05 Oct Post Pandemic Oil and Gas — Four Scenarios
How might the world of oil and gas gas unfold in a post pandemic world, given rising nationalism challenging globalism, and fast growing renewables challenging fossil fuels?
I’ve been invited by the Board of a technology company to share my views on the world of oil and gas in a post pandemic world. As ever, I’ve tackled this challenge with gusto, researching dozens of articles and studies, framing the current state, and exploring the actions and reactions of the industry to the pandemic.
One observation is clear. Predicting the future of oil and gas is pretty pointless as there are so many uncertainties. In fact, it’s likely as useful to sketch out what is uncertain about the future, and to keep an eye on those uncertainties as they firm up.
In my case, I’ve opted to return to scenario planning, a technique developed by Shell many years ago to assist with strategic planning. Identifying and exploring possible and plausible future scenarios is helpful to planners and Boards to avoid myopically focusing on a simple linear extension of the current state.
If you’re interested in this study, I’m available to present it to your organization too.
Framing Scenario Planning
Scenario planning involves mapping trending truths to a set of social uncertainties and characterising how the truths impact your part of the economy. In this case, I’m interested in the implications for the oil and gas industry.
The Trending Truths
The trending truths are macro level observations about the world around us that are solidly rooted in easy to find data. There is probably room to argue their accuracy and currency, but in the main, the data is accepted as truth. Here’s a small sample.
Digital technologies (computer chips, data, analytics, telecommunications), are growing at exponential rates. The largest companies in the world by value are now all digital companies. Laggard industries are now rapidly deploying digital innovations to improve cost profiles and asset productivity, and are given a huge boost from the pandemic.
Population growth is now clearly centered in the East, with birth rates falling across the OECD and many other advanced economies. Rapidly ageing and longer lived populations are seen in many economies where the retired depend on a shrinking number of workers. The trend to urbanisation has been unrelenting, although the pandemic may moderate in those economies that can afford it. More nuanced is the shifting influence of Baby Boomers to other generational cohorts.
Many nations are experiencing rising levels of chronic health issues (diabetes, obesity), increasing costs of healthcare, and the limited flexibility to cope with surge health crises. The pandemic has exposed significant weaknesses in the ability of many healthcare systems to cope.
Low interest rates create pressure to seek returns to fund retirements, fuel economic growth, and shore up national treasuries. Capital moves quickly around the globe, and efforts to create even more fluid capital such as crypto currencies continue to gain ground.
More countries acknowledge climate change risks and are committing to significant structural shifts to reduce environmental impacts. Money should follow these commitments. Stresses on water, forests, and bio diversity compel initiatives to drive change.
The Social Uncertainties
There are many social uncertainties to work with, and for my purposes, I intend to look at two.
Globalism vs Nationalism
Since WW2, the world has been globalising. Globalism was seen as the antidote to the nationalism that gave rise to the wars in the last century. Global supply chains created tight links between nations, lubricated finance, and spurred migration flows. But nationalistic pressures have been the backlash, and rising nationalism is plainly visible in Brexit, the Crimean invasion, the governments of Venezuela, the Philippines, Hungary, and, most tellingly, the US MAGA movement. The pandemic has slammed borders shut.
Are we at the stage where nationalism now becomes the defining construct of our world, or will the successful model of globalism renew and refresh itself?
Grey vs green
Fossil fuels (coal, oil, gas), have been central to improving our human existence for the better part of 100 years, and the legacy infrastructure in support of fossil fuels is in the many trillions of dollars. There is huge inertia to change because of 1.2 billion cars, 300m trucks, terawatts of power generation, and thousands of vessels and aircraft. Governments dependent on fossil fuel exports also suffer from inertia to change. But the greening of the economy is becoming a central theme to leading companies and the next generation of workers.
Will governments enact the necessary policy changes accelerate the greening of the economy, in areas like taxation, land use, environmental standards, and national investments, or will we renew our commitment to fossil fuels given the aftermath of the pandemic?
Imagine a two-by-two matrix that features one social uncertainty on the horizontal axis and the other on the vertical axis, creating four scenarios for consideration.
- Grey and Global
- Grey and National
- Green and Global
- Green and National
I see countries and companies signalling their relative policy positions and beliefs on these two dimensions, both with purpose and by default. Those positions might not be artfully stated, but the stance appears unambiguous to me.
Grey and Global
Signal Nations: Canada, OPEC nations
Illustrative Company: Exxon
This is the status quo, the golden age of global fossil fuels. In this future, COVID 19 is swiftly beaten with a slew of inexpensive vaccines, and the world quickly returns to normal. Fossil fuels maintain dominance in the energy mix. Renewables, batteries, and the power grid only slowly make a meaningful dent in consumption. Energy supply chains remain firmly global, with few or no restrictions on crude and gas trade. Existing fuel consumption, pent up because of the pandemic, is unleashed with recovery in many sectors. Governments lack the capital to do anything else, are highly motivated for economic recovery, work to keep supply lines open for this vital commodity, and do not undertake meaningful overhauls of their economies or policies to curb fossil fuel growth. Key global institutions (the WHO, the IMF, the WTO) go through some tuning up.
Grey and National
Signal Nations: USA, Russia
Illustrative Company: Koch Industries
Putting nation first is the rallying cry for the Grey Nationalist. COVID 19 does not abate quickly, keeping borders under tight lockdown. Energy rich countries (OPEC, Russia, the US) deeply pursue their own self interests, using energy products as tools to achieve broader political ends. With borders closed, governments become major owners and investors in key oil and gas infrastructure as a way to further the sector. Basins are run to their limits. Global institutions (COP) are less relevant, governments deregulate domestic oil and gas to promote development and jobs. Individuals are unable to make meaningful personal choices to alternatives because of their own poor present and future economic condition.
Green and Global
Signal Nations: California, Germany, Norway, the EU
Illustrative Companies: BP, Repsol
In the Green and Global scenario, the hegemony over energy security by former energy supplying nations is gone, replaced by democratic energy generation and consumption technologies. COVID 19 is swiftly beaten with a slew of inexpensive vaccines, and rich country governments and companies, boosted by younger generations, take up the charge to use the pandemic to hasten the overhaul of energy systems globally. New rules are passed to promote the green economy, such as becoming carbon neutral, banning fossil fuel engines, and limiting new infrastructure. Green energy alternatives behave like digital technologies, and grow exponentially. Borders reopen, and the economy recovers on the back of investment in new energy, new ways of working, and disruptive digital business models.
Green and National
Signal Country: China
Illustrative Company: State Grid
In a Green and Nationalism future, countries break free from the reliance on imported energy and produce their own using new energy technologies. COVID 19 does not abate quickly, keeping borders under tight lockdown, increasing reliance on local capabilities, and creating strong domestic energy suppliers. Only strong governments with access to capital can finance the energy system overhaul to achieve green energy, and achieve global leadership and bragging rights. Patchwork energy regulations prevail, raising costs and capping scale economies. Supply chains fragment and reconfigure because of border restrictions. Nationalism blocks the spread of digital innovations and hampers effective use of green solutions. Global economic recovery is uneven, and global institutions lose relevance.
This thought exercise points out that there are indeed multiple possible ways to imagine the future. In fact, you can see the outlines of entire countries and companies framed by their public positions relative to these alternative policy choices — globalism vs nationalism and grey vs green.
Of course, the world is not so neat — Canada is at the moment economically highly dependent on fossil fuel exports to the US, but the federal government is policy-aligned with a green globalism, which is questionably unaffordable given the pandemic and the grey nationalism of its sole energy export market.
For companies wrestling with their strategic plans at these strange times, here are some take aways:
- Policy choices by governments do matter, and policy choices are inherently political. The aftermath of the upcoming US election will be important.
- Countries can execute policy at very different speeds. China’s announced shift to green will translate into its 5 year plans with alarming speed.
- Inertia matters in matters of energy infrastructure, but countries and companies are now signalling strong intent to drive change. The pace will be key.
- The impacts of the pandemic will inform strategic choices for some time, influencing business models, capital availability, energy infrastructure and economic performance.
This brief article is just a summary of a 45 minute presentation on the future of oil and gas in a post pandemic world. If you’re interested in having it presented to your board, management team or staff event, give me a call.
Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course on Udemy.
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