOCs, all know too well that peoples’ egos, prejudices, traditions, cultures, conflicting feelings, goals and their strong differences of opinion may undermine mutual understanding. Company mergers must integrate people, technology, processes and workflow across the former company culture. If people are on opposite sides of an issue, they may not be comfortable

sharing their knowledge to full effect. Many of these feelings, prejudices and traditions have their roots in cultural identity. We focus on the management of Emotional Intelligence and the related emotional risk that may impair the efficiency of the up- and downstream business cycles. EXAMPLE OF SOCIO-CULTURAL TENSIONS _ Delivering gas from the world’s major reserves to the future demand centers will require a major expansion of inter-regional, cross-border gas transport infrastructures. Europe is no exception, as European natural gas production, the bulk of which is located in and around the North Sea Basin, has entered into decline. The imminent gas demand-supply gap in Northwest Europe will need to be filled by increasing supplies from Norway, Russia and LNG sources such as Qatar. Of all prospective suppliers ready to fill Northwest Europe’s gas appetite, Russia is the largest supplier, and its share in Northwest European supplies is expected to grow steeply in the coming decades. Managing the risk of the emotions involved (based on Feeling’s Logic) and realizing the value of cultural education are crucial stepping stones, if North-West Europe and the Northwest European gas industry are to realize a secure energy supply. As Northwest Europe is ready to engage in even larger scale natural gas trade with Russia, one may ask: “What is the match between the socio-cultural systems of Northwest Europe and Russia?” The Russian and Northwest European cultures vary to a great degree; one is hierarchical and has a long history of centralized government and the other is a liberal decentralized “networking” society. Seen from the perspective of the “Feeling’s Logic” model, the Northwest European social regulatory systems for natural gas emphasize unbundling and liberalization along the gas value chain to maximize price and efficiency. Even though large-scale infrastructural projects are undertaken, with investments and politics explained, there is a seemingly large difference in the socio-cultural systems of Europe and Russia. We observe differences in base aspects such as language and cultural disposition toward authority, differences in the regulation of gas distribution systems, differences even in the political ambitions about gas. These differences pose risks to agreements, which must be reached if NW Europe is to secure supply. Russian regulatory systems emphasize concentrating all activities along the gas value chain in a single organization, and creating synergy between state affairs and fuelresource affairs. In brief, NW Europe’s ambitions seem to be securing supply and facilitating open markets, whereas Russian ambitions seem to

be the growth of export volumes, maximizing revenue and using energy as a political tool.

THE OTHER CHALLENGES FACED BY THE OIL AND NATURAL GAS COMPANIES ARE: Development of new fields. Expansion of geological exploration. Searching for new ways of field production. Reducing the cost of producing, processing and transporting oil and gas are also becoming increasingly important.