Holiday Wish List for Oil and Gas Executives – Geoffrey Cann

By Geoffrey Cann

It’s that time of the year when oil industry executives pin their stockings by the gas fireplace and drift off to sleep dreaming of Santa. Here’s their secret holiday wish list.

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T’is the Season

When I was growing up, Christmas was the highlight of the year. We lived at the top of a hill in a century-old home that my parents decorated outrageously for the season. Six kids waited impatiently for the big morning to hustle downstairs in the early dark hours to see what Santa had left for us.

Probably the best toy we ever received was the table top hockey set. Thoroughly manual, fit for all ages, noisy and deeply satisfying. I remember perfecting a wrist move that let me flick the tiny plastic puck with a steel marble insert airborne into the far upper corner with enough force to pull the tiny net out of its moorings. Those were the days.

I do remember feeling a little disappointment because I had such unrealistic expectations for presents, built up by the combined weight in pounds of printed catalogues from far-off lands.

The Secret Holiday Wish List

With Christmas 2021 just days away, I like to imagine what unrealistic gift ideas that oil industry executives have for the great unwrapping. Here’s my top secret list of gift ideas that every oil executive wants, but probably won’t get.

ONE. A PROPERLY FUNCTIONING GLOBAL CARBON CREDIT MARKET.

Oil execs fully accept that the world is now deeply concerned about carbon emissions. The biggest economies that consume oil and gas fuel products have signed up to achieve carbon neutrality or better in just 20 years. This sounds like a long time from now, but it’s not. The leading economies of Europe and Asia will need to cut their carbon emissions by 50% in 10 years just to keep pace with this goal. So long as there is any burning of fossil fuels—and there will be until we replace all planes, ships, trucks and cars—we will need some way to offset that burning, and for that we will need some way to create credits to balance our way to neutrality.

Today’s carbon credit markets don’t work. Carbon prices are all over the map, the quality of the credits is suspect, and the demand is soaring, creating the perfect conditions for fraud, mis-representation of current state, and financial overstatements. Not only are oil and gas consumers making poor decisions, but so is the industry. A properly working global market sends better demand signals to everyone to drive investment decisions.

TWO. CAPITAL MARKETS THAT PROPERLY REWARD TRUE ECONOMIC PERFORMANCE.

There’s something amiss with capital markets that lend money to oil and gas companies. Markets are not valuing oil and gas companies as they have traditionally, and instead are conferring rock star status on digital companies like Alphabet and Facebook. This makes some sense, but three of the top five largest companies in the world by revenue are oil and gas companies (CNPC, Sinopec and Shell). Petroleum demand is almost back to pre-pandemic levels, and cost structures have shifted to help make those revenues turn into stellar margins.

Meanwhile, wells decline by 6% annually (on average), meaning the industry needs to invest both to offset the decline and meet demand growth, but capital is not flowing. We are short billions.

Oil execs want capital markets to provide at least a little acknowledgement that the industry is still someone to love, if you love cash. And who doesn’t love cash.

THREE. A RESPITE FROM THE DEMONIZATION OF THE INDUSTRY.

The hero’s journey is a beloved story-telling technique that features in all the great yarns of our time, including The Lord of the Rings, Star Wars, and Harry Potter. The hero faces some daunting villain to be overcome in the face of overwhelming odds, self doubt, a skills and tools mismatch, and generally poor competitive positioning.

The world is painting the oil and gas industry as the villain of our time. This is ultimately self-defeating because we are collectively and globally entirely dependent on the industry to meet the entirety of our basic needs for food security, heat, light, and transportation. Certainly some of the actions of the industry are villainous and deserve to be pilloried, but the vast majority of the industry’s works are aimed at helping us keep our lights on and our homes warm.

Demonizing the industry distorts the legitimate and collective interest we all have to see young people want to join the industry, both to work in it (keeping the lights on), and to work on it (transitioning to better ways).

FOUR: A SWIFT END TO THE PANDEMIC.

The pandemic has been a god-send to the industry. Finally oil execs could point to a legitimate villain of their own, one over which they had no control but which was forcing long overdue and badly needed reforms on the industry. Many insiders assert that the industry advanced 20 years in 24 months in how it approaches data management, cloud computing, mobility solutions for workers, robots and automation.

The cost structure of the industry has proven to be rather more elastic in the face of the relentless celebrity virus COVID and the countervailing power of digital technologies, and the industry is only just getting started. The speed of change has been remarkable for an industry that measures time in geologic terms. The number of new business models in the industry has blossomed. The pandemic promises to cement these gains in place, but more importantly, to unlock the agility gene so that the industry gears itself for the changes coming from energy transitions.

A swift end to the pandemic allows some in the industry to regress back to their former stately pace of change, their legacy ways of business, and their cost management behavior. But for the majority, it’s time to get back to the future.

FIVE. EMPLOYEES WHO WANT TO OWN THE BUSINESS.

For the past 20 years, the industry has hired people with the explicit goal to work in the business. Few if any are hired specifically with the goal to transform their jobs and their role in the machine at the same time as they’re running the machine. As the pandemic has demonstrated, the oil and gas industry has ample internal opportunities to improve, and oil leaders now need many more people to step up and own the business like it was their own, to carve off time from their days to step back from what they’re doing and to deploy some innovations into their daily routines.

Of the full wish list, this one is the least unrealistic as it is the industry that hires the workers and sets the conditions.

SIX. A MORE ELASTIC SERVICES SECTOR.

The services sector for oil and gas development and infrastructure are the locus of much of the industry’s innovations, but are not normally very elastic in terms of supply. Services can ramp down quickly enough in the face of a drop in demand, but struggle to ramp up just as quickly when demand jumps, leading to price escalation and quality problems. The lag between supply capacity and demand signals is offset just enough that the industry economics suffer during the growth phase, such as the one we’re in now.

Prices are going to rise just when carbon taxes are starting to bite, and as alternative energy costs continue their falling ways as dictated by Moore’s Law.

The industry desperately needs the services companies to maintain momentum on the innovation train, and to pretend like it’s 2020 all over again, minus the virus.

SEVEN. A FASTER APPROVAL PROCESS FOR NEW INFRASTRUCTURE, PARTICULARLY PIPELINES.

It’s now devilishly hard to secure approvals for pipelines that move energy around. Those opposed to the use of fossil fuels have figured out that blocking pipelines is the most effective means at their disposal to halt the industry. From NordStream 2 in Europe to North America’s multiple hamstrung projects, pipelines now take it on the chin.

But these same approval processes are going to apply to that presumed new energy salvation, hydrogen. Once society figures out that hydrogen in a pressurized pipeline or a bullet container on a truck or rail is just as, or more, dangerous than one filled with oil, the jig will be up. Hydrogen needs just a tiny bit of oxygen (4%) and an ignition source to burn. The rules are going to tighten further.

More regulation and slower processes are entirely at odds with a world that wants to accelerate its transition actions.

EIGHT. A CLEVER FINANCIAL MECHANISM FOR REMEDIATION AND REHABILITATION OF BROWNFIELD INFRASTRUCTURE.

As the world ramps down its use of fossil fuels for energy purposes, more and more brownfield infrastructure becomes surplus to need. The industry knows how to decommission and remediate plant and equipment that is to be retired, but lacks capital to do so. What capital supplier will pony up the funds to devote to this task? Decommissioning doesn’t yield a return to the investor. Sure, the steel in an off shore rig can be recycled, but what about oil wells that need to be shut in and remediated?

Regulators have tried many different ways to approach this problem, from requiring the industry to fund a trust ahead of field development to charging a tariff on production so as to build up a remediation fund. However, as the pace of transition steps up, these mechanisms are likely to fall well short of the demand.

Conclusions

Here’s to a fun, safe and expectations fulfilled holiday break. And remember: in oil and gas, some assembly is usually required and batteries are rarely included.

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