Main content | back to top
Investments and the changing market
With new demand patterns, new players and new technologies, how will executives deal with the strategic, operational and investment implications of the emerging changes?
- Major investment, targeted regionally and by technology
- Fast pace of change, new investors, transparent markets
- Breakdown of traditional industry boundaries
The global demand for energy has led to a period of massive investment in the oil and gas and related industry arenas.
Although the scale of investment is massive, the whole market is framed by uncertainty. Investments are based on assumptions that can no longer be founded on the analysis of information that worked in recent years because the market is more volatile. Moreover, uncertainty surrounds the rate of growth and the return on investment potential. The tried-and-tested methods and economic models for evaluating markets are no longer working.
Although the Middle East and the Gulf of Mexico remain draws for investors, there are regional shifts in the global targets. Hot spots include Australia, Canada and Brazil, but as demand from India and China continues to rise what will the new dynamic be in supplying these markets?
The profile that technology plays in the market has also changed. For years, the industry has invested in relatively static technology, but now high demand has opened the way for spending on new technology. Money is going into oil sands and unconventional oils; first- and second-generation biofuels; developments in the Arctic; and gas to liquids, coal to liquids and coal to chemicals technology. The economic models that have served investors are changing. With volatile prices, how do you plan your investments? Do you work with other enterprises? Do you develop technology yourself? Where will the value lie? Difficult choices and new opportunities come with interesting times.
Articles
Industry leaders gather to share ideas (PDF, 94 KB) - opens in new window
Today’s refiners prepare to meet tomorrow’s challenges (PDF, 122 KB) - opens in new window
The oil and gas industry is one of the world’s most buoyant industries and currently one of the fastest changing. There are new players and investors, and the traditional economic models used to evaluate the markets are no longer applicable in what is a far more volatile and excitable marketplace.
The industry’s investors now include sovereign wealth funds; organisations that were formerly the customers of the industry players have become investors, which adds a new dynamic to the business. Private equity companies have also entered the market, and, although the credit crunch has left them temporarily more circumspect, they should be back in force when confidence is restored. There may be opportunities for new types of players, and this adds to the difficulty of evaluating markets for making strategic decisions. For effective decisions, it is vital to know and understand exactly who the competition is likely to be.
Driven by IT and finance, the demands for compliance and disclosure being made by stakeholders are greater than ever before. It is no longer possible to report performance figures after six months or even a year; the requirement now is for accurate figures every quarter. This demand for immediacy adds to the volatility of the market.
As the gold rush continues, this is the time for investors and industry players to review and reassess the models that support their strategic decisions.
Articles
Industry leaders gather to share ideas (PDF, 94 KB) - opens in new window
Today’s refiners prepare to meet tomorrow’s challenges (PDF, 122 KB) - opens in new window
The exceptional vigour of the current oil and gas industry has brought several changes that affect company strategies. For example, some industries are exploring territories outside their traditional spaces. More national oil companies are developing their own service companies. Is this a strategically appropriate route to take when there is still so much uncertainty in the industry? For example, who will be in the winning position in biofuels: the manufacturer, the technology feedstock company or the distributor?
Companies are also facing decisions about whether to continue on the well-tested route towards integration or whether to take a more specialist approach. For some time, integration has been favoured because it enables organisations to balance strengths with weaknesses and to hedge their bets. Integration remains a reasonably secure strategy because it may offer greater operational scale and power, potential synergies and a good basis for relationship building.
Yet the oil and gas market might also favour a specialist approach in which a unique strength in just one part of the value chain is offered. Specialist companies tend to have more focused capabilities and the decision-making process is generally simpler. Development and innovation can be effected more quickly than in integrated companies, as management can move rapidly to build on their strengths. Specialist refinery companies are a good example of this. By the same token, they suddenly become far more vulnerable when refinery margins start to plummet, particularly as they have done in the USA. The specialist strategy then looks less attractive.
This is a market in which the old models that have traditionally supported strategic development should be discarded and new factors should be taken into account in determining future direction.