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The Oil Industry: Challenges and Strategic Responses

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The Oil Industry: Challenges and Strategic Responses Cuadernos Orkestra 2018/47 ISSN 2340-7638 The Oil Industry: Challenges and Strategic Responses Álvarez Pelegry, Eloy Bravo López, Manuel November 2018 Cuadernos Orkestra nº47 External collaboration by Eloy Álvarez and Manuel Bravo E-mail: [email protected] E-mail: [email protected] Keywords: business models, climate change, future uncertainties, industry challenges, market trends, oil demand, oil supply, regulations, technological developments. This study was prepared by the authors in their personal capacity. The opinions and views expressed in it are exclusively attributable to the authors and do not necessarily reflect the opinions and views of Orkestra-Basque Institute of Competitiveness. Responsibility for any errors or omissions lies solely with the authors. Cuadernos Orkestra nº 47 PRESENTATION LETTER The energy industry is experiencing very significant changes, and it is probable that we will see more dramatic uncertainties in the future. Climate change is one of the main issues that are affecting the environment, but as the authors of this study have clearly put into context, there are many other issues that are affecting and will disrupt the Oil and Gas (O&G) industry. One of the significant contributions of this study is the detailed analysis of the context in which energy companies, and particularly O&G companies, are working and developing their activities. The study identifies those issues in the “New Landscape”, in which not only climate change has been considered, but also the social concerns and new market trends, the technological development and applications and regulations. The study carefully identifies issues and topics in each of those blocks, and discusses them so as to understand the context and, what is more relevant, to infer which challenges will face the O&G industry. The analysis carried out revolves, in a very detailed manner, around specific challenges that are, in turn, grouped into seven general categories; the first four of which are ‘energy transition to a low-carbon economy’, ‘social acceptance and license to operate’, ‘changes in consumer preferences and consumer empowerment’, and ‘reduce GHG and pollutant emissions in the industry processes and reduce the carbon intensity of products’. All of these general challenges may be grouped under the heading of ‘fighting climate change and reducing environmental impact’. A second block of general challenges are grouped under the heading of ‘energy products markets and competition’, which consists of ‘regional decrease in demand for conventional oil products’, ‘greater competition at a global and regional scale’ and ‘greater competition from alternative energy products’. The merit of this study, ‘The Oil Industry: Challenges and Strategic Responses’, goes beyond the in-depth analysis it conducts of the context of today’s energy and the energy of the future. It also looks at the strategies and, furthermore, it identifies and explains general strategies and 50 specific responses that the oil & gas industry may put in practice, with some of which are already being executed. These issues may be said to comprise the core of the study and for doing that, the authors also analyze some business models, and the oil product demand and supply examining the current state and the future uncertainties. In my opinion this is also key as uncertainty is the key characteristic of the oil & gas industry today. The Oil Industry: Challenges and Strategic Responses I would also like to thank the authors of this study Eloy Álvarez and Manuel Bravo for their dedication to this study. I am aware that their intention was to add value through providing insight into the present-day circumstances, and particularly into the future of an industry that is subject to considerable uncertainty and that will most definitely experience considerable changes in the future. Emiliano López Atxurra Vice President Orkestra-Basque Institute of Competitiveness Cuadernos Orkestra nº 47 EXECUTIVE SUMMARY For some years now, the fight against climate change and the efforts to begin low- carbon energy transitions have been the forces driving very relevant changes in the energy industry. Thus, to a certain extent, it is quite common to emphasize the need to increase and reinforce the development of renewable energies, and there are several analyses that examine the energies and technologies that are going to play a pivotal role in the future energy landscape. However, it is not so common to look in such detail at the industries that apparently, and according to popular consensus, have no future, or at least not a brilliant one. This document looks at the oil industry, from exploration and production (E&P) to refining, in order to identify the challenges and the strategic responses that industry players are already developing, or may attempt to implement, so as to become a leader in the future energy sector. New landscape for the oil industry First, the document examines the issues that are considered a part of this new landscape and groups them into the following four categories: climate change policies and transition to a low-carbon economy, social concerns and new market trends, technological developments and their applications, and regulations. Climate change policies and their corresponding legislation are key issues for the oil industry, as well as the means to cope with the energy transition to a low-carbon economy. Social concerns and new market trends are also essential aspects to the industry. In this group, the study identifies and analyzes the factors dealing with renewables and their future, new approaches to mobility, energy efficiency, and the change in consumer preferences and empowerment. Regarding social concerns, other topics that are not so critical are also identified and examined, including peak oil demand, supply security, and the security and protection of critical infrastructures. In addition, another topic for discussion is how the changes in the global oil and gas product markets affect -and will influence- the oil industry. Likewise, technology is a relevant matter. In an industry where technological developments have been key since their inception, some specific technologies are under analysis, as they could be considered examples that may frame the future of the industry in one way or another. Namely, these include carbon capture and storage, information and communication technologies (ICT), catalyst technologies and vehicle technology. The analyses carried out in this document show that an important group of issues have arisen from regulations. Under this heading, a diverse list of topics must be The Oil Industry: Challenges and Strategic Responses considered, such as environmental legislation, ecosystem protection, product regulations, safety risk analysis, waste management, transportation safety, and monitoring, reporting and compliance. These regulatory issues show quite clearly that not only is the industry affected by complex environmental regulations, but also that there are many other regulatory questions that are essential for its future. These four main groups have resulted in the identification of numerous challenges and responses, all with a varying level of granularity. On the one hand, there are general strategies that are likely to be addressed and implemented in a timelier manner; on the other hand, deeper analysis has led to a range of specific responses to industry challenges. To better understand the general strategies and specific responses, it is advisable to use the supplementary document, ‘The Oil and Gas Value Chain and the Oil Refining Process’. One of the objectives of the value chain is to create oil and gas products that satisfy consumer needs. In this document, value chain activities are structured with a traditional approach: upstream (E&P), midstream (transportation, storage and trading) and downstream (also including trading, and essentially refining, petrochemicals, distribution, and retail and marketing). In this section, we will focus just on E&P and refining. Exploration and production The upstream business is clearly a critical part of the value chain. The upstream industry has four factors of intrinsic complexity and two additional factors that make it even more complicated. The first four factors refer to complexity in terms of resources, projects, the industry, and safety discipline; and the other two are a loose control of costs and government action. In this context and in order to maintain profitability and cash returns to shareholders, the E&P industry has reduced capital expenses and the investment in exploration, as well as operational costs. At the same time, it has made several adjustments both to the portfolio and the operating models. In E&P, a distinction should be made between conventional and unconventional fields, and also regarding the different types of contracts. Particular attention is paid to digital technologies along the E&P value chain. One of the challenges of the oil industry is to deal with different types of oil fields and with changes in oil prices, in addition to responding to price variations and to the changing environment in terms of investment decisions. For many years, the oil and gas (O&G) industry has been aware that easily-exploitable reserves are decreasing and can be found farther away from the existing logistics infrastructure and the major oil routes. As a result, projects have become more technically and commercially complex. Neglecting opportunities to improve collaborative efforts,
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