The convergence of forces creating profound changes in domestic energy production is being driven by technology, globalization, demographic changes and by economies turning things upside down. But only recently and only in selected places across the energy value chain has it hit critical mass. One of them is reflected in the graphic above from the US EIA showing the growth in US domestic oil production.
Opportunity is born today out of the risk-induced realization that insight can be extracted from the visual data predictive analysis of the profound changes taking place in the energy vertical. Results have been produced not by sitting on our hands waiting for the Federal government to get its energy policy act together, but by rolling up our sleeves and putting American technology innovation in the form of horizontal drilling and hydraulic fracturing to work. Constant disruptive change is now something we use for competitive advantage.
That sense of constant disruptive change from these convergence forces is accelerating from use of other technologies to extract information and insight to provide fast, efficient, consistent ways for evaluating opportunities and risks across alternative views of the global energy business future.
In October, 2008, the stock market had tanked and we knew we were in deep economic trouble. The question was no longer whether there we were in recession but whether we’d go over the cliff into the abyss. The Harvard Business Review that month published an article entitled Shaping Strategy in a World of Constant Disruption. The authors John Hagel III, John Seely Brown, and Lang Davison were veteran observers of the process of change.
The focus of the HBR article was the convergence of forces of change that were turning our world on its head. And from our view in the ditch looking up we understood the concept. From our vantage point today four long, hard years later we are thankful we did NOT go off the cliff and while our economy still “sucks” to use a technical term we have learned a lot about using some of the same forces that drove us into the ditch to rage against the dark forces we still face.
This is a story about dark and then dawn, about fear and now hope. It is a story of redemption, a story of strength in fundamentals. Risk is still a four letter word—ask JP Morgan Chase, Facebook or Dell or HP. The dangers of risk never seem to change but the reward from informed risk taking gone well is still exhilarating.
STRATEGY AND BUSINESS RISK IN THE ENERGY VERTICAL
Domestic energy production growth in the oil and gas sector has proven to be an unqualified good news story. This good news comes from those same factors of the convergence of disruptive technologies in horizontal drilling and hydraulic fracturing combined with the global demand for energy even in a weak and volatile economy.
The insatiable global demand for energy and high oil and gas prices in the pre-recession days (remember $13 MMBTU natural gas prices?) allowed smaller E&P firms to use horizontal drilling and hydraulic fracking to compete onshore with the super majors drilling offshore in conventional deep water vertical wells. It started slow with natural gas and shale oil and kept growing. By 2010 we had so much natural gas that shale gas growth decoupled natural gas prices from global LNG and even oil prices. The US became a net exporter of natural gas displacing the expected natural gas imports of LNG. By 2011 the US was producing more natural gas than Russia and natural gas prices were falling. By 2012 we are now awash in natural gas, prices were briefly below $2 per MMBTU. Producers have begun to rapidly shift focus from natural gas to unconventional shale oil production to go after higher prices for crude oil and petroleum liquids.
We now have an energy boom on our hands. In the first five months of 2012 US crude oil production from onshore unconventional sources had increased by an average of 395,000 barrels per day to more than 6.2 million barrels of oil per day and imports of oil were falling. Think about that—the growth alone in US domestic production in the first five months of 2012 is equal to 15% of the global crude daily average spare productive capacity —the metric used to set global oil prices.
So what’s the problem you ask?
The problem is at a time when the US is poised to leverage the forces of the change to turn around our weak economy and get back to growth, the nation is engaged in a raging debate over policies on greenhouse gas emissions, proposed rules that force the retirement of coal fired generation, limit the production of fossil fuels on Federal lands and waters. This debate is about politics not energy.
Constant disruption is everywhere in the energy value chain. Recession and market volatility adds pressure to grow earnings in the face of falling energy demand, weak credit access, and rising risk slows large scale energy projects. Will new EPA rules on emissions amplify the closure of coal plants just when America’s global competitive opportunity to reclaim offshore manufacturing seems to be growing? Will the US get into a trade war with China over the fairness of subsidies that BOTH governments provide to wind and solar energy equipment manufacturers? Will the average 31% countervailing duties on China’s exported photovoltaic panels in the US slow the rapid convergence of prices at grid parity?
The global business challenges facing the energy vertical:
1. Growing earnings in a world of constant economic volatility where competitors are gaining advantage, scaling faster and diversifying markets and business lines.
2. Global regions with the best growth opportunities also have high volatility exposures, barriers to entry or scale and interdependent supply chains.
3. Rapid change in disruptive technology, networks, IT/OT convergence and high performance computing exposes gaps in traditional enterprise software creating openings for new entrants.
4. Fierce competitive pressure from low natural gas prices is accelerating coal plant retirement and undermining the economics of new nuclear base load capacity in favour of load following gas plants given looming including fear of inflation and cost of uncertain regulatory compliance.
5. Energy pipeline infrastructure is being rationalized. Oil pipeline flows in Seaway have been reversed to relieve congestion at the Cushing Hub. The Keystone XL pipeline may have been rejected by the State Department but it is now likely to be built in segments that do not require the US government approval.
6. Pressure to reduce greenhouse gas emissions despite soft energy demand and policy uncertainty has not receded even with failure of cap and trade legislation.
7. Environmental challenges especially in emerging markets create opportunities and problems to be solved to turn them into profits.
8. Alternatives to the traditional utility business model create demand for microgrids, combined heat and power, energy storage, and other distributed energy solutions for both existing customers and new entrants not previously used or modelled.
9. Consolidation creates fewer bigger players and new entrants seeking to use disruptive technology in the ‘sweet spots’ for growth. Hunkering down and playing defence may be the riskiest strategy of all for many traditional energy vertical players.
10. Traditional software license business model faces new threats from software as a service business models that make products easier to use and envelop them in an ecosystem of applications and service extensions to create more end to end solutions that work for clients.
THE SHIFT IN ENERGY STRATEGY AND RISK ANALYTICS
Scenario analysis has long been used to help market participants proactively manage energy risk and volatility. Strategic decisions require testing ideas and options across alternative business environments. Scenario analysis provides the consistent framework for this critical thinking. The hands-on involvement of key decision makers forces issues and uncertainty to the surface in search of the “sweet spots” of strategy that make all the difference to success.
Predictive energy analytics is bringing the power of disruptive technology in the form of visual data analysis, temporal and semantic analytics tools, knowledge capture and the mobile access to data in remote locations to make insight actionable from fundamental analysis and scenario planning. Collaboration technology and the amazing power of dynamic entity extraction to unleash the power of our interactions with customers and colleagues is turning risk management on its head.
The shift induced lesson learned from listening to the wisdom of the crowd is that the process of building scenarios and creating interactive communities is a powerful way of extracting deep strategic insight that uses energy market fundamental analysis and scenarios of alternative energy futures to accelerate the search for the sweet spots where disruptive information technology and operations technology leverage the wisdom of the crowd for maximum value creation from optimizing existing resources.
Scenarios create a common language to assess opportunities and risk under uncertainty and strip away the conventional wisdom that prevent us from seeing the future with fresh eyes. New management practices and methods focused on text analysis, semantic web search, and talent management offer just in time dynamic training, knowledge management, and context to ‘see insight’ in the pattern analysis of data and trends.
These forces of convergence are accelerating the transformation of business and institutional relationships to focus on scalable growth by intensifying community building within a business and multiplying it by partnering with other businesses to form a loose ecosystem that speeds the time to market for new products, turns those good products into more complete end to end solutions through collaboration, and ruthlessly ‘kicks competitor butt’ with constantly changing disruptive technology applications and methods that yield insanely good results.
The difference between business as usual and this new focus on harnessing constant disruptive change as a competitive advantage is passion, intensity and focus—and belief that the risk is worth the potential reward for that genius idea that excites the crowd every time you let them use it.
The shale energy boom is evidence of the amazing power of disruption. The dramatic growth in unconventional oil and gas domestic energy production in the US and the oil sands in Alberta are a direct result of the constantly disruptive forces of opportunity and risk at work:
• Fracking Dis-intermediates EPA Regulators and Creates Growth and Jobs. US EPA-driven emission reduction rules are an administrative response to failure to pass cap and trade legislation. The goal is to force coal plant retirements and prevent new construction but disruptive change from horizontal drilling and fracking proved a more ruthless force for change by undermining the economics of coal with low priced natural gas but revitalizing domestic oil and gas dramatically increasing domestic production, jobs, tax revenue and growth.
• Shale Gas Boom creates a Global Challenge to OPEC. The US has gone from a looming importer of LNG to replace its depleting natural gas reserves to a new exporter of LNG to project shale gas into higher priced global markets. Shale plays are by their nature faster depleting resources, but there are many more play opportunities widely distributed across North America, and other parts of the world creating a serious future challenge to OPEC.
• Ruthless Global Energy Competition could give way to Collaboration. Today we see ruthless global competition for access to conventional energy resources from emerging economies like China, India and Brazil eager to fuel exports to sustain their economic growth. The myth of peak oil has been shattered by the growth of unconventional oil and gas and the wide global potential for its future. Instead of competing for limited perceived resources and shipping them round the world, the shale disruptive revolution is a big shift transition to collaboration to improve technology, share and develop knowledge and expertise to use it. Far from being a competitor for energy resources, the United States and its advanced technology prowess in horizontal drilling and hydraulic fracturing democratizes energy access and reduces the corrosive dependence on OPEC, Russia and other oil and gas cartel wannabes. Scenario analysis is a powerful tool to anticipate and rehearse these big shift events before they happen.
The transformation in predictive energy analytics is that crowd sourced scenario analysis with advanced data visualization combined with expert knowledge of regional energy market fundamentals is the business economics equivalent of war games enabling managers to stress test strategy opportunities and risk exposures across alternative business futures. War games require good ‘intel’ inside to prepare for the combat of constant disruption in competitive global markets.
That is the genius of a dynamic analysis of constant disruptive change. Turn disruptive technology to your advantage and use it on competitors to create your own winning formula!
By. Gary L Hunt
Gary Hunt is President, Scalable Growth Strategy Advisors, an independent energy technology and information services adviser and a partner in Tech & Creative Labs, a disruptive innovation software collaborative of high tech companies focused on the energy vertical. He served as VP-Global Analytics & Data at IHS/CERA; global Division President at Ventyx, now an ABB company; and Assistant City Manager-Austin Texas responsible for Austin Energy and Austin Water.