20 Nov Digitalisation of Oil and Gas: Four Plausible Scenarios
Many in the oil and gas industry are wrestling with how their sector will shape up over the long term. How can scenario planning provide some insight for Boards and management?
We live in a world of considerable volatility and complexity, and the news feed about the global oil and gas sector has been relentlessly grim (at least for the past 3 years). It’s useful to hold some ideas of possible future scenarios so that you can make some choices today that could play out over the long term.
One technique that helps give some shape to futures is to consider what trend lines are unfolding that are looking really hard to stop (ie, there’s a solid enough fact base to suggest they’ll continue), and what are the big uncertainties that no one really has an answer for. Map these out and see what it tells you.
A look at some trend lines
There are many trends worth consideration in oil and gas, but here are six that seem unstoppable.
Demographics favour the East. There’s no disputing the rise of Asian and African economies for the next several decades driven by their big base populations, higher birth rates and overall youthful age shape. Consumers will want more of the stuff that uses energy (cars, transportation, household appliances, industry), as these economies enable more of their populations into the middle class. Gravity is pulling all of everything to the east.
And technology is everywhere. Technology innovation is unlocking new fuel sources like shale – helping capture greenhouse gases (GHG) for safe disposal, improving energy efficiency, lowering the cost of renewables, and transforming transportation, industry, education and farming. Ideas move around the planet in ever faster cycles. Faster, smaller, smarter, networked, everywhere. Everything on line, all the time, more efficient and smarter.
But climate change is a concern. Skeptics notwithstanding, science consensus is that the planet is warming up because of GHGs. While the long run planetary temperature effects are uncertain, what is predictable is that society will generally support on-going steps to slow, stop and reverse climate effects.
Developed economies are well advanced in this regard with new carbon taxes, fuel consumption taxes, fuel efficiency targets, renewable energy adoption and grid transformation, but the big economies of India and China are not far behind. Most nations have signed onto the Paris Climate Accord to try to limit the rise in the planet’s temperature.
The world appears to be at the point of a new era in energy. Digital advances change the traditional roles of industry players in the power sector — a consumer with solar panels on their home become an energy producer. The flow of electrons becomes bi-directional rather than one-way. Energy producing and consuming devices will communicate with each other rather than through a grid operator. Appliances and machines will soon be able to respond to price signals and shift load to times of excess capacity.
Renewables look to provide more and more of energy supply as their costs continue to fall. Batteries and natural gas power plants will backstop the intermittency inherent in renewable energy supply.
Transportation, as a big consumer of energy, is also shifting. Drive trains will become electric, slowly at first, but will pick up pace (it’s taken 20 years for the first million electric cars to hit the road, but only 12 months for the second million). The top 6 big automakers who account for 50% of all cars and trucks have all announced plans to electrify their vehicles in the next 5-10 years. Tesla has announced its new entry into the heavy truck sector. Cruise and container shipping are embracing liquefied natural gas as a fuel.
Less visible, but with just as significant an impact is the addition of technologies that create connected, autonomous, shared and energy efficient vehicles.
The great shale gale blowing through North America is turning the global order of things upside down. North America is soon to be self sufficient in oil, which will cause trading patterns in oil to change. Digital innovation will shift the recoveries from shale to match those of conventional, unlocking yet more hydrocarbons. America may not ever ship that much of its energy wealth, but the effect of removing 9 million barrels of oil demand from daily markets means that product has to find other markets.
Surface some critical uncertainties
In as much as the trend lines have some predictability, life is uncertain. Let’s take a look at just two uncertainties — the directions of the global economy and its energy dimension, and the government digital policy agenda.
Global economic performance
Growing economies consume greater quantities of energy to drive growth, whereas unstable environments cause price inflation and supply pressures. Will we see a return to the stable geopolitical environment of the past 15 years with its strong globalisation flavour, or will we see the continued chronic, and increasingly confrontational, stagnation that has plagued much of Europe since 2008?
Will there be more geopolitical conflicts, such as between ISIS and the Middle East, the Ukraine and Russia, Qatar and the other Gulf states, China and other nations on the South China Sea? Will unrest return to key oil and gas exporting nations (Arab Spring, round 2)? Will governments make needed changes to their national energy policies to eliminate distortions in pricing, investments and infrastructure?
Will Brexit trigger other grumpy segments in the Europe experiment to seek an exit? Will the southern Eurozone countries adopt some of the industrial policies of the north? Will the Transpacific Partnership, which has taken ages to develop, survive government changes in Canada and the US? Will NAFTA collapse under pressure from nationalist governments with little economic sense but strong political support?
Government digital policy agenda
Governments are behind in addressing digital shifts. We see this play out in markets where Uber and AirBnB attempt entry into new markets, and run headlong into politicians, regulations and institutions that favour incumbents.
Data is the lifeblood of digital, but will policy makers lighten restrictive privacy and national governance rules around data to enable innovation? Will trans border data rules be relaxed to allow innovative solutions in artificial intelligence and machine learning to transform whole sectors of economic life?
Will governments permit the rapid adoption of technologies that threaten current jobs but hold out the promise of different future jobs? Will education systems that are tied to perpetuating skills in the Industrial Age embrace the curriculums of tomorrow to create future employables? Will regulatory systems that assume human operators of equipment (in aircraft, trucking, shipping and rail) be modified to allow for more robots, even as these threaten jobs and, in the interim, community safety?
Will tax and tariff schemes, based on income from the sale of traditional fuels, adapt to the rise of alternative, untaxed energy sources? Will governments tax sunshine?
Will governments change institutions so as to recognize cryptocurrencies as legal tender and smart contracts as legally enforceable? Will courts recognize robots or their inventors as criminally liable should an accident between a robot and a human take a life? Or will cyber attacks, identity theft and criminal activity aided by cyber paralyse governments into inaction?
Some nation states (Singapore, Dubai, Estonia) have embraced digital change, but will the others?
Map them out
If we map out a “stagnation vs globalisation” world against a “digital vs analog” world, we get four rather intriguing future scenarios for oil:
With the world on a global growth agenda and the rapid adoption of digital technologies, the demand for energy continues to grow unabated. Digitalisation of the economy facilitates renewables and electrification which are most amenable to digital enhancement. Digital, enabled by eager governments, rapidly transforms significant segments of the global economy — unlocking new business models, accelerating trade and unleashing demand growth. Oil loses ground to electrons. The application of digital technology to oil accelerates, particularly in shale resources which have low recovery rates.
Back to the Future
With the world on a global growth agenda, but with governments resistant to adapt to digital change, digital transformation of energy demand centers such as agriculture, manufacturing and transportation falter. Oil and gas companies apply digital thinking inside the fence, and demand for oil remains robust in our analog, 1990s business models. Traditional fuels maintain their dominance as institutions, tax policies and regulations block digital efforts. The climate suffers as population growth adopts the energy intense lifestyle of the west.
Low global growth favours established energy sources like oil, particularly from low cost producers with large established resource bases (OPEC), to the detriment of non-conventional sources (shale, oil sands). With taxes under pressure, rising unemployment, little funding available for innovation, and carbon still on the agenda, governments hunker down. Restrictive rules on digital accelerate the rise of China whose government system is more directive. A few early adopters of digital look like winners, but jobs at home count for more. Pizza will still be home delivered by a pimply teen on a moped.
Low global growth, and a resulting low demand for energy, in a highly digital world leads to job scarcity, and unemployment cramps pay packets and tax revenues. Governments have no option but to play along with cryptocurrencies, autonomous trucking and robo-farms, or risk being globally uncompetitive. Wealth shifts to the innovators in digital. Fossil fuels face an uncertain future, with digital running rampant, destroying oil demand while unlocking yet more reserves. Renewables increasingly behave like digital, and continue to eat the energy world.
There is no “correct” scenario, of course. There are many possible futures, as there are many trend lines that this discussion hasn’t considered. But the trend lines above do not show any signs of abating, so a thoughtful response is to watch how the uncertainties play out and to manage accordingly.