How real estate strategy can help energy companies navigate through change

While speculations about the future of oil prices and the industry in general continue to grow, energy companies are thinking about today and the new reality they have to operate in. Albeit positive in the long-term (after all the world energy consumption is projected to increase and technological innovation should gradually drive the production costs down), the atmosphere is quite tense.

Oil and gas executives need to think about margins as well as the year-end results and record low oil prices coupled with bottoming commodity indices are not helping either.

Change in global supply-demand patterns and the emergence of new trading partners has forced many oil and gas companies to reconsider investment projects

Tensions around the globe have added an additional level of complexity to the economic environment, which is already highly influenced by political agendas. As a result, cost reduction remains a key strategic priority for many senior leaders.

The renewables sector is also facing a number of challenges

Although it appears that the consensus among the international community, reaffirmed at COP 21, is to move towards renewable energy, cuts in domestic subsidy budgets are not leaving investors with much confidence. This is very unfortunate because the renewables sector needs investment to achieve scale and to be able to compete across borders. For instance, according to the UN data high investment volumes in renewable energy made China the global market leader in just two years. And of course let’s not forget cheap oil, which from a purely financial perspective reduces incentives to invest in clean energy.

How to survive in the current environment of political uncertainties and shrinking revenues

To survive in the current environment of political uncertainties and shrinking revenues, energy companies need to develop internal strength and operational agility. There are a number of ways in which a strategic approach to real estate can help with that.

  • Location analysis can increase an organisation’s chances of hiring the best talent, which for energy companies is particularly pressing as they change their organisational models and increase investment in Big Data and digital technology.
  • Both acquisitions and divestments involving energy companies are still going strong, although 2015 saw a slightly suppressed level of activity compared to 2014. Industry analysts expect next year to be more eventful as for many companies organic growth will be less achievable. When merging or splitting operations, real estate portfolio optimisation and restructuring can help create the right environment from Day 1 and avoid unnecessary cost.
  • Portfolio analysis can help companies identify what is core and what is not, what could be vacated or only needed short term. In the current strong real estate investment market, corporates with owned real estate, that is perhaps surplus or non-core, can benefit from disposals. Since for many energy CEOs growth is still a priority, capital raised through the sale of real estate can be reinvested back into the business to support expansion.
chart Thomson Reuters 2015
Source: Thomson Reuters 2015

When the sky turns grey, it might not be the first thing on the executives’ minds, but not only can proactive real estate management mitigate risks it can also strengthen the organisation’s financial performance and help achieve strategic objectives.

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