Falling commodity prices – it’s not all bad news

By Alison Huntington

“Our challenge is to get as much oil out of the ground as possible while spending as little as possible on anything else.” That’s the oil industry in a nutshell, as summed up by the HR director of a major oil company.

It sounds so simple that you’d be forgiven for wondering why oil and gas companies buy any consulting support at all.  But, as our new report on consulting in the energy and resources sector makes clear, they do – to the tune of about $6.6bn - a figure we expect to grow by about 5% in 2015.

Energy and resources sector clients' propensity to spend on consulting depends a lot on the state of commodity prices in their given market: when commodity prices are high and rising, as they were for much of the last ten years (ignoring the financial crisis), there’s plenty of work for everyone. On the other hand when they tumble drastically, consulting is often one of the first things to go, as clients embark upon drastic cuts to costly projects and operations. Rather than trimming here and streamlining there, clients simply shut down those areas of expensive infrastructure that can’t be supported. It’s hit particular markets hard – the consultants we spoke to in Australia and South Africa had seen their clients close down coal and platinum mines that were no longer profitable. In that context, consulting not only moves to the bottom of clients’ list of priorities – it drops off the list entirely.

But the correlation between commodity prices and consulting expenditure isn't always as simple as one following the other: there's an in between state, and it's here that consultants to the sector are finding themselves at the moment. The implication is that there's a threshold for commodity prices above which clients are still interested in using consultants, despite the outlook being far from rosy. They don’t need them for the simple or drastic cost cutting (they can do that themselves) but they will call on consultants for more sophisticated work around raising productivity and creating efficiencies.  Indeed, that's what they were doing in 2013, when operational improvement made up a quarter of the sector's entire consulting expenditure.

With commodity prices slumping 11% since June alone, many more energy and resources clients will find themselves in this tricky space, balancing the desire to improve efficiency with the imperative to slash costs.  And consulting firms which want to continue growing in this environment will have to help clients square this particular circle: while allying themselves firmly to the productivity agenda they also need to demonstrate that their work can have an immediate and material impact on costs – and there’ll be nothing simple about that.