Introduction:The oil industry is facing up to the immediate challenges of oil price volatility, industry restructuring and the impact of new technology and innovation. But in meeting these challenges, it is important not to lose sight of long-term strategic objectives.
Today’s carbon economies built on coal and oil are not going to disappear overnight, but we are witnessing an historic shift from to oil to gas to renewable forms of energy, and a growing business commitment to sustainable development.
In the 21st century the oil industry will need to be more active in investing for the energy needs of tomorrow and in meeting the changing economic, environmental and social concerns of our customers and stakeholders. Only in that way, can we be confident of earning our “licence to grow” and of ensuring long-term economic success.
It’s become something of a cliché in recent years to highlight the impact of globalisation and our 24-hour Internet world on political and business decision-making.
Information dissemination is instant and constant. Decisions require immediate diagnosis and comment. Media hype and sensationalism distorts complex issues and makes the search for practical solutions more difficult.
But it’s not just recently elected Presidents with a desire to work a “normal” day who have reason to fear this trend. In our business, we have to take the long-term view.
Investment, exploration and production decisions are not based on a whim or the prevailing public, political or even industry mood.
And we work against a backdrop of industry predictions for growth in demand for fossil fuels and energy over the next twenty years, the rise of e-commerce, the restructuring of regional and global markets, rapid industrialisation of the developing world, and increased competition.
A roller-coaster ride: The last two years have seen our industry take a roller-coaster ride, buffeted by oil price volatility and political uncertainties.
It is only two years since the price of oil fell to $10 a barrel and publications like the Economist were predicting a further dip down to $5. Volatility and uncertainty continue to characterise the global oil market.
These trends have done significant damage to long-term confidence in the industry. And they have increased the likelihood of short-term knee-jerk reactions from governments and regulators.
In recent months for example, it has become fashionable, particularly in the UK and Western Europe to criticise the industry for high pump prices and rising costs for motorists.
This in turn has increased speculation that governments may introduce windfall taxes or tighten current regulatory requirements.
There is clearly more that the industry can do to address these immediate financial concerns and to ensure greater capital and operational discipline.
Oil price volatility has already had important consequences for individual companies. Throughout our industry there is now far greater emphasis on capital rationing, and many companies have moved the goalposts in terms of the criteria for new investment.
Large multinationals such as the Royal Dutch/ Shell Group are evaluating their prospective projects on a world-wide basis much more carefully than even two years ago. That’s a fundamental and I believe permanent shift.
In this brave new world of global ranking, funds will migrate to those areas that offer the best trade off between risk, return on investment and long-term strategic goals.
Major restructuring: We have also witnessed major restructuring in the industry with its inevitable impact on employees. The number and pace of major corporate mergers and takeovers has been astonishing.
Consolidation and rationalisation are going to be two of the main drivers for this industry in the 21st century. Of course there’s always speculation that Shell will jump on the acquisition bandwagon.
But for us, the main and immediate focus has been on cutting our costs, to increase our return on capital and to rationalise our portfolio. That’s what we said we would do, and we delivered on that promise.
Competitive market: In a highly competitive global market, successful businesses must do more to reduce costs, seek out new markets, attract and retain international talent, and invest in new technologies.
The application of new technology is key to driving down costs in exploration and production. Today for example, we are using ever more complex equipment, operating in higher pressure and temperature conditions, in very deep water, and working reliably and safely in even the harshest weather conditions. We routinely drill wells that were thought impossible ten years ago.
We can also do more to ensure that the industry renews its focus on customer choice and customer service – new advances in B2B and B2C e-commerce open up exciting new opportunities for our industry right through the supply chain.
Long-term objectives: But while short-term economic pressures have inevitably taken centre-stage, as an industry, there is always the danger that we take our eyes off our long-term strategic objectives.
These immediate business imperatives should not be seen in isolation. It’s not enough for us to react to prevailing market trends or the threat of increased regulation. The energy industry cannot afford to take such a short sighted view.
Today’s carbon economies built on coal and oil are not going to disappear overnight, but we are, I believe, witnessing a historic shift from oil to gas and renewable forms of energy, and a growing business commitment to sustainable development.
In this respect we are going anywhere but “back to the future.” A few months ago, I heard one company executive refer to Shell’s commitment to sustainable development as “the triumph of the hug a tree tendency."
For many in business, sustainable development is still seen as irrelevant, or worse, a threat to profitability and economic success.
Sustainable development: These fears are misplaced. For us sustainable development is actually a rather simple concept and a business opportunity. It’s about doing more with less. It’s about innovating in the way we extract and produce oil and gas.
It’s about reducing our environmental footprint. And we’re doing this for sound economic, as well as environmental reasons. All of these changes are aimed at increased profitability and shareholder value, by reducing waste and developing new products and services.
So, sustainable development is about how to do “good” business. And “good” is defined by all of the stakeholders with whom we interface as a company. This positive message has now reached Wall St and the City of London as well.
For example, the Dow Jones Sustainability Index sets out to show that the top 10 percent in each industry sector, measured in terms of sustainability, deliver higher investment returns.
Meeting global energy needs: This shift in business thinking clearly has profound implications for our industry and for wider society.
For one thing, it is helping companies such as Shell focus on developing new ways of meeting global energy needs in the 21st century and combating the threat of climate change.
The oil industry cannot ignore the likely impact of domestic and international initiatives to address global climate change, or its own responsibilities in this area.
Fossil fuels currently meet about 85 percent of the world’s energy needs, and the industry is taking practical steps to invest more heavily in lower carbon gas, as well as to develop new cost-effective renewable sources of energy.
Royal Dutch/Shell Group scenarios suggest that gas and renewables could provide almost 50 percent of OECD countries’ energy requirements by 2020.
It’s my view, that our industry needs to be more active in investing for the energy needs of tomorrow, and meeting the changing economic, environmental and social concerns of our customers and stakeholders.
In doing so, we need to recognise that oil and gas companies do not work in a business vacuum insulated from the concerns and actions of others.
Jeroen van der Veer, Managing Director of Royal Dutch Petroleum Company and Group Managing Director of the Royal Dutch/Shell Group at the 20th CERA Annual Executive Conference, Houston, Texas, USA
Source:Shell.com.
© 2001 Mena Report (www.menareport.com)
