Donald Rumsfeld (former US Secretary of State for Defence) 2002
The oil and gas sector is very much in the position described by that great philosopher Donald Rumsfeld. Many aspects of the businesses are going to change, some of them out of all recognition. It is not possible to know how fast this will happen, or what form all the changes will take. The demand landscape is changing, and will change far more in the future. The competitive landscape is also changing and likewise will continue to do so. Competitors will not just be renewables but all forms of energy efficiency and National Oil Companies (NOCs) with a more intense set of pressure and less strategic flexibility. There will be disruptive new entrants and disruptive new technologies.
So what on earth is a rational management to do?
- Run the core oil and gas businesses really well. Choose investments low on the cost curve, run them efficiently and consider whether restricting reserve life to the lower end of the conventional range might be wise, now or in the future. This is the foundation of any successful strategy, providing the most strength and optionality.
- Also run your core businesses as well as possible in terms of your own carbon footprint: reducing methane flaring the International Energy Agency (IEA) estimates that the oil and gas sector could reduce methane flaring by 50% at no net cost which would reduce CO2 equivalent to shutting down two thirds of Asian coal fired power stations) and carbon intensity in production are powerful indicators of a responsible attitude. Put relevant targets in management remuneration.
- Be transparent about carbon related risks, and climate change related risks.
- Continue calling for a broadly applied, consistent carbon price. It would at least provide a rational framework for demand development and, if implemented, might speed the exit of more coal.
- Consider diversification very carefully. Be very honest about your capabilities, both current and needed in future – culture and people are going to be a greater constraint than capital, and this is a major risk. Ensure clear communication internally and externally about progress with these investments.
- It is not always important to be early – sometimes greater clarity matters more.
- Remember that shareholders have other ways of investing in many of the businesses into which you are diversifying and that the external market for capital matters.
- Don’t rule out de-capitalising in the future: it can be an honourable and popular strategy.
- Even if your diversifications are successful, they may not be of a scale needed to maintain the size of the overall group. Capital return and a smaller company with growth could be very attractive.
- Be ready to adapt. The future is extremely unclear: the oil and gas business can’t stay the same as it was five years ago, but neither is a strategy set in stone plausible.
- Monitor all developments, avoid confirmation bias and be ready to adapt your strategy as businesses and economies evolve.
- Accept that there is no one single winning strategy. What will be right for your peers will not necessarily be right for you.
- Your best strategy will change over time, be ready with alternative plans and always ensure you communicate clearly.
Beth Mitchell is an independent specialist advisor to the oil and gas industry specialising in fund management and portfolio advisors.