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Board Conversations in #oil and #gas get interesting

With all that’s changing in global energy, board conversations around the top table at oil and gas companies should be pretty interesting. What are they discussing?

 

Board conversations probe competition

 

First discussion point: how will we manage through demand shifts

 

Boards are discussing how the underlying demand drivers for fossil fuels are finally facing serious long term competition. 75% of a barrel of oil goes into the transportation sector. For the first time in forever, anyone can take a test drive in a thoroughly viable, affordable and more environmentally responsible alternative to fossil fuel personal transportation. As Peter Tertzakian noted in a recent article, the oil and gas industry has yet to come to grips with this coming new generation of personal transportation. The competition is going to redefine the personal transportation sector by changing consumer behaviour.

 

Boards note that these new vehicles from Tesla, BMW and other leaders are seriously cool, with their ludicrous speeds, and ultra quiet, high tech interiors. They’re more like what next generation buyers think of as a technology – as easy to use as smart phones. Plug it in for a few hours, download some updates, and you’re good to go. Indeed, they’re more like pure technologies and look like they could behave according to Moore’s Law.

 

In fact, the next generations of buyers of transportation might not even see car ownership as a personal imperative. My kids see driving as a frustrating time sink when they could be watching videos, web surfing or texting friends. Smart phones came first in their lives, not cars, and the on line experience just keeps getting better and better, compared to driving a car, which is just getting worse and worse (think traffic jams, parking hassles, expensive repairs).

 

Boards marvel at the possibilities posed by vehicle sharing (Uber, Car2Go), and the breathless hype around self driving cars (Google, Tesla). They discuss how these fundamental behaviour shifts will translate into permanent demand shifts. Researchers have modeled, for instance, how many taxis might be needed to supply New York City once these technologies get solidly in place, and it’s shockingly few.

 

Of course, there are a billion cars in the world, and global annual manufacturing capability of 65m fossil fuel units or thereabouts. It would take 20 years to phase out the existing fleet. I’m ignoring the learning curve effects associated with manufacturing, but think for a minute what happens when personal transportation starts hyper improving a al Moore’s Law. The head start that fossil fuels have could evaporate in a hurry.

 

Boards who move their meetings to different global locations discover that the early adopters are hidden from view (China). While North America might raise the bar for accepting self driving cars on shared city roads, the Chinese might simply mandate it. And fossil fuel growth is predicated on continuous Chinese demand growth.

 

Once demand destruction starts, the high cost reserves are going to get stranded first. Canada is blessed with abundant high cost reserves.

 

I’m sure that boards are asking management what preparations are underway to manage through this period of fundamental demand shift.

 

Board Conversations about water, GHG, energy

 

Second discussion point: how is the business adapting to deep-seated structural changes

 

Boards note that oil and gas, along with extractive industries like mining, has been based on three fundamental economic underpinnings that are being upturned, and Boards will want to discuss how the business model is adapting and how quickly changes are being addressed.

 

First, energy inputs are changing. The oil and gas industry, from extraction of crude oil to retailing of petroleum to customers, consumes a significant amount of energy, including oil and gas (diesel, natural gas). But input energies are rapidly evolving with the rise of renewables, batteries and smart grids for distribution. These new energy sources are falling dramatically in price, and are the energy of choice for the rising new challengers in personal transportation. Boards get this and are pointing management at the energy inputs, but in the main, the sector is pretty reliant on what is a high cost fuel.

 

Indeed, energy inputs are probably one of the most significant costs, and greatest threats, to oil and gas operations. Boards in mining companies are starting to ask which executive is in charge of energy inputs (as there is in, say, supply chain, HR, production, or retailing). Boards in oil and gas are asking the same question.

 

Second, air emissions of green house gases, despite the actions of the new US administration, are going to be highly scrutinized in Europe, China, India and Asia. Boards know that the oil and gas sector is a significant source of GHG emissions, after coal, through its own tailpipes, but also in rogue emissions from its equipment. I like the idea that oil and gas industry leaders are embracing a carbon tax, in part to level the playing field with coal, but also to create the right economic incentives to tackle GHGs.

 

The shift away from coal is creating a bump in interest in natural gas, but the trajectory is clear – fuels that emit gases that contribute to global warming are going be sanctioned everywhere. Boards will be actively reviewing the impacts of climate regulation on oil and gas, with keen interest in how much R&D is going towards GHG response.

 

Third, concerns about water are rising on the social agenda. Water features very prominently in oil and gas operations, as a fluid in fracking, as a viscous medium for drilling muds, and as a treatment environment in settling ponds for oil sands. Water is both a waste byproduct of the coal seam gas industry in Australia, and a key input as steam for in-situ bitumen extraction.

 

Boards are aware that society is becoming increasingly alarmed about water usage in oil and gas. Society raises all manner of questions about the safety of drinking water, harbour pollution, earthquake threats from fracking and disposal. Proven methods of moving hydrocarbons around (shipping, pipelines), are being throttled by the environmental movement.

 

Boards are challenging management to outline how the business intends to reposition as a low cost, zero carbon, and hydro-neutral fuel supplier of the future.

 

Board conversations about change

 

Third discussion point: Are we transforming enough, quickly enough?

 

Let there be no doubt that managers in oil and gas have had an exceptionally difficult 3 years, and the outlook isn’t exactly sunshine and roses either. Budgets have been slashed, capital has been curtailed, dividends have been cut, staff numbers have been reduced, and suppliers have been squeezed.

 

Boards are asking harder questions about the actual work getting done inside oil and gas companies, and if the work has materially changed in response to high prices and other threats. Other industries have discharged their out-moded ideas about what is core to the business and what can be more profitably sourced. Digital solutions are becoming pervasive in other industries (apps, smart phones, tablets). Boards are asking if some organisational structures (two separate IT organisations, one on commercial solutions, the other on operational kit) are becoming less well -suited to a new cyber security context.

 

Boards recognise that the one-dimensional approach to adaptation, which is to do more of the same with less, may not be the right strategy for the future, given the other big conversations they are having.

 

Fortunately, the oil and gas industry is, in the main, highly innovative. The unconventional resources like shale have appeared from out of nowhere to fill a key market influencing position. Boards recognise that oil and gas innovates very well, but in just 2 of 12 innovation domains. They are now challenging why the limited available capital for innovation goes into extracting resources more cheaply, and in process issues like improving fracking and drilling. They press to see that the other innovation levers are not ignored.

 

As I see it, during a downturn, the industry normally cuts off innovation (in the form of funding, resources and management attention) across the business, leaving it poorly positioned for the future. Instead of doing different things differently, which is what happens in other industries, oil and gas just does less of everything.

 

Boards are familiar with the arguments in favour of the go-slow approach to change (our industry is dangerous, highly regulated, etc), but as many board members are exposed to other industries, these arguments may look more like excuses compared to how quickly the automotive industry is experimenting with auto drive vehicles on city roads.

 

Boards are engaging management on lively discussions on the need to bring forward more change and more dramatic change, that results in fundamental and systemic business change, not just more cyclical cost-cutting.

 

If you are on the board of an oil and gas company, and your colleagues are not having thoughtful discussions on these key issues, please share this article with your Board chair. I hope he or she finds these ideas provocative and inspiring.

 

 

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2 Comments
  • Daniel
    Posted at 00:01h, 31 January Reply

    Thanks, great food for thoughts!
    Can’t help noticing slight change of a tone from one brilliant energy blogger I know from Australia:)
    http://www.fueluplng.ca/how-quickly-will-solar-power-technology-displace-fossil-fuels/

    My prediction is when faced with rising cost of energy and mounting evidence of widespread data and public opinion manipulation from the likes of IPCC, folks will begin to question sanity of de-carbonization/carbon tax. So playing field may get more even and down to energy source cost per KW*h/convenience/availability.

    • admin
      Posted at 18:13h, 01 February Reply

      Daniel – thanks for the observations. Yes, my views are evolving consistent with the rapid evolution of the market. It’s getting interesting.

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