A 2020 THRIVE GUIDE FOR DOWNSTREAM - The one-two punch - Accenture
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The one-two punch for oil markets A 2020 THRIVE GUIDE FOR DOWNSTREAM
Today’s oil and gas downstream market is experiencing unprecedented upheaval. Oversupply, low prices and a crippling public health pandemic have created an overwhelmingly challenging environment. Industry leaders have responded by focusing on operational continuity, health, safety and environment and cash preservation. What we do next will largely depend on crafting a thoughtful, agile playbook to confront the most pressing of these issues in order to turn this crisis into an opportunity. Traditional playbooks simply won’t suffice for navigating the current situation and thriving in the future. The industry has faced daunting markets before, usually the result of sudden crude oil supply pullbacks in reaction to geopolitical unrest or an economic recession. On average, the severe impact of these market-tightening shocks lasted anywhere between one and six months. Recent events, however, are shaking out as perhaps the most disruptive market in the history of the industry. On the demand side, a large portion of air travel has halted and the contraction of other modes of transportation has been significantly reduced. On the supply side, OPEC+ failed to reach a production curtailment agreement when Saudi Arabia announced it would flood the oil market. Eventually, the OPEC+ group agreed to a significant cut in production but oversupply still persists. Similarly, while refiners have cut production, there is still an oversupply of products. THE ONE-TWO PUNCH FOR OIL MARKETS 2
The one-two punch
While product prices have dropped and The effects of demand destruction, among other
inventories have risen, the high level of factors, began emerging as early as the first
uncertainty about the future that pervades quarter of 2020 (Figure 1):
the industry shows no signs of abating.
Overall global product consumption for 2020
Typically, downstream players enjoy an initial could be up to 10-20 million barrels a day lower
margin windfall as crude prices drop faster than in 2020 than in 2019:
product prices. However, such windfalls tend
to be short-lived. In fact, as economic activities • Flight numbers were down 70% at the start
grind to a halt, the demand effect drives of April1
overall refining margins—and perhaps retail • Gasoline was down by 50% to 60% in major
margins—down. Deteriorating demand and profit global cities, and in the U.S., gasoline
margins for fuels produced at refineries—including consumption was about 37% lower than the
aviation and motor fuels—are resulting into a previous five-year average for late April2
reduction in operations. These reductions range
• Refiners have already reduced the amount of
from cutting refinery runs, to closing units,
crude they process by 7 million barrels a day,
to completely shutting down refineries. The
and are likely to halt as much as 25% of total
conflating factors at hand are increasing the
capacity in May3
pressure on refiners’ balance sheets, currently
strained from a low-margin business environment.
Figure 1: Demand destruction is significant
“Stay-at-Home” Peak Demand Destruction Total Oil Products Demand
Low High Scenario 1: One COVID-19 wave, mild recession
Low
High 1
Air travel 70% 90%
-7 -5 -7
-6 -13
-7
-11 -10
Light -7
duty road 50% 70%
transportation -20
2020(E) Q1(F) Q2(F) Q3(F) Q4(F) 2020(F)
Heavy
duty road 20% 40% Scenario 2: Two COVID-19 waves, severe recession
transportation
Low
High 1
-12 -17 -13
Other 15% 30% -6 -20
-10 -18 -20
-25
-30
Source: Accenture analysis. Data as of June 5, 2020. 2020(E) Q1(F) Q2(F) Q3(F) Q4(F) 2020(F)
THE ONE-TWO PUNCH FOR OIL MARKETS 3
It is all but impossible to predict when trends will reverse, but logically, such a reversal would require a
number of factors to dramatically switch course—the crude supply and refinery runs would have to lower
as demand rises. Essentially, the direct opposite of the situation leading to the one-two punch.
Some industry players are at high risk, with a median of 2.4 months of cash and cash breakeven refining
margins uncomfortably close (Figure 2). Making matters more urgent, average U.S. and European refining
margins have fallen between 35% and 90% from their Q4-19 levels.4
Figure 2: Refining companies not immune to financial distress
Refining margins ($/bbl) are not
Financial position across regions has deteriorated
enough for all players to break even
Flexible Liquid and Geared $16
4.0
Balance Sheet Balance Sheet
$14
Refining
ASIA IR
$12 Margins
3.0
$10.5 (High)
Current Ratio
$10
$8
NA RETAIL
EUROPE $6
NA IR
RETAIL
EUROPE IR
$4 $4.4 (High)
1.0
$2 $1.7 (Low)
Limited Liquidity
Balance Sheet ASIA RETAIL
$0.6 (Low)
0.2 $0
0.0 0.8 1.6 NA NA Global Global NA Global
Leverage Ratio Refiner 2 Refiner 3 Refiner 1 Refiner 2 Refiner 1 Refiner 3
Independent Refiners (IR) Retail Timeline
Cash Breakeven Margin ($/bbl)
North America North America
Europe Europe
Asia Asia 2018 Q1 2019 Q1 2020 Q1 Refining Margins
Q2 2019 May 2020
Source: Accenture analysis.
Figure 3: Retail sector will also be hit hard Beyond the dire consequences the
current situation is creating for cash
generation and refining margins,
355 other sectors of the oil and gas (O&G)
-4 downstream industry—such as fuels
5%
retailing—have experienced large
Fuels
margins, but that’s likely to revert
143 the longer demand levels remain
depressed (Figure 3).
57
-25%
Convenience 34
Store
Pre-COVID 1 Month 6 Months Pre-COVID 1 Month 6 Months
After After After After
Revenue Margin
(Thousand dollars per month per store)
Source: Accenture analysis.
THE ONE-TWO PUNCH FOR OIL MARKETS 4
Thriving vs. surviving
Let’s be honest, not all downstream companies are While these plans can serve as a useful starting
likely to survive the current environment if it lasts point, particularly in terms of emergency
for much more than a few months. In fact, the response and early cost-cutting, leaders also
crisis is significant and novel for a number of need to:
reasons. Chief among them, demand can dip as
much as 40% to 60% in some locations, triggering • Prepare for more extreme operational scenarios
the need to reduce refinery runs and close down with significant volatility
plants while critical employees and vendors may • Increase levels of optionality while cutting
be unavailable. In addition, customers, vendors down costs
and employees are experiencing high stress levels,
• Introduce hyper-localized action plans
fearing for their health and the health of their
family members. • Reduce response times
• Provide emotional support to employees
None of the playbooks the industry has deployed
and other key stakeholders
in prior crises properly addresses all the
challenges in today’s environment (Figure 4).
Figure 4: Old playbooks are not good enough
This is not the same as prior Tried and tested playbooks
demand-supply imbalances are only a good start
40-60+% of demand drop in just days Comprehensive response needs to:
Hyper localization of supply-demand Provide emotional support to employees
dislocations
Potential absence of critical employees Plan for extreme operational scenarios
and vendors
Have hyper-localized insights and action plans
Uncertain shape and duration of recovery
Cut costs and increase optionality at the
same time
Unknown effect on long-term impact
Lack of reliable long-lead indicators to Streamline response times
plan around
Fear for the security and safety of self
and family
.
Source: Accenture analysis.
THE ONE-TWO PUNCH FOR OIL MARKETS 5
While the industry has reacted by focusing on immediate continuity needs such as safety of operations,
it must now address a number of critical issues, particularly around liquidity, resilience and going on the
offensive, while transforming the way they lead and manage talent (Figure 5).
Figure 5: Thrive guide for downstream
Virtual Command Center Cost
• Establish safe and effective ways • Zero base your activities and
to connect spend
• Define extreme scenarios • Rethink sourcing
• Organize overall response • Increase outsourcing
Safe Operations Y R Optionality
ES
T
• Assess readiness to extreme TALENT AND • Increase refinery/manufacturing
UI
IL
cases LEADERSHIP and operation flexibility
IN
IEN
• Revamp mobile workforce • Refresh contractual flexibility
CONT
capabilities Talent
CE
• Rethink inventory levels and
• Protect against cyber attacks • Retain top talent chartering
Liquidity • Accelerate digital models Margins
• Delay non-safety-critical capex, Leadership • Revamp demand forecasting,
cancel dividends/buy-backs, • Provide motivation and clarity pricing and offering capabilities,
reduce working capital leveraging advanced analytics
• Make trade offs clear
• Minimize counterparty risk • Take production optimization
processes and analytics to the
• Strengthen balance sheet
G E
next level
O V
ON SI • Invest in value chain
T H E O FFE N optimization and supply and
trading tools and analytics
• Shorten planning cycles
Customers and Products Footprint
• Enhance product portfolio and redefine customer offers • Re-envision what the winning footprint looks like, including
new markets, the role of regional scale and vertical
• Identify collaborative opportunities with ecosystem
integration
partners
• Acquire assets and/or companies to build desired portfolio
• Dispose what doesn’t fit
Source: Accenture analysis.
THE ONE-TWO PUNCH FOR OIL MARKETS 6
A closer look at today’s playbook reveals four • Reducing inventory by freezing new purchases
critical components:
• Using existing stock buildup
• Closely monitoring cash reserves
CONTINUITY
Practically all players have already taken steps to RESILIENCE
ensure operational continuity in light of needed
As companies begin to move from ensuring
refinery-run reductions. In fact, at the time of
continuity to calculating next moves, putting
publication of this paper, there has not been any
measures in place to ensure resilience is critical.
major incident. In addition, some leaders have
Essentially, leaders must prepare the organization
already taken steps to ensure continuity in
for inevitable future product demand. We
extreme cases of demand destruction and
believe there are three chief components to
employee/vendor shortages. This includes
resilience-building: reducing costs, enhancing
preparing for a combination of run reductions,
optionality across the value chain and protecting
plant closures, high stock and inventory levels,
and enhancing margins.
and limited staff and vendor availability. Part
of this effort has also included mapping out
Reshaping downstream companies’ cost structure
worst-case scenarios of demand destruction,
requires taking steps beyond making cuts to
customer and vendor distress, and labor and
survive a potentially long period of low margins.
material shortages. Other actions we have begun
Successful leaders will use this time to streamline
to observe in the marketplace include revamping
their organization for the long run. It will likely be
mobile workforce capabilities, re-imagining spatial
necessary to variabilize non-core costs and
work planning, stabilizing core systems to enable
leverage digital tools to support safe and
work-from-home, and reinforcing cybersecurity.
streamlined operations with minimum staffing.
Where liquidity is concerned, leaders have taken
Companies will need to look at lowering costs in
early steps to preserve cash by:
a way that accomplishes two objectives. First,
• Delaying non-safety-critical CapEx it must not compromise the ability to rebound
quickly. Second, it should include measures such
• Canceling dividends and stock buybacks
as outsourcing to increase resilience for future
• Reducing working capital to minimize industry volatility.
counter-party risk and strengthen the
balance sheet Practical tools to significantly change the cost
structure include:
In addition, companies have been working to
further release cash from working capital and • Zero-base the company’s spend, eliminating
manage collection risks by: “non-working” expenditures
• Analyzing major receivables and payables to • Rethink operating model and organizational
assess risk to working capital structure, including what, where and how work
gets done
• Renegotiating with suppliers to free up cash
• Increase outsourcing of support functions and
(e.g., lengthening payment terms)
other work activities
• Monitoring customers to ensure days sales
outstanding does not become overstretched
THE ONE-TWO PUNCH FOR OIL MARKETS 7Beyond costs, companies also need to maintain GO ON THE OFFENSIVE
and increase optionality. This is particularly
Beyond ensuring continuity and resilience, O&G
important given the hyper-localized nature of
downstream companies must also consider how
demand destruction. The uncertainty of demand
to emerge stronger after the crisis. This is the time
recovery, including the potential irregularities
to think about how to use this opportunity to
within short timeframes also make maintaining
position for leadership, which requires a deep
and increasing optionality imperative. Industry
consideration of factors such as customers
leaders must look purposefully at the optionality
and products as well as the company’s footprint.
they have in their operations and supply chains,
including logistics, contractual flexibility and
Where customers and products are concerned,
inventory levels.
we recommend industry leaders consider how to
enhance their companies’ product portfolio and
Important optionality considerations include:
redefine customer offers. The goal is to increase
• Improving visibility of current operations and share of wallet aggressively for existing
degrees of freedom customers—while acquiring new customers.
Tangible actions include:
• Improving contractual flexibility across the
supply chain, from sourcing to selling • Enhance offering and product portfolio to
• Re-assessing distribution network model, reflect current customer needs
including optimal inventory levels, as well
• Selectively invest in growth and next-generation
as approaches to chartering and storage
products aligned with energy transition
In addition to cost and optionality, companies • Rethink marketing spend to support retention
will also have to enhance their capacity to and growth targets
capture margins under a broader set of
situations. Key considerations include: Companies should also explore what a winning
footprint looks like, including new markets, the
• Improving pricing capabilities role of regional scale and vertical integration.
• Adjusting terms and service levels to customer Looking to reposition the portfolio strategically
profitability could mean acquiring assets and/or building a
footprint by seeking opportunities to:
• Shortening planning cycles to better react to
changing market conditions • Strengthen regional leadership positions
• Expand into adjacent markets
• Secure advantageous sources of crude and
lock in access to attractive markets
At the same time, companies should consider
shedding what does not fit and determining
the right approach and timing for discarding
marginal assets. They may also consider exploring
consolidating activities or assets through formal
or loose joint ventures, particularly in high-volume
geographies such as North America and Europe.
THE ONE-TWO PUNCH FOR OIL MARKETS 8TALENT AND LEADERSHIP Practical actions leadership can take to inspire
trust and confidence:
Leaders should focus on building and maintaining
trust and confidence with their workforce and • Address your people’s mental, physical and
other stakeholders. Our research found that over relational needs. Examples include offering life
64% of the global workforce is facing high anxiety coaches, mental health support and wellbeing
over their personal job security.5 This anxiety is programs to help grieving employees or those
further compounded as work may open, but managing stress, such as those caring for
schools and elderly care may not—in fact, 67% elderly patients and partners of key workers
of American children under six have all available
• Honor losses and ensure leaders share their own
parents participating in the workforce.6 In light of
COVID-19 experiences
the volatility in downstream markets, compounded
by these human stressors, downstream leaders • Elevate consciously compassionate leaders to
need to do three things well consistently for their lead the charge and position them to coach
people: Communicate with compassion and others in empathy and communications skills
confidence, build trust through the company’s • Give greater prominence to the organization’s
purpose, and care about employees’ work purpose and values, particularly its
problems and their households. commitments to its people
Actions to retain (and build) talent include: • Communicate early, often and with compassion
• As roles are disrupted, focus on skills not jobs
• Turn furloughed workers into flexible workers,
retraining them in skills that will enable them
to refocus on areas of higher demand
• Build AI-based processes to help predict skills
demand in immediate and adjacent markets; for
example, in an international oil company, assess
how the linear programming skills of a refinery
engineer can drive end-to-end value chain
optimization from the wellhead to the pump
• Connect workers with job opportunities at
scale, either internally or externally, using
technology platforms; for example, supply
chain and logistics skills which are core to
downstream, are much needed outside oil
and gas by e-commerce players
• Accelerate learning by curating updated
program choices and maximizing adoption
with AI-enabled personalized learning
• Support people with career pathway advice
and career planning
• Support people by leveraging the many
technology platforms that help match workers
with safe childcare options during the crisis
THE ONE-TWO PUNCH FOR OIL MARKETS 9The long view
While the long-term effects of the one-two punch In challenging times, it is not uncommon for
on the downstream market are unknown, it is companies—entire industries, in fact—to become
still important to have a view of the mid- and so caught up in devising ways to address a crisis
long-term future while taking a proactive stance. they miss opportunities. Searching endlessly to
It is fair to expect that the one-two punch will find a perfect solution is not an option. Instead,
accelerate the pace of already-existing trends this is the time to act swiftly and flexibly.
such as shifts in demand patterns, the move to
customer-centric models and the decarbonization
of the energy ecosystem.
Executives need a flexible
and holistic playbook in
The shakeout of these trends will vary greatly
depending on timing, location and other factors.
order to navigate the
For example, a refinery in Western Europe will months ahead of the
see a very different reaction than a retail operation
in Southeast Asia. Similarly, it is likely that the
one-two punch and to
destruction of the demand for hydrocarbon-based devise strategies that
transportation fuels will look very different in the
U.S. in 2030 than it will in Latin America, where
will take them from the
it will likely still be growing. Understanding the now to the next.
nuances of these trends will influence whether
the decisions in the next weeks and months will
have been correct or not.
THE ONE-TWO PUNCH FOR OIL MARKETS 10Connect with us About Accenture
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Managing Director services company, providing a broad range of
pedro.caruso@accenture.com services and solutions in strategy, consulting,
digital, technology and operations. Combining
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aleek.datta@accenture.com across more than 40 industries and all business
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sustainable value for their stakeholders. With
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@AccentureEnergy
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References This document is produced by consultants at Accenture as
general guidance. It is not intended to provide specific advice
on your circumstances. If you require advice or further details
1 “Global Energy Review 2020 -The impacts of the
Covid-19 crisis on global energy demand and CO2 on any matters referred to, please contact your Accenture
emissions, April 2020, ©IEA 2020 representative. This document makes reference to marks
https://www.iea.org/reports/global-energy-review-2020 owned by third parties. All such third-party marks are the
/oil#abstract%20&%20 property of their respective owners. No sponsorship,
endorsement or approval of this content by the owners
2 Ibid. of such marks is intended, expressed or implied.
3 “The Next Chapter of the Oil Crisis: The Industry Shuts
Down, April 26, 2020, Bloomberg News © 2020
Bloomberg L.P, via Factiva.
4 “Can diesel carry the margins as gasoline demand
plummets? 17 March 2020, Platts Oilgram News, ©
2020 S&P Global, via Factiva.
5 “COVID-19: 5 priorities to help reopen and reinvent your
business” May 6, 2020, Accenture © 2020 Accenture
All Rights Reserved
https://www.accenture.com/us-en/about/company/cor
onavirus-reopen-and-reinvent-your-business.
6 Ibid.
Copyright © 2020 Accenture
All rights reserved.
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