by Jennifer H. Yang | Senior Managing Consultant Chemicals & Petroleum Center of Competence IBM, Global Business Services

Overview
Despite increasing attention to alternative energy sources, the world can’t forget about oil and gas as it struggles to meet ever-rising demand for clean and affordable energy. Technology is the most important force to increase the supply of more challenging oil and gas and mitigate the environmental impact of energy production and consumption. Additionally, in light of the tsunami and its impact on the nuclear power station in Japan, several governments are re-evaluating their energy mix and the role of nuclear power.

This uncertainty further spurs a heterogeneous regulatory evolution, one that will see how different countries tackle their energy challenges going forward. To compound the complexity, the latest political unrest in key regions with large supplies of hydrocarbon has also further encouraged countries like China and the United States to rethink the robustness of energy security.

Globally unaligned government regulations and uneven distribution of oil and gas sources as well as technological expertise will result in more diversified operations, mergers & acquisitions (M&A) and deeper complementary partnerships. Looking toward 2030, companies need to develop, deploy and integrate strategic production and information technologies to enable key success factors: performance management, enterprise risk management, operational excellence, people management and adaptive business models.


Energy demand is expected to grow significantly in the next two decades, with increased demand mainly coming from emerging nations with increasing economic power. While governments and companies investigate alternative sources, for most regions of the world, the biggest challenge will be learning how to better leverage technology to extract more oil and gas from existing sources and uncover new ones, while maintaining their cost competitiveness and managing total-lifecycle carbon footprint.
To better understand how oil and gas companies can be successful in the changing future industry landscape, IBM interviewed more than 100 corporate level executives from different parts of the industry ecosystem, mainly focusing on the upstream segment.
Not surprisingly, respondents readily acknowledged that there are many forces impacting the oil and gas industry, from both the supply and demand sides. Respondents identified growing trends that their organizations need to address: the ability to operate in chalchallenging frontiers, the need for a new skill mix, government impacts that are stricter and more diverse, the evergrowing demand for oil and gas, increasing environmental concerns, and a shifting competitive field where National Oil Companies (NOCs) are becoming more dominant and the Independent Oil Company’s (IOC) role is challenged. Governments will need to prioritize energy security, economic growth, social development and mitigate environmental concerns. For example, the governments of Switzerland and Germany have made public proclamations to phase out their nuclear plants altogether in response to the Fukushima accident in Japan.


The changing industry landscape
and impact of key external forces
When asked to name the five most important external forces impacting their companies today, the top answer was technology progress. While 61 percent consider technology progress to be an important external force today, a full 81 percent expect it to be important in 2030. For the same period, 42 percent of respondents included energy source availability as one of the top five external forces. Interestingly, they anticipate it will carry the same importance - no more and certainly no less - in 2030 as it does today.
With growing energy prices and environmental concerns, a focus on cleaner alternative energy sources is expected to grow, particularly with government support. However, this growth will be limited given challenges to scale these energy sources at a pace commensurate to demand. The prevalent view suggests that alternative energy could emerge as a “complement” to hydrocarbon supply, with governments supporting cleaner alternative energy to secure supply and to curb carbon emission. Also worth mentioning is that approaches to limit CO2 emissions are evolving, but it is not evident that carbon policies will be aligned globally. At the same time, pricing fluctuations and compressed margin have propelled oil and gas companies to venture into both more inaccessible supply sources and unconventional energy.

Despite this awareness of the importance of technology, extensive industry research acknowledges that oil and gas companies have fallen short in deploying new technologies at the pace of general technology development. One respondent cited high costs and risk as barriers to commercializing technological solutions – even those available for more than ten years. Finally, external events can disrupt the industry. However, we found through our interviews that these events only have a short-term industry impact regarding public perception, but beyond the implications on operations, these events also have a longer-term implication on safety and environment. Recent discussions have been raised around the “Golden Age of Gas” in response to a re-prioritization of future energy sources resultant from the Japanese nuclear incident. Companies are now investing in new technological advancements that allow both emerging markets and mature markets to unlock the potential of shale gas and oil sands in a cost-effective and environmentally conscience manner.


Shifting competition among
industry participants
Today’s oil and gas industry is comprised of a broad mix of participants that are not equally advantaged. Each has different combinations of access to energy sources, consumer markets, availability of capital and/or special “know-how” and technology. With limited energy source access, the role of IOCs is challenged, especially if NOCs reduce their demand on IOCs for technology and risk expertise. Forty-eight percent of respondents predict that by 2030, IOCs will diversify in related energy products and services. Forty-eight percent also predict that by 2030, IOCs will be complementary technology providers serving NOCs.

In the future, we can expect more diversified operations, mergers & acquisitions (M&A) and deeper complementary partnerships resulting from IOCs focus on niche segments. NOCs are likely to expand internationally, also focusing on M&A and complementary partnering to gain access to energy sources and technologies to grow revenues. In particular, those NOCs with emerging demand in home markets and limited energy sources are expected to grow on the international stage to secure supply. Similarly, the attention on light gas, coal, natural gas, even shale gas, is driven largely by energy security, particularly given instability in the Middle East and price volatility of oil and gas prices.

Per conversations with National Oil Company’s executives, the urgency and necessity to address talent management and organizational change as a result of international expansion into resourcerich countries becomes further highlighted. Culturally and organizationally there is much to be done to assimilate to a new operating environment, to up-keep safe and optimized operations, and to adapt to a heterogeneous marketplace. This is definitely unchartered water for many NOCs and much is to be learned and observed from IOCs. Seventy-nine percent of respondents agreed that service providers will keep their current important status as the key complementary service and technology providers to the industry, and that this will particularly be true for NOCs. But for service providers, competition might increase with emerging IOCs diversifying into technology services.


Preparing now for 2030
Based on analysis of our study findings and the wide-ranging changes that are already impacting the industry, how can oil and gas companies act now to position themselves for success in 2030?
Arguably, the best oil and gas companies in 2030 will not just be the biggest resource holders with the strongest balance sheets. For at least the next two decades, the future of oil and gas will be defined foremost by the geology of more challenging oil and gas sources. Those who remain competitive will find themselves developing and deploying strategic production and information technologies that will enable them to achieve greater operational performance, better manage enterprise-wide risk and respond to current and emerging industry trends.