Management challenges in the natural gas business

Energy markets, with a marked global nature, combine multiple geopolitical, technological, economic, environmental and regulatory issues that pose numerous management challenges to the governments responsible for issuing policy on energy, and especially to companies operating in these markets. These companies operate in complex environments with many uncertainties that require high adaptability, flexibility and strategic vision.

This document provides a brief overview of the situation with the main energy markets: oil, gas and electricity. It then discusses some of the levers that may enable management at energy companies to take advantage of the opportunities offered by the current situation as well as to mitigate any negative effects arising from it. Some of these levers include: operational planning and budgeting, financial management and planning, proactive risk management and control, as well as cost management and commercial and operational efficiency.

These areas of management, applicable to the industry as a whole, have developed in a particular way for activities related to natural gas to the extent that they involve relevant specific features:

  • Margins in the gas business are highly uncertain due to the price and volume of this commodity being dependent on regulatory, geopolitical, climatic and industrial activity aspects.
  • Understanding the factors that introduce volatility in company results is essential to implement commercial and risk management policies that are effective for protecting and optimizing margins.
  • Market liberalization undoubtedly offers opportunities for expert managers in the sense that it broadens the scope for action in relation to both procurement and sales strategies.
  • The potential liquidity surplus/deficit resulting from uncertainties in physical supplies and sales volumes, as well as the necessary funding for major business infrastructure, require proactive financial management that is also aimed at protecting solvency and therefore credit rating levels. Financial and risk management is a key element in the industry, especially while the current economic and financial conditions prevail.
  • The ability to discriminate between different counterparties and customers according to their creditworthiness and ability to pay is a competitive advantage that will allow companies to defend their margins and ensure value creation in every business relationship. The combination between the level of risk from counterparties and the commercial profitability from operations and clients should therefore be considered in customer selection and in the implementation of differential pricing policies.
  • Market pressure in the current economic environment toward a "healthy" income statement that defies the crisis will put much emphasis on improved efficiency in companies. In this respect it is necessary to find innovative ways to improve margins through better tactics for enhancing revenue and especially for containing costs (there is limited room for improvement in traditional cost-cutting methods, and such methods require a major systematic effort to implement plans to meet the targets).

Technology management becomes even more critical in this process involving transformation and a search for efficiency through automation and the capturing of synergies in business and support processes.

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