Tuesday, September 18, 2012

Global Leadership-Sustaining Growth

In any public company there is an imperative to grow the business.  Shareholders expect a return on their investment and the path to return on the investment is through growth. In a traditional commercial enterprise there are really three paths to grow a business...expand sales of current products and services, mergers and acquisitions(buy growth) or develop new products or services.  In the oil and gas business growth has a slightly different twist to it.

Sustainability of the business isn't really driven by expanded sales or development of new products and services in oil and gas.  Sustainability is determined by a term called reserves replacement ratio.  Simply this is a measure of the amount of proven reserves added to an company's reserve base compared to the amount of oil and gas produced in that same year.  If a company ratio is less than 100%....if they consistently produce more than they discover or acquire....they will eventually be out of business.

Coll does a good job of describing how important the reserves replacement ratio is to ExxonMobil and the other oil and gas companies.  Adding to the reserve base has been an important driver of  mergers and acquisitions in oil and gas...Exxon's  merger with Mobil...BP's acquisition of Amoco...Total/Fina....Chevron/Texaco.  Coll also outlines how much of a driver it was in Exxon's acquisition of XTO's gas assets.  Why all the M&A activity?  Because organic growth...finding new reservoirs.....is more difficult technically and more difficult in terms of those who own the resource.  The technical challenge has to do with the geology of where the prospects are for new discoveries.....the deep waters of the Gulf of Mexico and elsewhere...wells in over 5,000 feet of water and then another 25,000 feet or more below the seabed...or the arctic with the challenges of ice, a short drilling season and contingency preparations...or in the oil sands of Alberta.  Another dimension has to do with the governments who are the "major resource holders".  Coll does a good job of outlining the challenges ExxonMobil faces in places like Chad, Equatorial Guinea, Nigeria, Venezuela, Indonesia and Iraq.  Its not that the major oil companies like to go to dangerous places and deal with non-democratic governments who don't treat their people well or have high levels of corruption....it's where they have to go for new growth prospects and if already there, it's where they have to stay to keep the reserves on the books .

What are the leadership lessons here?  One is that leaders at the enterprise level have to understand  both short and long term growth drivers in their business and industry.  Not only does the enterprise level leader have to understand those drivers, he also needs to build a strategy that is sustainable ten to twenty years into the future.   Last, it's important to recognize the role that the growth strategy has in framing other strategic choices.  My blogs of 19/20 Sept show how that framing played out for ExxonMobil.

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