Everyone with the word manager in front of his name thinks they have the abilities needed to lead others in their organization.
Lee J. Laviolette, managing director of the newly expanded energy practice for Navigant Consulting, has his own definition. It’s simple and it works. “Leadership of change is all about people. Only people can raise an organization’s performance.”
Laviolette has worked in the energy industry for over 30 years, specializing in strategy, operations, commercial and technical issues. He has worked with executives in chemicals, metals and mining as well as energy, helping them to transform their businesses in North America, Latin America, European Union, Middle East and Asia. Before becoming a consultant he held several operations management, commercial and technical assignments with ExxonMobil and Total. He also served as resident Operations Optimization Advisor for the refining division of a Middle Eastern national oil company.
Now he is in charge of raising Navigant’s profile in the global oil and gas industry from the company’s new Houston office. In this wide-ranging interview, the western Massachusetts native discusses his extensive background and his perspective on today’s fast-changing energy business.
P&GJ: What was the career path that brings you where you are today?
Laviolette: I entered the industry during a pivotal time in the early 1980s at Exxon where I had the chance to work on both technical and commercial sides during a period of great changes to industry structure and economics. After that, I moved into operating leadership roles with Fina Oil and Chemical Co. and then into consulting. My first consulting assignment as the resident refining optimization advisor in Saudi Arabia gave me a feel for the various projects, challenges, travel and ability to learn that come along with consulting. After that, I was hooked.
P&GJ: What were your interests growing up, and how did you get involved in the energy industry?
Laviolette: I developed a love for chemistry as a child – my most memorable gift ever was a chemistry set. I read every article in the World Book Encyclopedia related to chemistry and industrial processing. I realized that my passion centered on the industrialization of science, so I enrolled as a chemical engineer at Worcester Polytechnic Institute where I knew I could do independent study. Part of that research was in coal and sewage sludge liquefaction, so joining the energy industry was almost a non-decision for me.
P&GJ: As the energy industry has changed, how has the consulting business changed and become more competitive?
Laviolette: Because of scale and truly global nature of the business, oil and gas clients are some of the most interesting companies that a consultancy could support. As such, you see all kinds of consultancies looking to broaden their footprint. One area services firms are flocking to is performance-improvement consulting. Everyone from data houses to IT firms to equipment manufacturers is trying to enter this space.
That happens to be the core focus for Navigant’s Oil & Gas practice, so it is very interesting to see new competitors emerge on a regular basis. Our differentiation is that we have consultants with deep industry experience. No client would ever have to explain what a “pipeline nomination” is to one of our team members. We’ve all heard the horror stories.
P&GJ: What specific abilities should a prospective energy consultant have and is it more difficult to attract young people to the business?
Laviolette: It is an industry where someone can make a difference. That said, it is also a very challenging consulting environment that requires deep insider knowledge to add differentiated insight and to implement sustainable solutions. All of this tells me that a young person should get significant experience inside industry before moving to consulting. There is a lot of pull on top young talent from many different directions, but the need for energy – whether conventional or alternative – endures. As such, energy companies and, in turn, consultancies will need to work hard to attract their share of the talent pool.
P&GJ : What are the drivers of the oil and gas industry for the next year? What is the greatest challenge or threat facing the industry?
Laviolette: The most important driver, at least for much of 2015, will be price. Although we may have reached a floor in recent weeks, I don’t anticipate a truly significant price recovery until at least the second half of the year, if then. That affects everything from capital investment in exploration and production to pipeline construction – not to mention geopolitics, as we see unfolding with the Russian economy.
There are multiple other drivers, including the regulatory environment (I anticipate further softening of the federal export rules in the U.S.), the changing role of OPEC, abandonment in the North Sea, and so on. All of these tie back, in one way or another, to the direction of oil and gas prices.
For consumers, falling oil prices translate into lower fuel price, which seems like a good thing. The ramifications for the industry, of course, are less positive, and the longer term effects across the national economy are less clear. We could see mid- to long-term oil prices in a range of $60-70 a barrel, and that will have powerful effects not only on operations, but on the structure of the industry itself. The industry has become accustomed to prices in the $90-100 range. We could be seeing the advent of a new normal below $70. I don’t think anyone has fully reckoned the effects that will have – although the December issue of NG Market Notes, which is produced by Navigant’s Global Energy Practice, explores the possibilities in detail.
P&GJ: How is the low price environment going to affect oil and gas development domestically? Is there a price level at which development will become unfeasible?
Laviolette: I don’t think we’ve seen prices at a level that would really jeopardize onshore unconventional production in the United States, and frankly, I think it’s unlikely. In recent months, we’ve seen several analyses that indicate that prices would have to dip well below $50 for U.S. shale production to be significantly affected.
GlobalData, for example, said most commercial unconventional plays in the U.S. are profitable at $50, and many of them can make money at prices below that. Morgan Stanley has said that projects in the Eagle Ford break even at prices ranging from $30-60. Also, you have to factor in the long lag time for world oil prices to move upstream to production projects- prices would have to stay low for a year before we’d really see effects on unconventional plays in the U.S.
Although it fell slightly in January, the U.S. rig count as of early December was actually up over the last 12 months, and a higher percentage of the rigs are producing oil, as opposed to natural gas. So we certainly haven’t seen a lot of knee-jerk reactions to date. Having said that, I think a dose of reality in the U.S. market is not such a bad thing. Development has been breakneck and more focus on efficient development could actually be healthy for the industry over the longer term. We’re seeing lots of headlines on layoffs in the E&P sector, which is unfortunate for overall employment in the industry, but I don’t think anyone really believed that the frenetic pace of the last few years was sustainable.
P&GJ: What’s your outlook for oil and gas pipeline construction for 2015-16?
Laviolette: The long-term projections for demand for pipeline capacity in this country are extraordinary, and there is expected to be a lot of investment beyond Keystone XL. Last year, the Interstate Natural Gas Association of America Foundation forecast that the U.S. and Canada will need about 850 miles a year of new gas transmission mainline for the next 20 years, plus another 800 miles a year in natural gas laterals to reach power plants, processing plants, and storage fields, and over 730 miles of new oil transmission lines a year. That’s around $30 billion a year in pipeline investment, over two decades. It’s a good time to be a pipeline builder in North America.
At the same time, applications for new construction actually fell in 2014, after a big jump in 2013. Some of that could be due to political challenges. Proposals for new pipeline construction peaked most recently in 2009 at more than 2,100 miles. Now, we’re back to the range of 500-1,000 miles a year, at least in applications. Again, I think a leveling off and a return to steady long-term growth is reasonable. >>
P&GJ: Will we see even more consolidation in the industry, and if so, in what sectors?
Laviolette: In previous periods of sharp price declines, like the late 1990s, we’ve seen fairly dramatic consolidation as companies seek to reduce costs and maximize efficiencies and I don’t think this time will be any different. So far, much of the consolidation has been concentrated in oilfield services. The biggest merger, of course, is Halliburton’s proposed purchase of Baker Hughes, but that deal may go under Department of Justice antitrust review and, if so, it may be well into 2015 before it gets approved.
We’ve seen other deals that are almost as significant, including Siemens’ acquisition of Dresser-Rand, which was approved by Dresser-Rand shareholders on Nov. 20. Siemens is clearly moving up to take on GE in this space, but GE isn’t standing still, either: among the major acquisitions by GE in the oilfield services sector is its $3.3 billion buyout of Lufkin industries in 2013.
So more consolidation, and more acquisitions of midlevel players by the majors, is inevitable. Recently we saw completion of the Sabine-Forest Oil merger, which will create one of the largest upstream operators in East Texas. That sort of combination of medium-sized players is something we’ll see a fair amount of over the next 18 months or so.
After a period of intense focus on investment and production growth, the industry is under pressure to deliver shareholder value. One big way to do that is mergers and acquisitions. I think the activity will be concentrated in the upstream sector, as opposed to downstream and retail. Many of these companies are not seeing returns on their exploration activities and need to replace reserves through acquisitions.
P&GJ: Who would you define as some of the leaders of the energy business today?
Laviolette: That depends on how you define “leader,” doesn’t it? From a geopolitical sense, Vladimir Putin is a leader of the energy industry because his decisions affect the Russian oil and gas industry so profoundly, and that has energy implications around the world.
In the oil and gas business, I would go back to George Mitchell, who was really the father of the shale gas revolution. He is clearly seen as a pioneer who transformed the industry and brought about a new era, particularly for U.S. unconventional production. You could put Rich Kinder of KinderMorgan in that same category from a midstream perspective. Then there are the companies that are really excelling at low-cost, high productivity shale gas work today. On that list I’d put Anadarko, Chesapeake, Southwestern Energy, and one or two others.
In the energy business broadly there are some U.S. utilities leading the way into a new model for the provision of energy. The spread of distributed and renewable energy is really forcing the utility industry in the U.S., along with countries like Germany and the U.K., to reconsider its entire business model. Combine that with regulatory changes, like the EPA’s Clean Power Plan and the EU’s 20-20-20 rules, and you’ve got a broad transformation occurring that will change how people obtain and generate electricity and how utilities make money.
P&GJ: With the GOP controlling Congress, what changes on Capitol Hill do you foresee affecting the oil and gas industry? Will it approve LNG exports?
Laviolette: This is difficult to predict and depends on many factors. It’s likely that we’ll see multiple export license approvals in 2015 and the U.S. will greatly expand its export capacity. There’s so much pent-up demand in Europe and Asia Pacific for inexpensive natural gas that U.S. producers and exporters can supply. The question, to me, is how long that window will remain open.
The most significant development on Capitol Hill in my view, though, will relate to drilling approvals and the fate of the Clean Power Plan. If the new EPA restrictions on CO-2 emissions from power plants take effect, it will immediately make a large portion of the U.S. coal fleet obsolete. That will have a huge impact on domestic natural gas demand.
It’s an interesting political dichotomy right now: coal-state members of Congress are not necessarily enthusiastic about the expansion of natural gas-fueled power generation, while supporters of natural gas would love to see more coal plants shut down. It’s a divide in the fossil fuels industry that I’m not sure we’ve seen before.
P&GJ: Has OPEC declared an unofficial war on shale development?
Laviolette: I don’t know that it’s a “war on shale” so much as a price war focused on high-cost producers. That would apply, for instance, to oil sands development in Western Canada more than to onshore U.S. unconventional plays, which, as I said earlier, are still profitable at very low oil prices. Already we’ve seen some major projects in Alberta scaled back or canceled altogether.
The larger point is valid, though: OPEC, and in particular Saudi Arabia, has abandoned its traditional role as a swing producer, able and willing to curtail production when necessary to keep prices up. There is now a divide emerging in OPEC between countries like Iran and Russia and Venezuela, and the traditional Middle Eastern producers, led by Saudi Arabia, who are more willing to withstand lower prices for a longer time. The implications of that split will be fascinating to watch.
P&GJ: What are the chances that Keystone XL Pipeline will be approved, and is it still needed?
Laviolette: Here we get into politics vs market forces. Even given all the opposition to Keystone XL, it has a political momentum of its own. The political fight over Keystone XL really misses the point. Infrastructure is good – it creates flexibility and optionality. Whether Keystone gets built is not going to determine whether the oil sands in Western Canada get developed. That’s an entirely different issue.
There’s another factor that many people, certainly not U.S. politicians, are paying enough attention to, and that’s the fact that Keystone XL is hardly the only pipeline expansion being considered from Western Canada. The Energy East project, announced by TransCanada in 2013 to take oil from Alberta to Canada’s east coast, would be longer and carry more crude than Keystone XL’s projected volume of 830,000 bpd.
It will require major export terminal construction on the coast, but if it goes forward it could essentially make Keystone XL moot. The converse is also true: if Keystone gets built, I’m not sure there’s a need for Energy East. You have all those export terminals already built, or under construction, on the Gulf Coast, while on the coast of Quebec they’d essentially be starting from scratch. Keystone XL and Energy East may be mutually exclusive.>>
P&GJ: How are Mexico’s energy reforms coming along?
Laviolette: The reforms are welcome and necessary to bring Mexico’s oil and gas industry fully into the 21st century. The process of reform and new investment in Mexico is likely to continue, regardless of low prices. The reforms are not driven by price. I’ve done a lot of work through the years with Pemex and there’s great pride in Mexico around the concept of self-sustainability. Further, industry leaders in Mexico have been working to introduce leading practices and technology to their operations for decades. A key channel for accelerating this is now becoming feasible.
From the international oil company perspective, companies have wanted to get into Mexico in a meaningful way for a long time. If they don’t get in early they’re probably not going to get in. We’re likely looking at significant investment regardless of the price of oil. That’s what will drive the reforms forward. Mexico has met every deadline set for their energy transformation, including the Herculean task of getting a constitutional amendment passed. It will be great to watch the new process play out and hope that the momentum does not get derailed.
P&GJ: Since you have worked throughout the world, where do you think the greatest opportunities exist for businessmen?
Laviolette: Such a broad question! Let me answer it this way: There are amazing opportunities – and challenges – for an energy professional in every geography. That said, the nature of the opportunities and challenges vary wildly from continent to continent, and even country to country. My personal passion is around operational excellence – executing with skill and finesse to accomplish strategic objectives. While important everywhere, this becomes most critical in regions and environments of tight margins and restrictive operating parameters.
It is always most challenging – yet most satisfying to successfully navigate a channel at low tide. Personally, I’m quite excited about the current market dynamics and exceptionally pleased that my team has strong footprints in North America and Europe.
P&GJ: During your career, do any particular memories or experiences stand out?
Laviolette: It’s all been fantastic and I wouldn’t trade it for any other career. Living with my young family as expats in Saudi Arabia was thrilling both professionally and personally. My greatest client experience came later, in the form of a major operational transformation program over a three-year period with another national oil company.
As the CEO and I toured one of the facilities together at the end of the very successful program, he made the comment “This is fantastic. When I look around, I see the same assets and the same people. What’s different is how we work, and how we work together.” Nothing has ever stuck with me quite like that. I am privileged to have been part of it.