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.