The Perfect Storm for Energy Companies: Low Oil and Peak Demand

The Perfect Storm for Energy Companies: Low Oil and Peak Demand

The term “A Perfect Storm” is commonly referenced when multiple events occur simultaneously to create a worst-case scenario. Often overused, this phrase has become synonymous with many things, from cataclysmic weather events to financial crises. For the global energy industry, sustained low oil prices and the emergence of demand-side technology improvements across multiple fronts have created that perfect storm scenario. In the eye of the storm is peak oil demand, where the global demand for oil plateaus or even shrinks. This reality has crept up on an industry that until four years ago was operating with huge profits and growing global demand with no end in sight. To weather the storm, companies across the Oil and Gas value chain will need to adapt and evolve.

Peak Oil Demand: How did we get here?

The flip side of peak oil demand, peak oil supply, has been lurking in the energy space since the 1970s. Energy companies turned to engineering and technology to search for oil from deeper offshore depths and more challenging locations. These developments chased the theoretical date of peak oil supply well into the future. The cost and complexity of projects skyrocketed, but with oil comfortably above $100/bbl, these huge, exotic, major capital project investments were funded and executed. Onshore, unconventional technologies, particularly in North America, emerged to keep the pipeline full for the foreseeable future. The massive growth in development tilted the demand vs. supply balance to the supply side, driving prices to half of what they were only three years ago.

On the demand side of the equation, legislation, technology, and overall culture shifts over the past 10 years have disrupted the expected growth rate of demand for oil. Government mandated vehicle fuel efficiency targets and carbon emissions limits to offset climate change are only part of the demand side. Technological and cultural shifts are the real catalysts of demand disruption. Advances in both alternative energy (wind, solar) and battery storage capabilities have enabled the feasibility of these technologies to even outpace the massive reduction in oil prices. See charts below:

Peak Oil

Furthermore, the capability and practicality of electric cars, trucks, and buses enabled by self-driving technology is making science fiction into a reality within a single generation. While no one can predict the future, there are multiple scenarios suggesting that global demand for oil will plateau at around 100 million barrels per day. The only question is when. Timing depends on how quickly new policies and technologies are adopted and exploited – see chart below:

Peak Oil 2

This is the reality that major oil companies are coming to grips with. And it’s not just technology, but the overall business model and the staffing of these organizations that will have to change. Many oil companies are already on that path, and much of it is driven by cost cutting to find operational efficiencies in response to the recent oil price drop. Getting comfortable operating profitably with sustained $60 oil is a strategic imperative.

Operating profitability: How do we get there?

To sustain, and even thrive, oil companies will need to embrace many operating norms to weather the storm.

Embrace digital

Energy companies will shift their operating models, from those that leverage a collection of different technology-based tools and applications to a digital model. This new model should be built on a foundation of technological and analytical capabilities to fundamentally change business conditions, create an adaptive culture, and use data to scale and grow. Some examples:

  • Maximize technology’s role in making operations more proficient.  Not only to support functions like HR and Accounting, but to also accelerate and automate project management, surveillance, maintenance, engineering, field service, and operations.
  • Leveraging Big Data and the Internet of Things (IoT) to operate more efficiently and effectively. Predictive analytics of asset integrity, equipment reliability, reservoir modeling, and even project planning will help to operate in a predictable, repeatable, and cost-effective manner, enabling both transparency of performance and more certainty when funding new development.

Optimize your workforce

While a workforce is the most valuable asset to any energy company, it, along with capital investment, is the lever pulled when oil prices change. Technological acumen and tribal knowledge enables the effectiveness of your people. Oil price-driven workforce reduction and/or aging demographics have led energy companies to increase the investment to build and preserve core knowledge. Coupled with an increasingly competitive war for talent, energy companies will need to optimize their workforce to attract and retain employees, but also operate safely, reliably, and profitably. Some areas of note:

  • Manager Effectiveness – building the next generation of leaders who are accountable for performance and act as outstanding role models for junior staff, all while balancing technology with old-fashioned face-to-face interaction with their teams.
  • Standard Operating Procedures – creating methods and standards, benchmarked across non-energy industries, that are scalable and adaptable to changes in technology, while still preserving a safe, predictable, and repeatable way of working.
  • Automation/Artificial Intelligence (AI)/Robotic Process Automation (RPA) – identifying repeatable, process-based activities that might be better served by a robot, and empowering employees with greater data transparency to elevate the value-added interventions where experience and capability are truly required (engineers, analysts, etc.).

Operational Excellence = Innovation Excellence

Operational Excellence is table stakes for any energy company. Being safety-first, process driven, and operating one way, the right way, every time is modus operandi. However, those that will thrive in this new reality will expand Operational Excellence to include innovation as well. Anyone will tell you turning an ocean-going oil tanker on a dime is impossible, but somehow large, capital-based, global energy giants will need to do just that. This can’t happen if you only focus on being nimble and scalable. Companies must also continuously innovate and apply lean principles at the core of operations. This will lead to improved decision velocity, reduced project cycle times, effective change management and scaled operations to maximize return on investment while minimizing risk.

While no one can accurately predict when peak demand will ultimately occur, or what oil prices will do in the long term, those energy companies who embrace the changes are more likely to weather this perfect storm and survive.

This thinking was inspired by a recent article in Fortune Magazine, Inside Oil Giant Shell’s Race to Remake Itself for a Low-Price World (January, 2018).

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