Well, I know I said in November that oil prices might spike in the short term, and that we should not discount the prospect of war – but even I didn’t expect $140 oil by March and gas prices up to 800p per therm.
Tragic for those caught up in the mess but for the oil industry it will be profitable in the short run, fill your boots while you can.
Prepare now for the future
But what about the long term? Does it make sense to invest money now when you won’t be reaping the reward until a few years have passed? Will prices stay up, or will they crash when everyone else who invests comes on stream together?
That dynamic will drive the short- and medium-term market, it’s the classic conundrum of all cyclic markets – lurching from over to under capacity as industry players second guess each other and end up rushing for the exit at the same time. Right now Mr. Putin has just shouted fire in the cinema.
It’s a classic theme that I come across often with my clients. How to balance short term money making with investments that are both speculative and, even when they work, won’t pay off for years. The other position is equally bad – like Wily Coyote running over the edge of a cliff, running fast in the short run looks smart until, one day, it isn’t.
Invest through the crisis
This crisis will be bad, but can lay the foundations for energy security through transition
The industry just got a second window, don’t waste it. Windfall profits can fund transition, which will create the energy security craved by the politicians.
Have a read about energy security, the Russians and the Saudis in my post from 2016 [LINK]
How to think about transition strategy
The clients I work with are addressing energy transition strategy. It’s a hard one for the indsutry veterans because – well old dogs and new tricks. It should be easy right now – but perversly it just got a lot harder .
In 2014 markets were booming and then suddenly they weren’t as prices fell (due to oil oversupply from shale – or so some thought). Some companies hunkered down and waited for customers to come back but they didn’t. I suspect customers will rush back now. The old strategy is about to make a lot of money and be “successful”. Waiting for customers to come back seems like it might have been the right decision (as it was in 1984 and in 2000).
Wait for the chorus of “I told you so” – as they chase the road-runner into unsupported fresh air.
This is the moment to reap the profits from oil and gas and invest in energy transition. This will not last, this is borrowed time, we are in the end game.
So what’s the plan?
Between 1945 and 2005 the world agreed a “dominant design” for the creation and distribution of energy and set about expanding capacity. I suspect that we will see another stable configuration from 2050 onwards where expansion proceeds along agreed lines with technologies that currently either don’t exist, or are uneconomic at scale. But frankly that’s a bit far away to be relevant, there is a process of transition that’s going to unstablise the energy industry until then.
My advice to clients is to consider building a strategy that addresses dimensions of time, space and focus-area.
There are 3 distinct periods to consider.
- Now->2030
- 2030->2040
- 2040->2050
In each of these periods there must be a strategy for making the most of moment, but also one that prepares for the next period.
The immediate question is: how to balance making money between today and 2030 and how to lay foundations for success in 2030+.
The boundaries have S-Curves
If history is a guide, the handover between periods will be based on technology adoption. It starts as a gradual “more of this, less of that” approach and then accelerates through an S-Curve of adoption. I suspect the steepest part of the first curve will be immediately before and after 2030. For a more in depth discussion as to why, I recommend reading the late Paul Geroski, Evolution of New Markets (https://www.amazon.co.uk/Evolution-New-Markets-Paul-Geroski/dp/0199248893). I wish I could still call him – I’d ask what he thinks about energy transition, he’d really have loved this.
Options for each period
Option 1: Milk it now for as long as you can
Option 2: Innovate and be a leader and drive the change
Option 3: Wait for the change and then buy the emerging winners.
All are valid approaches but what you do to implement them is different, so a choice should be made and made explicitly. It is possible to blend elements of all three, but make sure incentives don’t get in the way.
Geography matters
My clients operate internationally, so there is the question of where to focus. Europe, America, Asia, ME will transition at different times and at different speeds. It might sound silly but don’t discount “outer-space” as a geographic area, because within this time frame, space energy will be “a thing”.
Focus Area
Once you have selected the periods you are addressing, the approaches you want and the geographies that matter to you, then what are you going to do?
One framework available, is to answer: Who, What and How. Who are your target customers, what will you offer them, and how will you deliver (and charge). That’s for the next post.