Restructuring the energy industry

Restructuring the energy industry

By Ian Scott

JAKARTA (JP): The underlying importance of the energy
industry in Asia is perhaps only surpassed by that of the banking
sector, with its critical need for restructuring and the
management of non-performing loans.

Countries in the region are either major energy exporters,
like Indonesia and Malaysia, or heavily dependent on imports,
like Singapore and the Philippines.

However energy sectors in all countries have been exposed to
currency fluctuations since the prices of primary energy -- oil
and gas are denominated in U.S. dollars.

These companies represent a significant proportion of regional
GDP, therefore future performance of the major oil, gas and power
sectors will key in the overall recovery of this region.

All countries face the challenge of turning around performance
and restructuring their national energy businesses to deal with a
new and more complex, competitive and ambiguous environment which
policy makers deem necessary to create greater efficiency and
accountability.

This challenge has arisen when the energy industry in the
region is going through a major period of change.

Oscillations in oil prices from a low of around US$10 then
back to over US$20, the desire of governments to contain price
rises of gasoline, gas and electricity, and at the same time a
drive towards regulatory change, have all conspired to intensify
the challenges facing energy company CEOs.

Globally, oil, gas and power companies are contending with the
challenge of realizing value from a frenzy of merger activity
over the last few years.

British Petroleum, Amoco, Atlantic Richfield, Exxon, Mobil and
Total are among these, and all have important positions in Asia.

In the power sector merger activity has even spread from the
U.S., UK and Australia to countries in continental Europe with
even major German utilities now seeking to build scale.

Here is Southeast Asia "independent power producers", arms of
major global utilities or conglomerates are contending with the
impact of lower electricity demand and assessing their
relationships with national power utilities.

Closer to home, however, the national energy enterprises
themselves may be facing even greater challenges.

Until now, companies like Pertamina, and PLN in Indonesia,
Tenaga Nasional Berhad in Malaysia, and EGAT and The Petroleum
Authority of Thailand have operated within a controllable
environment focused on industry and national objectives.

These companies now face a very different future, where
success will be driven by their underlying economics and ability
to meet customers' needs.

Restructuring domestic energy businesses to meet these success
factors is an issue of national significance. Figure 1
illustrates the nature of the challenge facing policy makers --
and represents a dramatic change in focus for executive
leadership teams.

While each of these national energy companies faces different
immediate issues, some common themes are important both for
policy makers and for their executive leadership teams.

At the outset, the objective of restructuring should be clear
-- the development of a "well run" firm. This is a firm that
meets its obligations to stakeholders -- owners, customers,
employees and the environment.

National development demands a portfolio of "well run" firms,
for these will be the engines of economic development.

Figure 2 outlines the context of many of the restructuring
efforts being initiated within the energy sector.

The transition process is complex where there are financial
challenges, consumers with heightened expectations, often a
dearth of talent and a drive for transparency in the operating
environment. These are evident every day in the news reports
across the region.

It is important that supporting regulation in the oil, gas and
electricity sectors should encourage development consistent with
meeting obligations to stakeholders -- dividends, products,
services, salaries and the like should be determined with these
obligations in mind. Restructuring to achieve this cannot be
undertaken without reference to the regulatory framework, which
should support the rational development of the energy industry.

The important first step in restructuring will be to recognize
a shift in role for state-owned enterprises. Wealth
redistributors must become wealth creators. The new role will set
a different agenda and objectives for the chief executive and the
senior management team, as well as impose new leadership demands.

A leadership committed to -- and excited about -- meeting
these challenges is a prerequisite for success. Given this the
leadership team should be "free to lead" reflecting the
appropriate roles for "regulator" and "regulated".

The second step is to determine the strategy of the company
within the relevant regulatory framework.

Which businesses are core and to be operationally managed?

Which are non-core, to be managed as investments?

Which activities should be divested?

A strategic blueprint for the enterprise must be developed --
a roadmap for change containing detailed implementation programs.

These programs should include details on managing the core
businesses (whether these be power generation, transmission and
distribution, or oil exploration, production, refining, marketing
and distribution), the role of the corporate center and business
units, and the development of performance metrics and supporting
infrastructure in human resources, information technology and
finance.

The third step is implementation. This requires the engagement
of key stakeholders within and beyond the organization.

It demands extensive communication of the reasons for change,
as well as the benefits and the risks of retaining the status
quo.

Pilot programs in selected areas are a key mechanism for
refining plans and demonstrating success.

This involves taking one part of the enterprise -- a refinery,
a power plant, a marketing region or an oil field -- and
implementing the changes in advance.

Such a pilot enables the organization to demonstrate to itself
that change is possible. It avoids the gridlock created by too
many initiatives at one time -- a situation where "culture
conflicts with vision".

Finally, it instills confidence in the senior management
team's ability to deliver the expected results and demonstrates
to stakeholders that the enterprise is on the path to being "well
run".

The author is a vice president and director of The Boston
Consulting Group (BCG) and is head of their Energy Practice in
Asia. He has spent the past seven years working with the national
oil companies in this region on issues of strategy and
organization. He has also undertaken several engagements with the
oil and gas majors.