Copyright of the Daily Oil Bulletin 2017
The Energy Future Is Unpredictable; Strong Management Teams Are Essential
Predictions simply are not accurate when it comes to understanding the energy industry, which is why companies need strong management teams that can effectively react and adjust to changes in the market, says Jeffrey Harris.
“They have to think through various scenarios and behave accordingly, and indeed they do that,” the Global Reserve Group founder told PricewaterhouseCoopers LLP’s recent energy report launch (DOB, May 19, 2017). “In fact, that is one reason predictions are often incorrect — because they never take into account that management teams will react. They will do things differently.”
It is just too complicated to know the future as it pertains to the energy business, he said, as too many unknowable elements persist, preventing those in the business from consistently being correct in their predictions. “I think actually the best we can do is try to identify the forces at work and to analyze them, to study them, recognizing we can’t control them. We are all reacting to what is going on around us. That is just the nature of this business.”
Perhaps adding to the uncertainty, consumers now more than ever have control over the energy market, which sees industry and policymakers dealing with the increasingly carbon-conscious demands of energy users, said Sarah Ladislaw, director and senior fellow for the Energy and National Security Program at the Center for Strategic International Studies in Washington, D.C.
“It is not actually terribly surprising. In energy markets you have one fundamental rule, which is the ‘supply-and-demand balance.’ All other things help you figure out how this supply-and-demand balance equals out. We are long on energy supply in the world, writ large. We know we have a lot of energy. You don’t hear people talking about ‘peak oil.’ You certainly hear them talking with great optimism about renewables, gas and a whole bunch of other things.”
According to Ladislaw, companies and governments want to know what future energy demand will look like, how resilient it will be, and how every form of energy will compete for its own market share, placing particular emphasis on consumers. At the same time, she anticipates a growing global climate change movement will deploy revised tactics.
“What you have seen over the last 10 years is not likely what you are going to see over the next 10 years, because people who want to advance this agenda need new strategies in order to do it.
“There is a lot of real-time thinking about whether those are legal strategies, investment strategies, civil action, protesting and civil disobedience actions, or whether they fall more in terms of fighting for policies and fighting for innovation that actually moves forward the decarbonization agenda. It is all really fluid right now.”
From the perspective of Brian Ferguson, president and chief executive officer at Cenovus Energy Inc., Canadian energy producers simply spend too much time thinking about commodity prices, which are entirely under the control of the market and not within the scope of individual oil and gas companies.
“Supply and demand will work, just as we have seen them work over the last two-year period,” he said, adding that from a corporate perspective companies such as his must focus on cost structure, how to develop the product and what technologies to use, all with a view towards generating cash flow and earnings.
“This is not about production growth. It is about how we create value. It is about how we create a business that can be self-funding and sustainable in a more volatile environment.”
For its part, since the downturn began Cenovus has reduced sustaining capital by half, reduced unit operating costs by 30 per cent, and reduced general and administrative costs by 30 per cent. “We are really on a journey here where we can absolutely, I believe, compete with the marginal barrel of supply, whoever that producer is. Those efficiencies alone, though, are not enough.”
Companies must grow organically regardless of commodity prices, noted Ferguson, which in a volatile world and a commodity business means economies-of-scale take on increasing importance.
“We have seen incredible advances in drilling technologies and fracking technologies. We have seen the same sort of thing occurring over here in the last couple of years in the oilsands. We are now routinely drilling the horizontal sections twice as long as we were two or three years ago.”