2010-2020A Period of Transition for

the Oil Industry

Looking back: historically, a shifting industry

Over the past 40 years, the international oil industry has witnessed several periods of
change and uncertainty during which the rules of the game have shifted significantly:
Industry shift 1:
In the 1970s, OPECs powerful influence on the energy system was on the
rise and an era of resource nationalism was unleashed, demonstrated by
the energy crises of 1973 and 1979.

Industry shift 2:
In the 1980s, exploration exuberance
in the North Sea, Alaska and other
basins outside OPECs sphere of influence established the supermajors as
the dominant players in the worlds
energy markets.

Industry shift 3:

Industry shift 4:

In the late 1990s, low oil prices led to

underinvestment by the international
oil companies (IOCs), a talent migration to oil and gas service companies, a reliance on mega-mergers to
improve the cost base and the rise of
national oil companies (NOCs).

In the new millennium, a multi-polar

world has emerged, spurred by rising
demand for energy in emerging markets, the growing influence of NOCs
and their control over the majority
of the worlds hydrocarbon reserves
and the impact of unconventional
sourcesspecifically shale gas in the
United States since 2007. Of late,
these trends have been coupled with
evidence of global demand destruction
driven by recessionary pressures.

Looking forward
Research by Accenture, surveying a number of global industry experts on the subject of
Understanding the Future Energy System, has shown that the 10-year period from 2010
to 2020 will continue the theme of transformation along a number of dimensions:1
Changes to the energy mix are occurring faster than expected driven by:
The end of easy oil and gas
exacerbated by the 2010 Macondo
Gulf of Mexico oil spill, which will
have lasting effects in the context
of exploration risk, regulatory
review and increased costs.
The rise of gasprincipally shale
gas, coal bed methane (CBM) and
liquefied natural gas (LNG), with
the potential emergence of a
global gas market.
The continuation of security of
supply concernshelping to
overtly politicize the industry.

The growth of renewables

becoming an increasing part of
the energy mix.

Energy infrastructure investment and

demand-side initiatives, such as smart
grids, progressing at pace and scale.

The evolving and uncertain energy

policy post-Copenhagen and postCancn, spurred on by concerns over
climate change and driving investment
in sustainable energy.

The emergence of new industry

players seeking to take advantage
of the changing policy landscape
and energy value chain, potentially
posing a serious threat to existing
energy companies.

The transition to a low-carbon

economy, resulting in the likely spread
of carbon markets beyond Europe,
highlighting the need for a perspective
on carbon pricing.

The influence of policymakers and

regulators seeking to dictate the
location, scope and pace of change.

Key themes
This year, Accenture worked with more than 150 energy companies across six continents.
That business footprint allowed us to discuss first-hand with our clients the challenges
they face as they manage the impacts from the recent recession and grapple with a postGulf of Mexico industry ecosystem. The result of these discussions has been the emergence
of six common themes.
Theme 1: Rebalancing asset
portfolios
Rebalancing and the pursuit of
flexibility is about maintaining a
portfolio of options and knowing
which to scale up and which to
shut downand when.
Almost all reference projections for
primary energy demand between now
and 2030 show substantial increases
in demand. In all scenarios, oil, gas
and coal will remain dominant
providers of energy requirements,
with gas taking on an increasingly
important role. The portfolio investments companies are making today
demonstrate the industrys conviction
that gas will be the worlds transition
fuel of choice as we move toward a
new energy future.
Portfolios are being adjusted to bolster
either the reserve type or technological skills critical to delivering energy
at scale in the future. Recent investments by Chinese companies in US
shale and Australian coal bed methane
operations demonstrate this trend.
Portfolio rebalancing globally
means divestments as well as
acquisitions, as companies seek
the right mix of assets for the
future. Falling energy demand in
some OECD (Organisation for
Economic Co-operation and
Development) markets has led
a number of multinational oil
companies to reassess the benefits
of integration in the face of falling
absolute demand. Statoils recent
announcement that the company

was going to carve out its downstream

operations is indicative of the shift
in emphasis to upstream operations.2
In some markets, downstream is
being left to new players. From retail
operations being sold off to franchise
operators, to commodity trading
houses such as Essar,3 Trafigura4
and Vitol5 owning assets outside
their original trading operations,
downstream is seeing a significant
ownership transformation.
Portfolio rebalancing and the pursuit
of flexibility are expected to continue
as the mix of energy solutions evolves.
However, we believe the energy world
of the future is an and and not an
either/or world in terms of primary
energy sources.

Theme 2: Capital allocation and

management
The quantity of infrastructure spend
that has been announced in recent
years is staggering. Globally, seven
countries are planning investment of
more than $100 billion, with another
10 countries looking at investment
levels between $10 billion and $100
billion.6 Announcements are one
thingbut delivery is quite another.
A study conducted by Independent
Project Analysis Inc., which looked
at mega-projects (valued at more
than $1 billion) found that up to
half of projects could be deemed
as failures due to inadequate cost
controls, scheduling problems and
operational underperformance.7

Capital investment at this scale

requires access not only to enormous
volumes of commodities, equipment,
talent and local infrastructure, but
also the mastery of complex project
management across multiple projects. These projects are made all the
more complex due to the increasing
geographical spread of operations
and the need to manage the impact
of environmental regulatory hurdles.
Domestically and abroad, costs, risks,
procurement, communications, quality,
knowledge resources and time must all
be managed as a unified program with
the appropriate governance model.
Developing a superior capability in
managing multiple complex capital projects will be a must-have for
energy companies seeking to ensure
delivery of future business value.

Theme 3: Operational excellence

and integrity
Historically, the energy industry has
not been known for lean and efficient
management of business processes. In
the period from 2000 to 2008, steadily
rising prices for oil and gas heralded
an era of inefficiencies in functional
and operational processes. However,
the consequences of suboptimal
operationsfor example, oil spills,
gas pipeline ruptures and refinery
firesremind us that the search for
operational excellence and integrity is
ongoing. The response to the Macondo
disaster in the Gulf of Mexico will
inevitably lead to greater regulation
and substantial changes in procedures
to ensure operational integrity.

Operational excellence also extends

to operating models, which over time
tend to evolve in response to both
changing company requirements
and the external environment. The
geographic expansion of energy
operations illustrates this point.
The more geographically dispersed a
companys operations become, the
greater the determination to maximize
efficiencies across the greatest
number of locations. However, this
determination can come into conflict with local requirements, such as
employment or procurement targets.
Thus, IOCs are increasingly looking at
the balance of their operating models
and trying to match the need for
global efficiencies with local
responsiveness, resulting in the
emergence of:
Super-global, super-local operating
structures becoming the model of
choice for many companies.
A new role for the corporate center.
A renewed focus on shared services
and standardization.

In each instance, the degree of

change with respect to networks,
standardization and decision making
will need to take into account a
particular companys circumstances.
There will not be a single correct
answer, but rather a range of options
for companies to consider in designing
the optimum operating model.

Theme 4: Cost management

Across the industry, global energy
companies have been confronted by
the realities of the economic downturn. With falling demand in some
markets, the focus switched to the
one element companies felt they could
controlcosts. For many companies,
cost management has risen to the top
of their agenda as a critical challenge.
After easy costs were cut, companies
were challenged to locate the second
and third levels of cost-reduction
opportunities, with examples including
reconfiguring both supply chains and
sourcing organizations.

The pursuit of cost reduction

has resulted in a fundamental
transformation for many companies,
particularly in downstream, where
falling demand in developed markets
has combined with new regulations
to severely depress margins. As a
result, a number of companies have
taken steps to reemphasize supply and
improve the level of integration within
their downstream operations through
a redesign of their downstream organizations and value chain processes,
often in parallel with existing changes
to underlying systems (e.g., enterprise
resource planning [ERP]). Once any
major cost-reduction programs have
been implemented, the importance
of having robust cost management
systems and processes in place to
ensure continued delivery of cost
savings is paramount.

While cost management is no less

important to companies in the growing Asian market, the emphasis is
different. Uncontrolled costs can
restrict growth plansdelaying or even
endangering future projects. And for
NOCs, balancing costs against national
employment targets demonstrates the
complexity of the task ahead. Winners
will be those companies that have a
management system in place and that
enables them to reach an optimum
balance.

Sixteen large, state-owned companies have agreed to form an alliance

to conduct research and development, and create standards for
electric and hybrid vehicles in the
country by investing $15 billion.
The state-owned Assets Supervision
and Administration Commission
initiated the alliance and provided
it with about $200 million in
start-up capital, allowing the
government to underwrite or
subsidize development costs.

Theme 5: New energy value

chain

The sheer scale of planned greenvehicle development makes China

a great potential opportunity for
companies providing transportation fuels. The challenge will be for
oil and gas companies to determine
where they are best placed to compete
with all the other playerswith the
threat being that hydrocarbon companies fail to stake out a differentiated
position. However, the industry should
not lose sight of the fact that hydrocarbons (or a hydrocarbon-green-fuel
mix) will still be a necessary part of
the overall transportation fuel solution
for the time being.

At a time when the optimum future

energy mix is still being determined,
energy companies need to deliver
energy today, yet prepare their operations for the energy value chain of
tomorrow as it transitions in response
to economic, consumer, policy, sustainability and technology pressures.
From trading, to refining fuel slates,
to retail offers, to the integration of
clean energy sourcesall aspects of
the value chain are affected.
Transportation fuels are a case in
point. Refining slates are evolving
to take into account the addition
of biofuels, nontraditional energy
players are entering the retail fuel
market, new vehicle technologies are
impacting engine efficiency and the
progressive electrification of significant portions of the transportation
fleet will all bring opportunity and
threat to the oil and gas industry.
The Chinese experience is a useful
case in point:8
The Chinese government aims
to place nearly 500,000 energyefficient vehicles on the road
between 2010 and 2013.
Over that same period, the government aims to increase electric and
hybrid vehicle sales to account for
5 percent of Chinas total passenger
car sales.

Already, the oil and gas industry is

witnessing early gambits in the race
to control the new energy value chain.
Utilities such as Enel and Centrica
have made recent forays into the
upstream gas market to secure supply for their downstream operations,9
and oil and gas companies have made
substantial investments in the renewable sector as the future energy mix
unfolds. The point is that even though
the future is still uncertain, companies
can and should be proactive participants in defining the new energy
value chain.

Theme 6: Low-carbon economy

In November 2009, anticipation was
high that there would be binding
global agreement on climate change
in Copenhagen. That has not materialized. But a low-carbon economy is still
high on the agenda of many countries,
even if internationally the pace has
slowed. China aims to boost the share
of renewable sourcesincluding solar,
wind and nuclearto 15 percent by
2020.10 The European Union has set
a mandatory target of a 20 percent
share of renewable energies in the EU
energy mix by 2020,11 and Australia
has set a similar 20 percent target
over the same time period.12
Increasing the sustainability of the
energy system will require a combination of solutions. Renewables will
need to play a larger role in the global
energy mix, but for that to happen,
infrastructure improvements such as
construction of smart grids will need
to be implemented, so the scale of the
challenge should not be underestimated. Also, companies need to adopt a
portfolio approach to managing their
clean energy R&D investments until it
becomes clear which technologies will
win out.
Another aspect of sustainable
solutions is the area of energy
efficiency. It may seem at odds for
energy companies to be talking about
energy efficiency, but they understand
better than most organizations the
challenge of delivering energy at scale.
Energy efficiency not only makes
sense for the economy as a whole,
but is also of value to customers and
consumers as they look for ways to
marry their environmental concerns
with cost-saving opportunities.

Conclusion
Energy companies are experiencing an environment of change and an uncertain future
energy system as they come to terms with new energy sources, increasing levels of
regulation and an evolving business model. Nonetheless, we remain tremendously
optimistic about the international oil industry. The technical, regulatory and socioeconomic challenges faced and met over the past 50 years demonstrate that the
industry is more than capable of responding to the challenges ahead.

Endnotes
1 Understanding the Future

Energy System, Accenture 2010,

www.accenture.com/Global/Services/
By_Industry/Energy/R_and_I/FutureEnergy-System.htm.
2 Statoil Tests IPO Market with Retail
Arm Listing, Reuters News, October
7, 2010, via Factiva, 2010 Reuters
Limited.

5 Vitol Taking a Step Back on Etinde

Option, Upstream, October 8, 2010,
via Factiva, 2010 Upstream.
6 World Energy Outlook, OECD/IEA
2008; Accenture analysis.

3 Essar Energy Plans Overseas

Acquisition to Boost Fuel Exports,
Chemical Weekly, October 19, 2010,
via Factiva, 2010 Elsevier Engineering
Information.

7 Taking on a cult of mediocrity,

Upstream, May 23, 2003, via Factiva,
2003, Upstream; Merrow, Edward
W., Mega-field developments require
special tactics, risk management,
Independent Project Analysis, Inc.,
www.ipainstitute.com/home/
publications/pdf/ipa_megafield_
developments.pdf.

4 Trafigura Agrees to Buy BP Fuel

assets in Southern Africa: Report,
Platts Commodity News, November 5,
2010, via Factiva, 2010 Platts.

8 China to Invest Billions in Electric

and Hybrid Vehicles, New York Times,
August 20, 2010, via Factiva, 2010
The New York Times Company.

9 Enel Given Go-Ahead for Gas

Asset Purchase Deal, EU Energy,
April 23, 2010, via Factiva, 2010
McGraw-Hill, Inc.
10 China Amends Law to Boost
Renewable Energy Law, December
26, 2009, http://english.gov.cn/200912/26/content_1497233.htm.
11 Road Map for Renewable Energy
in Europe, European Parliament
procedure file, 2007, www.europarl.
europa.eu/oeil/FindByProcnum.do?lang
=en&procnum=INI/2007/2090.
12 Australian Parties Agree on 20
Percent Renewable Energy Target by
2020, August 19, 2009, Associated
Press Newswires, via Factiva, 2009.
The Associated Press.

About Accenture
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