All industries need to keep innovating to remain relevant. Natural resources is no different.
All industries need to keep innovating to remain relevant. Natural resources is no different. Despite, or perhaps because of its century at the centre of the world’s energy mix, critics suggest that it has got into a habit of simply repeating the same strategies and expecting the same outcomes. Whether that’s a fair observation or not, it’s not an approach that is likely to work in the post-pandemic epoch.
When the economic history books of the twentieth and twenty first centuries are written, most will discuss the phenomenal success of the oil and gas sector, both in terms of the revenue it has generated, and how it has been an enabler of global economic activity. Without going too far into details, it is hard to imagine a world without oil and gas, and certainly there are few industries that haven’t been enhanced by its presence.
This success has led to accusations of a certain amount of complacency in the industry. After a century at the centre of global economic activity, critics suggest that some parts of the industry expect to be able to carry on as they always have. As we have discussed before however, storm clouds were gathering even before the pandemic struck.
The natural resources sector cannot simply carry on as it has done before. Support for the industry is dwindling from regulators, governments, investors and even consumers. Any one of these might have presented an issue, any two of them could have been a challenge, but all four of them at the same time looks like a problem that is not going to be solved by simply employing strategies that were starting to lose their effectiveness a decade ago.
Folding your arms won’t help…
The instinct of some in the industry is to react defensively, point out the many good things that natural resources have done and utterly ignore the sector’s downsides.
That’s probably not an approach that is going to work in the medium or long term. One need only look at the issues in Texas in February and the immediate and opportunistic rush to blame renewables. In the longer term, that strategy may have done more harm than good because as the facts have emerged, a far more nuanced reality has become clearer.
If you look to blame someone else unfairly, whether you are an individual, company or industry, when the truth comes out, people become less likely to listen to you when you actually have a good point. And there are still plenty of credible arguments to made about oil and gas.
…but rolling up your sleeves might
So perhaps it is time to recognise and admit the challenges that the oil and gas industry faces. By identifying the problems, it becomes easier to develop useful strategies that will help protect the industry in a fast-changing economic environment.
The pandemic highlighted several issues with the supply chain across the sector which have rumbled on for the last year. Technology is offering an ever-clearer picture of how much oil and gas is in a particular deposit as well as an enhanced view of the best places to drill.
This offers an opportunity to manage supply chains more efficiently so that there are fewer barrels of oil and volumes of gas in the system at any given time. The sector could never operate on a just-in-time basis as you might see in the motor industry, but it could reduce holding levels and decrease the constant lurch between glut and shortage.
The industry could go a long way towards attracting investors back if there was a clear and transparent focus on reducing waste. This could be achieved through some relatively simple enhancements to tracking and logistics. The challenge is that the complexity of the path between upstream and downstream via midstream is colossal, and would require a concerted effort by all parts of the industry. There are also ways of making it possible to stop wasting stranded gas by flaring, one of the industry’s most obvious signs of waste.
If we are going to take a positive form the unfortunately gradual way that economies are regaining their momentum after the pandemic, then perhaps it is that this is a good opportunity for the oil and gas industry to look at how it operates today and make some decisions about how it could operate in the future. The appetite for the effort required varies, but there is little doubt that now would be a superb time to engage with the opportunity.
Given the amount of infrastructure that will need to be converted if alternative sources of energy are going to replace oil and gas at the centre of the world economy, it still has a strategically strong position. The more that the sector engages with its challenges, the longer the conversion to alternatives is likely to take. If you can demonstrate that you are trying to do the right thing, you are more likely to get support. If you show that you are willing to do the wrong thing, you are more likely see your support ebb away.
About the author
Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilising his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Haynesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.
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