Energy Outlook Special Report Q1 2017

Mike Tyson once said, “everyone has a plan until you get punched in the face”, and in many ways the world, the markets and the oil industry appear to be striding into 2017 with an all will be as I want it to be smile and a plan tucked away in the top drawer – but can everyone be a winner?

What happens when the Europeans slam the door on the Brexit-have-your-cake-and-eat-it plan, and the Chinese start retaliating to the Trump tweet-elect-protectionist-if I-say-so plan.

Or what will be the fate of the closer to home OPEC and Non-OPEC 20-nation treaty that has rocketed oil prices up 25%, when Libyan and Nigerian oil production recover some of their lost ground, while Russia and comrades return to their historical behavior and contribute little to supply cuts?

In the limbo land of the in between yesterday and tomorrow, all sunrises are perfect dawns to enchanting days where Putin and Trump’s bromance deliver Hollywood endings of continuous peaceful bull markets, low interest rates, high growth, rising incomes, a strong dollar, healthy emerging markets and most importantly, high oil prices. Ahhh – who knew economics was so simple!

However, my sense is that the year ahead will not be defined by the perfectly orchestrated 2017 business plans, but rather, how players react when they get punched in the face by more of the same 2016-esque unknown unknown black swans. Look on the bright side of self-interest – at least it may trigger the return of geopolitical risk from its long absence, to inflate the oil price higher.

John Defterios (JD): Minister, are you comfortable where we are price-wise and can we see gains in the second half of the year if the OPEC, Non-OPEC discipline holds? Are we in a sweet spot for oil prices today?

H.E. Suhail Al-Mazrouei: Looking at the fourth quarter average and looking at where we are today post deal, I think I would say that it has been a good and fair correction. But, keep in mind we have not yet actually cut. But, this is not a show-me-then-I-will-do-it. This is a commitment and I am confident that OPEC and Non-OPEC members who participated in this agreement are committed to it. They did not have to come, some of them.

JD: The real question is will the discipline last more than six months? Are you confident that there is an inherent discipline if prices spike, or in fact if prices go lower?

H.E. Suhail Al-Mazrouei: You need to keep in mind that we did not do it purely for the price. We did it because we were concerned about the level of investment and the sustainability of this industry. If we were just doing it for the price, we would have waited six months before doing anything. But, then you would have a huge level of production that is leaving the market because they cannot sustain it financially.

Whether we do it beyond six months is premature to decide. That depends for example on the reaction from unconventionals and we need to allow for healthy competition. This is not about curtailing production to achieve a certain price – it is about a cut to help the market stabilize. We knew the price was not right because the level of investment was not right. So, that is how we look at it.

JD: We are hovering around $55 a barrel – is this a price level that can be sustained for 2017? If we have this conversation in early 2018, is a band between $52 to $57 comfortable and sustainable with the demand and the production cuts that have been made?

H.E. Suhail Al-Mazrouei: I believe that the market will always decide. Price is not simply supply and demand and not simply geopolitics. It is also competition between different forms of energy. We tried $50 for some time and that did not discourage some investors to invest. For some countries and certain types of oil, it is good but not for all. I do not think $50 is going to cut it. We need a steady level of investment into this industry. What we have seen, and what people are not really talking about a lot, is how many jobs we have lost as an industry in services, which is the critical backbone of this industry. Around 500,000 jobs have been lost in two years. That is a lot.

"I believe that the market will always decide. Price is not simply supply and demand and not simply geopolitics. It is also competition between different forms of energy."

JD: Are you suggesting that for the collective good of the industry, that $50 needs to be protected? We lost over a million barrels of production in the last couple of years, but supply seems elastic. Do you see it coming back and recovering by the end of 2018, as forecasts suggest, to capture all that lost production in US tight oil?

H.E. Suhail Al-Mazrouei: I truly do not believe that we should target a price. If we do that, then we are a cartel and we are not a cartel. The change in policy happened in 2014 and this will not be changed again.

We need to allow the different forms of energy to compete and they will arrive at the price that is good for the customer. If the price is too low, it will stop investment and then people, like we did, will intervene. But, that intervention is not forecasted to continue to protect the price.

JD: When we sat down last year, you were not a big advocate of intervention in the market?

H.E. Suhail Al-Mazrouei: I am still not.

JD: But, we see some OPEC producers get together with six other Non-OPEC players, so common sense prevailed and you had to go along with the collective good?

H.E. Suhail Al-Mazrouei: Fixing the market for a price is not a strategy because you are not alone in the market; there are others. If you try to fix the price through curtailment, someone will increase production and you will lose your market share. What works is allowing healthy competition to happen. We intervened to protect the market because it was so close to reaching equilibrium and balance. We also do not want shale oil production to disappear – we can not afford that as it is a great resource that we need, but we also need the pace of its growth to be adequate with the more expensive form of oil.

JD: The UAE has just unveiled its 2050 energy plan. It includes 50% of green energy by 2050. That is a pretty bold declaration.

H.E. Suhail Al-Mazrouei: Green in our definition is anything that does not emit CO2 and anything that is emission-free, such as renewables and nuclear.

JD: And the plan suggests that 38% could be natural gas?

H.E. Suhail Al-Mazrouei: 38% natural gas and 12% super critically clean coal.

There were three, or four dimensions that we looked at when we developed our strategy; one was the security and reliability of supply and we tend to see nuclear as a very reliable source.

Then we looked at affordability: can people and the economy afford it?

The third pillar is sustainability: what does it do to our environment and what will CO₂ emissions be?

The fourth is achieving happiness for the people – holistically defined here as feeling secure that your source of energy is available now and in the future and that our people will be living in a healthy environment. This is as important as sustainability and security of supply.

JD: Is having a renewable strategy with a mixed energy policy actually cost efficient to the UAE?

H.E. Suhail Al-Mazrouei: Even though today we have a relatively good record compared to some other countries – zero coal, clean gas dominating our energy supply and advances in solar – we looked at what would happen if we did nothing and remained as we are. And then we looked at what if we go 100% green. We tested many scenarios within the Ministry and with stakeholders and the common conclusion was to be 50% green and 50% fossil-based. That was also the most economical – we would invest 600 billion Dirhams and save 700 billion Dirhams. If we did not, it would cost us 1.3 trillion Dirhams.

JD: Rex Tillerson is before the US congress today (Jan. 11th) as a nominated US Secretary of State for the imminent Trump administration. He is a former chief executive of an oil and gas company, which is one of the largest when it comes to the international oil companies. I did not think that would ever happen. What are your thoughts?

H.E. Suhail Al-Mazrouei: Working internationally in so many countries around the world, you tend to bridge gaps between politicians and you tend to help and build credibility for the country you represent. I think it will be a great addition to the foreign policy and I wish him good luck. He is a good friend and understands the region. His relationship in building successful business in Russia is going to be a plus for him, as well as in South America. Exxonmobil has been in so many countries around the world and being the chief executive and chairman of that company will give him huge credibility.

JD: Do you not think it would be a shame if the new US administration tears up the COP21 agreement? That they are not believers in climate change, not believers in a mixed energy strategy and that they want to make sure they protect the coal sector. Would that not be a huge step backwards for the world?

H.E. Suhail Al-Mazrouei: I think every country should adopt a policy that fits its own needs before someone else imposes a policy on you. For example, look at Germany where people do not mind paying 30 cents per kilowatt hour because they want to have 100% green energy in the future. Could the US economy, for example, afford to be 100% green? I think that is a bigger question for the US than for the rest of the world. When we look at our policy here in the UAE, we know we are committed to COP21, not because we want to join the group, but because we believe in it.

JD:We have a question from the floor.

Audience Member: Oil prices have risen about 30% in the past month or so even before the cuts have been implemented. What do you think the group of producers will have to do in terms of communicating to the market over the next six months to achieve the stability that you are looking to achieve? Specifically, you have got this monitoring process, which has not quite begun yet. What do you expect that to achieve in terms of defining what will be successful? How do you monitor and how do you communicate?

H.E. Suhail Al-Mazrouei: I would encourage everyone to do as we have done, and Saudi Aramco, Kuwait, and some of the other countries. We need to communicate numbers to the market and to our customers. All of the responsible members who signed need to become vocal about that, because it is real and it is going to be monitored by the Committee, which is made up of OPEC and Non-OPEC. I think those who signed up are genuine, but of course we need to see action. There is a factor that you have to keep in mind, which is that there is a natural decline in reservoirs and it is catching up with us whether we like it or not. The replacement of that balance is not easy and it is not cheap. And we were late.

We do not want to prejudge, but I am hopeful that this year we will see a correction. I am also hopeful that once we move to the first and second quarter, we will see some more commitment coming from others who have not yet signed on.

JD: Some upside surprises in the first half of 2017 perhaps?

H.E. Suhail Al-Mazrouei: I hope.

It is easy to feel deeply distressed if you are an Arab these days. The Arab Spring has turned into stormy wintertime in this part of the world. States have been destabilized by uprisings that have accomplished very little good. Lives have been lost, yet dignity in the full sense of the word has not been restored. Economies have been destroyed and prosperity seems like an ever more elusive objective.

Just look at the map! Gulf countries are becoming more preoccupied with their own domestic issues, slashing investments and reducing their interest in and support of regional issues; focusing instead on dealing with the ‘new normal’ oil price. Meanwhile, North African Arab countries are focusing on their own domestic issues while they deal with domestic terrorism and with a more challenging European landscape. But, the biggest tragedy is in the Levant, where old borders are being redrawn with its peoples’ blood and where foreign interference and meddling into the domestic affairs of these countries are at unprecedented levels.

The world is also witnessing unprecedented events marked by the rise of populism and xenophobia. From the Brexit vote and the election of Donald Trump to the rise of the extreme right in Europe, a new culture of separation and isolation is gaining ground.

In fact, it seems that the world order that emerged after WWII both economically and politically is unraveling. With all these changes happening both globally and regionally at all political, economic and social levels, the picture in the Arab World remains very fuzzy, ambiguous and uncertain. This makes it very difficult to construct a total picture of what lies ahead. The most that we could do at the present is to draw some observations and quick conclusions and to try to come up with some recommendations and guidelines.

In this context, I will list the top five priorities that I believe should be adopted by the incoming US President for our Arab region. Here is my take:

1. Founding permanent rather than transitory solutions to the festering problems of the region. The Arab-Israeli conflict in Palestine, Syria and Iraq, as well as Libya and Yemen. These open wounds provide fertile ground for all kinds of evils starting with dictatorships and violent extremism. Ultimately, this leads to further instability.

2. Recognizing that extremism on one side cannot be permanently defeated by extremism by the other side. Therefore, the war on ISIS cannot be won by the militias that are ravaging cities and entire regions in Iraq and in Syria and introducing religious, sectorial and ethnic cleansing in large swaths of these two countries.

Moreover, ISIS cannot be defeated by allowing more intervention from Iran and its client militias. On the contrary, this continued intervention would fuel further extremism and more violence in the region. Hence, since it is essential to stop the destabilizing role of the Iranian intervention in the region, it is very important to concentrate on the real underlying issues and problems in the Arab region that are causing discontent; exclusion, anger, increasing unemployment and poverty and distressed economic and social conditions.

"The new US President may have to realize that it is in his country’s national interest to support and help the Arab region by properly addressing these challenging issues to further stability in the region and beyond."

3. Strengthening and empowering Arab moderates. This region should not be ruled by extremism and it should not move backward when the entire world is moving forward.

It is also important to empower and encourage Arab states like Lebanon that respect human rights, democracy and good governance to stay the course. This particularly applies to states that are currently fighting terrorism. In this context, it is important that the US (as well as Saudi Arabia) continue to support the Lebanese armed forces, which have made a significant difference in the fight against terror.

4. Recognizing that it would be in US’ national interest as well as the interest of the region for the US to invest in the social and economic development in the Arab region.

In this global low-growth environment, the Arab world, with its huge pent-up demand and untapped resources, could provide a much-needed growth engine for the region and beyond if stability and security were re-established.

5. Pursuing an even-handed policy regarding the Arab-Israeli conflict, abandoning the idea of moving the US Embassy to Jerusalem and exerting US influence over Israel to abandon its expansionist settlement practices, thus allowing for the two-state solution to proceed.

But this does not mean we do not have a responsibility as Arabs. One of the questions I was asked to comment on for this conference was how can we as Arabs navigate the rising global tensions.

I say this very simply. Building civil states in which representative institutions that underline equal rights and obligations are the real protectors of all components of our diverse societies, instead of exacerbating tension by bringing up the devils of sectorial and religious divisions. Engaging in regional or global wars that tend to support a sect, or ethnicity is a wild adventure that would only lead to further chaos and destruction. Only building the civil state and giving back to our youth the idea of belonging to an Arab Nation rather than to a religious sect, or to an ethnic group would create a real and common sense of belonging. It would also bring a recognition of common interests among the various components of the societies of the Islamic countries as well. Thus, a real contribution could be made to help the Arabs in building a better future for the Arab youth.

Moreover, it is high time for the Arabs and the Iranians to look for and develop their common abundant interests, thus turning swords into ploughshares and turning their differences into new opportunities for progress and prosperity. This would be achieved by recognizing three key points:

A/ The politics of fatigue. The need to stop wasting limited and shrinking economic resources and missing non-recurring opportunities both in Iran and the Arab World.

B/ The benefits that would accrue to all Islamic countries by avoiding further seditions within Islam.

C/ Reducing tensions and extremism within the two Islamic sects and consequently avoiding the grave risks of maintaining the status quo of confrontation.

This would require Iran to recognize the need to stop meddling in the domestic affairs of the neighboring Arab countries through exporting a “revolution” that is empowered by a theory of “wilayat al fakih” across national and political borders. By the same token, the Arab countries must recognize that Iran is a neighbor that should be respected and dealt with on equal footing with other neighbors. A serious and determined dialogue must start as soon as possible based on the aforementioned recommendations.

We must understand the nature of the revolution that is happening right now in the US and draw the right conclusion. We should not be naïve to think that the world is continuing under the previous operating system. We must respond to it to survive the next decade, or two.

What is the Trump phenomenon? He did not come out of the blue. He rode a wave of resentment from millions of Americans who demanded a repudiation of everything that we have seen in previous administrations. Americans who want their lives to matter, who want their politicians to care more about them than others around the world and who have different priorities.

Firstly, Trump is the first US President in the modern era who does not have an ideology. He is a pragmatic person and views things based on instinct. Secondly, he comes in as President as we witness an emergence of what I call white American nationalism – a result of the Democrats having played identity politics for too long. A subculture of white hard-working Americans living in the Midwest now feel they have no defined identity and Trump simply saw this $1,000 bill lying on the floor, picked it up and ran with it. This phenomenon is not going away. It is here to stay and it will reshape the American psyche, American politics and certainly American foreign policy.

The third characteristic that represents Trump is that he is the first modern president who is seeing the world not through a geopolitical lens, but through a geo-economic lens.

"He sees the world like a big bazaar, in which people are engaged in business with each other and negotiating and trying to outsmart each other."

 
Money is going to be very central to his thinking and he is not going to be providing free services to the world like previous administrations. That era is over. The US’ foreign policy is going to be transactional and based more on bilateralism than multilateralism.

We need an energy policy in the US. We have not had energy legislation in ten years while many things have happened in that time, including the shale revolution. Under Trump, we are likely to see deregulation and the opening of new areas for exploration and so forth. But, even then, I do not think this will have a great impact on the global energy picture, because the US’ energy industry is operating as a business and not as a state-owned enterprise.

The role of government will be at best to facilitate markets, rather than control them. If the industry sees it needs to increase production, it will do, assuming government does not raise too many obstacles.

The Obama administration has been all about climate change, but the new team under Trump seems to think this is a non-issue. Just look at the appointment of the EPA administrator and the nomination of the former head of Exxon as the chief diplomat of the US. The head of the Department of Energy is a Governor of Texas. What does all this tell you? It tells you that climate change is not going to be a priority at all for this administration.

The US’ monetary policy will have a certain impact on the world’s energy scene. How the President influences dollar and interest rates will of course affect the price of oil, but I say that even that is not highly significant.

Where there will be a big impact on oil is through the President’s foreign policy actions and decisions. His policy towards Iran, Venezuela, Russia, or Libya could potentially inject, or remove up to 2m b/d from the market. For example, before Gaddafi was removed, Libya was producing 1.6m b/d. If the situation stabilizes there, that could add another 1m b/d. But, that would also require a decision by the new administration that Libya is a priority and decisions like those have not been made yet. There is no clear pathway. This administration will take more time to settle in and we need to be a little more patient.

Regarding the future of oil demand, we need to be looking at the outlook for global transportation in the next twenty years. Unlike electricity, which can be powered by coal, gas, nuclear, solar and wind, transportation is all about oil. When I look at the numbers behind transportation, it is mind blowing. It took us 100 years to put 1bn vehicles on the road.In the next twenty years, this number will double.

Boeing recently announced that China alone in the next twenty years is going to spend over a trillion dollars buying new planes – almost 7,000 aircraft.

So, are we investing enough in oil supply to meet the demand that is coming? And what about investing in general infrastructure? This is where China and the US should be focusing their relations. In Asia alone, the infrastructure gap is more than $700bn a year and we are barely doing 10% of it. We are in the 21st century and one third of humanity does not have electricity. Why not take this and make it a high priority? Invest in energy infrastructure, more terminals, more ports, free trade zones and places that we can exchange commodities.

We need to pay attention to China’s One Belt, One Road initiative. It is the first time that we see coherent thinking about infrastructure coming from a great power, which wants to create a vast network of fast rail, pipelines, highways, ports and airports that connect China and Europe. President Xi Jinping laid out this plan in 2013, but the Obama administration largely ignored it. Trump is different, because he is a builder at heart and predisposed to be interested in infrastructure.

The Middle East is also critical for China’s One Belt, One Road initiative. To connect China with Europe, you must go through the Middle East, so there should be a focus on increased investment in infrastructure here as well.

The revolution in energy over the last ten years is extremely significant when compared to the previous 100 years.

There has not been a dramatic change in technology in the energy field for most of that century. It was incremental growth, incremental change and incremental advances. Then, suddenly, we see a transformative change in the last 15 years in technology that changed the nature of the very market.

The industry went through a period of several years of oil prices at $100/bl, or more and many international oil companies (IOCs) and think tanks predicted that this was the new reality. CAPEX followed the same narrative. The growth of the US’ industry from 5.5m b/d of oil production ten years ago to 9.6m b/d in 2015 marks a remarkable growth rate. It allowed for the economic extension that helped the US come out of recession. The flexible nature of shale changed the market.

Agencies like the International Energy Agency (IEA) and the US’ Energy Information Administration (EIA) did not see this coming. Since the oil price began to fall in 2014, the breakeven price for shale production went from being predicted at $80/bl to the high $50s/bl.

In reality, the US did lose more production than others. The country went from a peak of 9.6m b/d in 2015 to 8.3m b/d. But, here is the extraordinary difference. The increase in price over the last few months to around $55/bl means we have seen growth in US’ market to about 8.7m b/d.

"The US has 525 rigs producing 8.7m b/d today versus 1,600 rigs producing the same volume in 2014. This is the factor that we need to focus on – technological advancements."

With all the rhetoric in the US about the new administration, I expect more of the same, rather than radical change. The market has done a lot of work on its own over the last few years and this cannot be undone. The economics and policies are in place.

The decline of coal is often mistakenly linked to regulatory change. But, it is more similar to the same reason we do not have VCRs anymore. The competitive cost of natural gas means coal will find it challenging to make a comeback. If you have a policy that will allow more drilling, that means even less ability for coal to return. As many as 94 coal power plants were retired in the US in 2015 and with the country’s coal-fired power plants averaging 50 years old, we are going to see another wave of decline.

Meanwhile, investments in solar and wind are increasing. There was $58bn invested in the US’ renewable energy market in 2015, which must now go through the system and be built. What is happening in the US is being driven by some government action, such as the tax credit extensions for five years on renewable energy. But, most of the changes are being driven by the market.

Natural gas at these prices is a great opportunity for oil producing countries in the Gulf to do a fuel switch for their electricity grids. Instead of burning their own oil, they can focus on selling it. Now is the time to make the investments to infrastructure to create opportunities throughout the region, which includes additional gas production and a better trading system. This specifically applies to Asia where we have point-to-point trading, instead of a regional system.

Investors are keen to re-engage in the oil market, but this is not a return to business as usual.

A new breed of eagle eyed investors will implement far stricter checks on clients, many of whom enjoyed free-flowing cash allocations before the oil price started its dive in mid-2014. Current oil prices of $55/bl – versus below $30/bl in January last year – have whet investorsí appetites, but on the proviso that know your client (KYC) checks, key performance indicators (KPI) and data transparency take on a more pragmatic meaning.  

The impact of investorsí reluctance to support a wounded market – oil prices have plummeted by more than 70% since 2014 – has been clear. The International Energy Agency (IEA) previously forecast a 25% decrease in spending at oil and gas fields in 2015 to $583bn, with another 24% decline to $450bn anticipated for 2016. Investorsí optimism that 2017 will not be a repeat of the bankruptcies, corporate restructurings, mergers and acquisitions and slashed payrolls that emerged as the status quo in 2016 remains tentative. 

Their careful approach will benefit established energy companies, with whom many have long running relationships, but the same importance must be given to preserving the entrepreneurial efforts of small and medium sized enterprises (SMEs). SMEs are a key component of the oil industryís efforts to create a culture of innovation and shrug off its reputation of ancient operations and bloated human resources. 

The agility of SMEs and the larger budgets and research and development (R&D) might of oil companies –  both privately and state owned –  must collectively change the face of the industry to rejuvenate the pool of established investors and ignite the interest of new investors. Tech investors will play a key role in supporting big data at oil fields and supporting the Gulf countriesí plans to create a regional replica of Silicon Valley, for example. The majority of investors will prefer to stick to the safer and more conventional onshore projects for the coming year while the dust settles, with the riskier and more expensive offshore deep-water projects that gained momentum in 2011 likely taking a backseat until 2018 at least.

The rapid rise in global energy demand means the more sources of financing the better. BPís Energy Outlook expects the Middle Eastís energy consumption to climb by 49% by 2035, while the USí Energy Information Administration (EIA) forecasts a 48% growth in global energy consumption between 2012 and 2040. Investors naturally want to leverage the commercial gain from meeting such demand, though many battered energy companies will need investors to provide financial crutches to ramp up their operations to pre-2014 levels. Accordingly, there will be a rise in the number of private public partnerships (PPPs) and joint ventures as companies try to strategically create buffers from any further price volatility while accelerating progress on blueprints that have languished since 2014.  

"The good news is that investors' confidence in the Gulf countries' financial acumen is improving." 

The ongoing implementation of energy subsidy cuts across the region, including Saudi Arabia and the UAE, has put a much-needed stamp of credibility on the regionís money management after decades of excessive spending. Plus, the volume of bonds and loans requested by energy producers in the Gulf fell by 26% to $17.5bn in 2016 from a record high of $23.7bn in 2015, according to Bloombergís data. Strengthening oil prices in late-2016 improved Gulf producersí balance sheets, which will help them lock in even more competitive pricing and terms on bonds and loans this year. 

Saudi Arabia successfully issued an international bond as recently as October, but the jury is still out on whether the initial public offering (IPO) for state-owned Saudi Aramco in 2018 will be realized. Early signs suggest it is a step in the right direction towards transparency. The company has kept the oil and gas reserves of the Kingdom, the worldís biggest oil producer, locked away. How Riyadh handles the IPO may impact how the global investor community views the evolution of transparency in the Gulf as a whole.

Investors are reassured that the first global agreement between OPEC and Non-OPEC producers since 2001, which was secured in Vienna last November, has so far remained on track and sidestepped producersí political agendas. But, the trick will be sustaining investorsí confidence to support projects, especially expensive infrastructure packages, if the agreement is derailed and volatile price movements resume. Commercial importance aside, pulling back on investment would mark the third consecutive bearish year for cash flow in the oil industry. Medium to longer-term supply could be hampered, which increases the risk of price shocks around 2020. 

Volatility is not always a foe, but the strained oil market needs a break. Energy clients must meet investors' more stringent requirements in order to transform the marketís beleaguered narrative into one of innovation and transparency. 

 

Moderator: How do bankers today view future investment in the industry in terms of enabling countries and independent oil companies to keep up with what is a very strong projection of energy demand over the medium term? The US’ Energy Information Administration (EIA) expects global energy demand to climb by 48% between 2012 and 2040. 

Speaker 1: Whether today’s oil price of $55/bl is going to be sustainable remains to be seen, but either way, the financial market must react now. The current state of the oil glut will shift this year and the supply situation could dip the other way into limited supply. If the industry does not invest to a certain level now, this could see us having higher demand than we can supply and thus, more unwanted price volatility. 

Speaker 2: Major energy companies all know that they must catch up on investments from the last two years, but their balance sheets have not been able to. However, as the oil price stabilizes and rises, the majors will be able to get capital. It is also worth giving a thought to the services sector, which is critical in enabling the market to adapt to volatility. The services industry, majors and national oil companies (NOCs) all need to re-think how they work together to be as efficient as possible. This is secular and not cyclical change and stakeholders are trying to understand how to partner up to slash costs for the long-term. There is a risk that oil prices may fall again if the agreement to cut global supply between OPEC and Non-OPEC producers falls through before June. But, this is part of the market and does not erase the fact that if you do not invest now, then it will cause issues later. It a case of the chicken and the egg.  

Speaker 1: Exactly - risk plays a major role, which is why we are focusing on lower risk projects now. Pre-2014, the decade of high oil prices made the industry fat and inefficient. Today, everything is about cost, but we are not at a point yet where we can build a sustainable business with oil prices in the $50s/bl and $60s/bl. There is appetite for risk, but it is not the same as it was three years ago. Companies’ portfolios must be mixed between exploring mature basins, while looking to new projects to build out over the coming decades.

Moderator: What really makes a difference to the financial community in terms of its willingness to provide finance in a market that often has volatile price movements? 

Speaker 2: Most of the majors expect the oil price to average around $55/bl this year, so the market is already feeling much better than two years ago. But, the majors are not flushed with cash, which is why they are still being disciplined this year. We need to see oil prices at a slightly higher level to feel more comfortable. In the US, the tight oil producers have access to capital at prices between $50/bl and $55/bl. It remains to be seen how far the US’ tight oil production can ramp up. The capital is there, but it will be selective. 

"The analyst community has had a terrible record as far as the US is concerned. Nearly all of us failed to appreciate how fast the country’s tight oil production would ramp up."

Speaker 4: The analyst community has had a terrible record as far as the US is concerned. Nearly all of us failed to appreciate how fast the country’s tight oil production would ramp up. We also failed to understand the resilience of the sector when the oil price skated down from $98/bl to below $30/bl in 2015. I suspect that we may be on the verge of making another mistake. Tony Hayward, the former CEO of BP, said that the oil industry is about men and women getting up in the morning and putting on their hard hats and overalls. They do not sit around making policies, or sit in conferences. They go out and turn valves and twist things and make operational improvements and efficiencies to cut costs. This is exactly what we have underestimated in the US and now I think we are underestimating their ability to rebound at $50/bl, or $55/bl. The US’ shale market is the new North Sea. When I first started analyzing the market in the 1980s, everybody was predicting the end of the North Sea in 1990. And then it was going to end in 2000 and then 2012. Yes, it has gone down, but it has been incredibly resilient – as is the US.  

Moderator: What about Saudi Aramco’s plans to launch an IPO next year, which may raise up to $100bn. Has it caused excitement, or concern within the investor community? 

Speaker 3: The fundamental requirement of a market, especially when it comes to publicly-traded companies, is access to information. I do not see that coming from Saudi Aramco. I want to know field by field information about the reserves. I need them to open all the books. If it is not going to happen, then do not waste my time. I think it is a PR gimmick and could be a dangerous move that sees financial systems falling into a trap. It will be a travesty if it happens without full transparency. It creates a very dangerous precedent. The financial community will do itself a huge disservice if it accepts some and not total transparency. 

Speaker 4:  The IPO is part of the process for Saudi Arabia; there is obviously going to be a lot more happening over the next decade. One common factor that unites most oil producing countries is that they are not in a fit state to invest without outside help. Not just the money, but also the technical knowhow and access to the best technology. I suspect that the IPO method will probably not be followed by other countries, but they all have the same aim: investment.

Moderator: How could rising oil prices affect the Gulf’s recent push to ramp up investments in renewable energy, especially solar and wind? 

Speaker 3: The fact that we are talking about renewables in the context of oil shows you where the problem is. This region is still burning oil to generate electricity, which is a huge waste of resources, especially now there are much cheaper sources of electricity. Saudi Arabia is the 6th largest oil consuming country in the world – they consume more than Brazil, or Australia. Renewable energy needs to be compared on an apples to apples basis with fossil fuels. How much does it cost to build the solar and the wind technology to guarantee a supply of electricity for 24 hours a day? How much of it needs to be backed up by other sources? How much of it can be stored? How much of it is wasted? We always look at how much we generate. But, we must look at how much we use of what we generate. If we cannot use it, then we lose it. When you add the storage, the cost increases dramatically and it suddenly becomes a very different cost calculation. I am all for renewables if they can be competitive and not subsidized. 

Moderator: Has the need to improve the industry’s talent pool received enough attention against the backdrop of the depreciated oil price of the last two years? For example, there is a whole new generation of data analysts with skills that very few of the baby boomer generation and even Generation X have. 

Speaker 1: The industry does not learn. People are relieved of their jobs every time there is a lower oil price cycle and it is very difficult to get those skills back. We need data analysts and so on, but we also need more people with core skills. Our core business is to explore, develop and produce oil and gas. What are the disciplines associated with that? It is the G&G side – geophysics and geology. It is the well engineering and drilling by a circle of reservoir engineers. These are principle skills that need replacing, which is increasingly being done with fancy three-dimensional software packages that rapidly load data and require a flick of a switch to get the results. But, that is not what the industry is about. You need to listen to your well and to understand the reservoirs to get the maximum production out of it. We need to get back to basics. 

Speaker 3: The conversation is always focused on how do we drill deeper and get more efficient. We are always in a drilling mode, but we are missing so many opportunities to expand the market. We need to have a much broader conversation about how to get an oil and gas industry that works for more countries, which includes more sophisticated trading systems. Today, the biggest markets for energy are those that have little say in the price, because they do not have any trading platforms there. Why should Asia pay Henry Hub prices? The structure of the market is crippled and it hampers investments.

 

The Middle East’s soaring demand for gas and LNG means the region needs to play its cards right.

The International Energy Agency (IEA) expects Middle Eastern gas demand to double by 2040. In Dubai, Egypt, Jordan, Kuwait and Pakistan, demand for LNG has grown close to tenfold since 2010 to 20.8m tonnes per annum in 2016, with Egypt taking about one-third of those imports, according to data by commodity pricing agency Platts. 

Monetizing the Middle East’s significant natural gas reserves will be a long, but worthwhile journey. Today’s use of the resources is limited – bar Qatar – due to the restrictive economics of exploration and production. It is becoming more expensive to extract gas than it is to import LNG, especially with lower LNG prices. LNG prices typically mirror the oil price, which has fallen by around 70% since mid-2014. 

But, an increasingly heavy reliance on LNG imports does little to improve the region’s long-term energy security. Plans for a Gulf-wide natural gas network have floundered for more than three decades, but Qatar has pushed ahead and established itself as the world’s biggest LNG exporter. Qatar met 40% of LNG import needs in the Middle East and North Africa (MENA) in 2015, but there is still a clear shortfall that means Kuwait and the UAE, for example, seek suppliers from further afield, including the US. 

Rising demand for LNG is propelling the growth of floating storage regasification units (FSRUs), floating LNG (FLNG) production units and floating storage units (FSUs). The capital expenditure for all three will total $41.6bn between 2016 and 2022, compared to $11.4bn between 2011-2015, according to Douglas Westwood’s World FLNG Market Forecast. 

Up to $10.3bn of investments have been earmarked for LNG import facilities across MENA in the medium term, with several projects underway. Kuwait is building an onshore LNG terminal near the Al Zour refinery, which will be operational from the early 2020s. Bahrain is scheduled to install a FSRU at the port of Hidd next year, while the UAE’s Sharjah National Oil Corporation (SNOC) will start importing LNG into the emirate’s Port of Hamriyah in the first half of 2018. 

Qatar must think carefully about how to counter the intensifying competition from LNG exporters in Australia, the US and Iran. The anticipated growth of the US’ LNG export market is extraordinary. The country’s first LNG export from its Sabine Pass on the Gulf of Mexico last February through the newly-widened Panama Canal was a gamechanger. Also last year, the US announced that the country’s gas exports surpassed imports for the first time since 1957. The US recently ended a 120-year hiatus by using an old maritime route – previously used to ship oil – to deliver LNG to Dubai and Kuwait, which speaks volumes about the Middle East’s supply-demand dynamics. More LNG imports from the US will be on the way considering that the 230-mile Dolphin gas pipeline from Qatar’s North Field to the UAE and Oman is the Gulf ’s only transnational submarine pipeline.

"The combined volume from the US and Australia alone could account for more than 90% of new LNG exports by 2020."

With the two countries representing the majority of a 45% increase in liquefaction capacity between 2015 and 2021. Meanwhile, Iran is flexing its post-sanctions gas muscle and signed a $2bn agreement last November with Total to develop the country’s giant South Pars gas field along with China’s state-owned oil company CNPC. 

Iran’s subsidy cuts, as well as more than a 30% reduction in inflation between 2013 and 2016, illustrate Tehran’s financial acumen. This, as well as the country being home to the world’s second largest natural gas reserves, will deepen investors’ appetite to support Iran’s re-emergence onto the global energy stage.  In short, Doha and other aspiring gas and LNG producers in the Gulf face tough competition.  

There will also be additional appetite for LNG in the Gulf up to and beyond 2020 following a decision by the International Maritime Organization (IMO) last October to reduce the Sulphur cap on marine fuels for ships by January 2020, instead of 2025. With just three years to go, the new cap of a 0.5% Sulphur emission limit will be a drastic reduction from the current 3.5% and adds a huge incentive to refineries and shipping companies to invest in what is considered a cheaper and cleaner fuel. This especially represents an opportunity for the Middle East’s vast, modern and relatively new refining network. But, operators must act quickly to get ahead of the competition. 

The Gulf and wider MENA must navigate political sensitivities and economic roadblocks to start laying the stepping stones to creating a regional and transparent gas and LNG network. Whatever hypothetical pain is felt today will be considerably less than the alternative scenario, in which fragmented efforts mean countries find themselves short of options and relying on exporters further afield with high freight rates. MENA must ensure that it is a leader and not a follower in one of the world’s fastest growing energy markets.

Moderator: Let us start with an overview of what is happening in LNG today, especially considering the current glut of supply and increasing competition in Australia and the US, for example.

Speaker 1: In the Middle East, Qatar, Abu Dhabi, Oman and possibly Iran export LNG, with Qatar leading the field as the world’s biggest LNG exporter. On the other side of the spectrum, everybody bar Iran, Iraq and Saudi Arabia, imports LNG, so the demand profile in the Gulf is significant. Kuwait is currently importing up to 4m tonnes of LNG a year and has plans at the Mina Al-Ahmadi facility for a large regasification terminal. In the UAE, Abu Dhabi and Dubai import LNG, with Sharjah and the northern Emirates starting LNG imports in 2018, while Bahrain will start imports to its soon-to-be-completed regasification terminals in 2019. The region’s appetite for LNG imports will rise significantly if Saudi Arabia decides to use LNG as a substitute for oil in its power generation. 

There are tentative discussions that Saudi Arabia may look to import LNG from the US, but we are all aware of the political complications in this part of the world. Qatar is also right next door. A deal between the two would benefit the energy security of the Gulf as a whole.

Qatar supplies 40% of the LNG that is already imported across the region, so it would be a natural fit to include Saudi Arabia. 

Speaker 2: Most of the demand in the Gulf is being driven by rising demand for power generation to support the industrialization agenda and unmet domestic demand, with the populations across the Gulf growing quickly. There is also the environmental agenda to consider, with Gulf countries collectively supporting the global climate change agreement that was drawn up at COP21 in Paris in late-2015. The global push to reduce emissions, including those in the Gulf, means energy stakeholders are having to reconsider how they use their resources. This will hopefully be enough of an incentive to go beyond some of the region’s political sensitivities. The Gulf is rich in gas, but there is a very limited monetization of that gas. This is primarily because it is becoming more and more expensive to extract. So, there is big demand for LNG in a region that has significant natural gas reserves. How do we match these two components? Price plays an important role. 

Moderator: Iran, which has the world’s second largest natural gas reserves, is eager to ramp up its beleaguered gas industry after years of sanctions and expand its export market. How is that likely to play out?  

Audience Member 1: Iran tried a decade ago to launch a LNG export scheme and to attempt a relaunch today will take time and a lot of effort to convince the buyers. The Chinese had committed to buy LNG from Iran, but then the Iranians stopped the project. It took China a long time to see Iran as a potential source of the LNG again. Plus, the domestic gas needs of Iran are also very important. 

Speaker 3: Everybody is speaking about the future of LNG and saying there is no future for pipeline gas. Russia has had a bad political relationship with Europe, with Europe saying for a decade that it wants to decrease its reliance on the pipeline gas from Russia. Yet, Russia’s share of the European market increased to a 25-year high last year. We have no LNG exports to Europe, but we are still the continent’s biggest gas supplier. Why? Europe’s gas consumption is up because the price is very cheap right now. Something to look out for will be the supply battle between Russia and Australia over China in the next five years. Russia is building a pipeline to China at the same time as Australia wants to increase its LNG exports. It will come down to price again, which will be the same for the Gulf. 

Speaker 1: In the Gulf, different parts of the gas chain are coming together. Maybe Gulf countries will remove gas subsidies in time, which is going to be the sort of effort required to see a gas market price that is relevant to both producers and buyers. We are starting to see this idea take shape.  Countries’ ability to store gas is also improving, with Dubai’s storage facility enabling greater imports while prices are low to offset the cost when prices inevitably climb. Sharjah will also move in that direction. In reality, it could take between five and ten years for all the parts to come together. Then, I think we could see some form of hub price. 

Moderator: What role can the UAE’s Port of Fujairah play in the growth of the region’s LNG market?  

Audience Member 2: Fujairah is specifically looking at how it can utilize its location to be a storage and trading business for LNG. Big companies have been very interested so far. For now, we are waiting to see how LNG will be affected by the price of oil and we are speaking to our friends in the UAE and Qatar. 
Moderator: Speaking of Qatar, what impact will increasingly strong competitors in the US and Australia have on Qatar’s position at the top of the global hierarchy? 

Audience Member 3: Qatar’s current position is a very profitable one, but it is less profitable than it was three years ago. Aside from the US and Australia’s growing market, there are also new players in East Africa and Iran to consider. Iran would be joining a very crowded market. Tehran may do one LNG plant, but will likely expand the gas pipeline to Turkey, build the planned pipeline to Oman and complete the pipeline to Pakistan. Tehran may also look at exports across Iraq, where it already has pipelines and maybe other countries in the Gulf. The country has a lot of pipeline options that are easier to pursue and make more commercial sense than building a very large LNG industry at the moment. 

Audience Member 4: Looking at market changes up to 2020, what is the view on replacing fuel oil in the maritime sector with LNG following the International Maritime Organization’s (IMOs) announcement last October that today’s Sulphur cap of 3.5% will fall to 0.5% in 2020? 

Speaker 1: The marine industry can get close to the new specifications without making the modifications that the ship engines will need to run LNG. Maersk, for instance, has done a lot of research and development on what it is going to take and how much it is going to cost to change out their fleet. It is still early days. Qatar is changing its vessels slowly to be able to burn LNG. It is also worth talking about reporting processes. There are a lot of emission control areas around the world, which mean you cannot run diesel engines when you are coming into port. That begs a question: will operators, who will probably have duel fuels, burn LNG coming into the emission control areas and revert to marine diesel out on the open ocean? There is still a lot to work out. 

Thinking outside the box has never been more pertinent as the oil and gas industry reflects on the challenges for the year ahead.

Companies must embrace a disruptive and innovative mindset, or risk losing to competitors who are redefining their approach to business. The industry is at a crossroads. Either the industry can stick to the status quo and lay low until oil prices rise, or it can innovate and transform today’s challenges into opportunities to drive long-term profitability. 

The hydrocarbons sector is characterized as conservative, clunky and slow moving, with an internal bureaucratic structure that does little to foster and promote new ideas. It can be extremely risk averse and carries the mantra that there is everything to lose, as opposed to everything to gain.

The industry is highly regulated and process-oriented with a strong focus on health, safety, and environment, while ensuring a steady rate of return for investors. These attributes do not allow for the innovative ethos in Silicon Valley, which is an ecosystem that many Gulf countries are trying to replicate to boost oil production and slash costs. The radical innovation of Silicon Valley is different – not worse – than incremental innovation. The energy industry needs to strive for the latter, which will lead to sustainable change. 

The coming age of digitization, big data and the Internet of Things (IoT) reflects the industry’s incremental innovation. Dubai’s government-owned ENOC’s ViP program is a fuel management solution that monitors consumption and fuel preference, for example, while the Daleel Oil and Gas Supply Chain Portal organizes massive amounts of data for procurement and supply chain professionals. 

But, much more must be done. First, the industry must create a controlled environment in which risk taking and disruptive thinking can occur. An individual will struggle to think outside the box when the confines of that box are bogged down with processes, procedures and guidelines. Initiatives that can be introduced include Google’s 20% rule, which sees employees spending 20% of their time working on what they think will most benefit the company. Industry could also adopt aspects of much bigger changes, as seen in the UK where the Financial Conduct Authority (FCA) has created a ‘regulatory sandbox’. This structure allows financial technology firms to test their innovative business models, products and services without strongly stipulated processes stifling their progress. 

Other programs in the Gulf are taking great strides towards developing a ‘safe’ environment for entrepreneurs. Saudi Aramco’s entrepreneurship arm Wa’ed, for example, was established to foster domestic entrepreneurship and develop local enterprises by providing programs that offer non-collateralized loans and venture capital partnering.

Second, a truly innovative culture can only take shape when there is complete ‘buy-in’ across an organization’s operating structure. This means a disruptive and innovative mindset must be encouraged, promoted and rewarded from the executive leadership to the summer interns. Stronger channels of upward communication must also be established in order to transport new ideas, technologies and solutions to a destination of action and implementation. At the same time, a ‘buy-in’ mentality should be actively marketed to the public. All too often, headlines on innovation are dominated by the Mark Zuckerbergs of the world. When great achievements are obtained in the oil and gas sector, it should be made well known as this can help attract more investors and strengthen the industry’s talent pool. 

Most importantly, the oil sector must continue to establish partnerships. Collaboration and the better alignment of industry, academia and government form the foundation of innovative ecosystems. It is critical in this challenging era of low oil prices that key pieces of the global energy puzzle work together. Unity will bring efficient and successful pathways to the development of innovative technologies, enhanced human resources and cost-cutting solutions.

Collaboration between the key entities is also vital to creating more and much-needed innovative human talent in 2017 and beyond. The future of energy supply depends on the intellectual vigour of today’s young generation. Creating a stronger culture of innovation within the sector would not only foster the development of much needed human capital, but also start nourishing a much-needed labour force of tech-savvy and innovative thinking millennials to the industry. Almost half of the world’s petroleum engineers are due to retire over the coming decade, for example. 

Embracing the modern characteristics that have enabled Silicon Valley to thrive on the global stage will boost opportunities for the oil industry at a challenging period. Thinking outside the box will be the release valve for the growing pressure on oil companies to solve an ancient conundrum – improve health and safety and ramp up operational efficiency while keeping costs as low as possible.

 Is the Archaic Energy Sector Evolving?

Speaker 1: The oil and gas industry is conservative, clunky, slow and has an internal bureaucratic structure that does not help facilitate an innovative ecosystem. Despite this, there are pockets of groundbreaking work. A lot of this comes from looking at innovative hubs worldwide, such as Silicon Valley, and seeing if we can apply any of those lessons to the Gulf. The coming year will see the oil and gas industry face many uncertainties and it is those with an innovative and disruptive mindset who will be able to carve out solutions.  

Moderator: How different is the ethos of the oil and gas industry in the Gulf to that of Silicon Valley and how might the Gulf adopt some of Silicon Valley’s key characteristics? 

Speaker 2: Throughout my thirteen years in the oil and gas industry, the topic of innovation has come up again and again. It certainly happens – as proven by the US’ shale market – but it is a long journey that requires a lot of effort. In Silicon Valley, people take risks, they are not afraid to fail and they have a passionate purpose behind what they are doing. In the oil and gas industry, people are very risk averse and for valid reasons – a careful approach improves safety. If someone uses a valve that was not thoroughly tested just to save a thousand dollars, it could result in a big disaster and even the loss of life. Plus, the oil and gas industry is very technical, which means that a professional cannot rapidly climb the chain of command to become a director of exploration without having in-depth experience. This is very different to the flexible hierarchy in Silicon Valley. 

Moderator: How hard is it to implement technological innovations in the Gulf’s energy sector? Is the  industry still afraid to embrace positive disruption, even in the retail sector, which is typically more progressive?

Speaker 2: It is resistant to change. For retail, we normally benchmark ourselves against the global presence of the retail business, such as the US and Europe. We see a little technology adaptation in those countries, but when we go to the petrol stations in Europe, we still have to get out of our car to handle the pump and pay. This should be something of the past. We really must think outside of the box. We are launching technology that will mean sitting in your car and paying for your fuel through a mobile, for example. Innovation has to be part of retail, so that services can be brought to your doorstep. 

Speaker 3: This happens by adopting Silicon Valley’s mindset. It has nothing to do with technology or innovation – that is just the by-product. The actual mindset requires the right environment to encourage entrepreneurship. This always starts with setting the right goal. What balance of innovation and traditional practices do we want? Do we want incremental, or radical innovation? What are the best steps to identify the next generation of talent? We need to literally create a new culture of innovation that is not just accepted, but actively sought after.Establishing a department of innovation is better than nothing, but it is just the first step. Getting the right mindset means literally starting from the top of the leadership board and working all the way down the chain of command. We must do more. Paying for fuel via a mobile phone and without leaving your car is wonderful, but let us go a step further where automatic plate recognition pays for the fuel without us having to do anything. We need to motivate the talent in the industry to come up with these ideas.  

Speaker 4: There have been a lot of positive changes in the energy industry in recent years that were the low hanging fruits and required little effort. But, now there is a law of diminishing returns and it will be a lot more difficult to produce the same results as before.

"Innovation is no longer a luxury – it is a necessity. People must try new things, but it must be in a controlled environment. You cannot allow a skipper to fly a helicopter, for example."

We can explore things that are risky, but not in terms of safety. Also, we must introduce changes steadily. If I go to an engineer and suggest that we use 3D printing to manufacture a valve and then use the Hyperloop to ship it offshore, I will have lost that battle immediately. 

Moderator: How does that work as a business case? How do you persuade investors to support new ideas that need to be tried and tested? 

Speaker 3: The answer depends on different regions. It is important that the persuasion is driven by data and facts, as decisions in the oil and gas industry are not based on emotion. If someone can demonstrate that a new technology was tested and tried for 1,000 hours, or 1000 days with successful results, then there is a stronger case that it will be piloted for the next phase.

Audience Member 1: We must all remember that this is not the first time that disruptive technologies have made their way into oil and gas. In the early days, the industry was running without any instrumentation and scatter systems. Nowadays, we cannot have any refineries, or oil fields without scatter systems in place. Then the second generation of disruptive technologies entered the market in the form of Advanced Process Control (APCs) systems. We are now at the beginning of the third wave, with the integration of the Internet of Things (IoT) and analytics. Digital transformation and disruptive technologies come in any form and any shape, as long as we find the right use for them. 

Speaker 3: In the core of businesses, the pace of innovation is going to be slower as this includes drilling and other activities where there must be utter safety. But, the support activities are already using analytics and thinking outside of the box. For example, Saudi Aramco have their own entrepreneurship center that is very, very well-funded. This helps their search for technologies and startups that will improve the company and country. We must keep in mind what has already been achieved – we are not hugely behind.  

Audience Member 2: I argue that the oil and gas sector has been embracing an innovative mindset for a long time. Twenty years ago, we produced 50m b/d and now we produce more than 90m b/d. This is disruption. In the last twenty years, we have had more than half a billion people move from rural to urban areas and we expect one billion more people to move in the next twenty years. All these people need reliable energy supplies. We do not adopt the same speed as those in Silicon Valley, because we are not purely product driven – we cannot risk that energy supply. 

Moderator: The global energy outlook has a growing emphasis on renewable technologies. How can solar, wind, hydro technologies and others co-exist with the continual growth required in the oil and gas industry?  

Speaker 4: There is so much room for more sources of energy when it comes to reducing the cost of oil production and power generation. For example, Oman uses solar-generated power to support its enhanced oil recovery (EOR)  technologies at the Amal field, which has reduced costs by 70% and is better for the environment. There are many innovative plans out there to give consumers more stability. Mitsubishi is trying to develop technology that transmits solar-generated power in space down to earth. But these, and other innovative solutions, need to be worked on today to make them a reality in a decade.  

Audience Member 3: We also have to differentiate between different types of failure. There is the failure of innovation, the failure of a new product in the development cycle and safety failures. The oil and gas industry must be able to afford the first one while not tolerating the third. We have to encourage people to do things, even when there is a 8/10 chance that it will fail in the development cycle. 

Moderator: This session has highlighted that the industry is already making significant progress and should perhaps be less shy about sharing its achievements. Still, much more must be done to increase the pace of innovation, especially when it comes to funding. Instead of replicating Silicon Valley, perhaps the Gulf can create its own Valley? 

Oil & Gas has Itself to Blame if Millennials are Not Prepared to Work in the Industry.

The sleek modern lines of NYU Abu Dhabi were the fitting venue in early January for a debate on the next generation in the energy business.

The Gulf Intelligence UAE Energy Forum put forward the proposition that “millennials are not ready to take over the oil and gas industry from the baby boomers”. As the generation born in the 1950s and ‘60s gives way to those of the ‘80s, will this be a smooth transition, or a shock?

The changeover is really a matter of necessity, not choice. The youngest baby boomers today are 53. The oil industry has for some years been going through its “great crew change” as the older generation retires and the current oil price slump is only accelerating that.

The UAE Minister of Energy, Suhail Al-Mazrouei, present at the event, emphasised his own youth, at 43. That makes him part of the industry’s emerging leadership, in “Generation X” like myself, between the boomers and millennials. But, the layoffs of the ‘90s have left this generation worryingly thin. Meanwhile, youth employment and the dearth of high-quality jobs is a concern around the world.

The millennials’ fitness for their role really falls into two parts. Portrayed as “tech-savvy” – a stereotype that overpraises some while denigrating the earlier generation that actually created the internet – they nevertheless have the technical skills required. Gaining experience takes time, but oil and gas companies could change the mindset to bring young people on board more quickly. The age of big data and the Internet of things offers many opportunities.

It was the same when I entered the industry in the late ‘90s. Digital modelling of oilfields was just becoming mainstream, creating a culture clash between the old school who emphasized “knowing the rocks”, and the juniors whom they derided as “Nintendo geologists”. But, the unlocking of 3D seismic analysis and computer optimisation of field development kept the industry alive through the ‘90s slump.

Although capable, do the millennials want to join the oil and gas business? In the West, at least, it is widely seen as dirty, contributing to climate change, professionally dull and a “sunset” industry with little future.

By contrast, within the field of energy, the image of solar power and electric vehicles is galvanised by the charismatic Elon Musk of Tesla Motors, SolarCity and SpaceX. More widely, tech start-ups are seen as the speedy way to fame and riches, as well as to “changing the world” through innovations, such as internet toasters that print faces on bread.

"The traditional energy industry has done a poor job of advertising itself. Under attack from environmentalists, social activists and consumer advocates, it has been secretive and defensive."

But, it has a great story to tell. What other industry offers well-paid international careers in some of the world’s most exciting countries, innovative technologies making multibillion dollar projects possible from the Siberian tundra and the deep seas to the Sahara desert, shifts in commodity markets that transform nations and the world economy, and the mission of bringing modern energy to the billions of people without it?

Of course, the petroleum business has to battle in the court of public opinion with the burden of a US contingent that has aligned itself with the most regressive anti-climate forces. But, making oil and gas compatible with a liveable climate is a task to be achieved from within the industry, not outside it.

While millennials are ready to take over, the converse question is whether the energy industry is ready for them. The oil companies have to capture the sense of mission, fun and self-realisation associated with a Google, without losing their professional integrity.
 
During a GIQ Industry Survey at the Forum, the audience voted narrowly that the millennials are not ready. That would be bad news for the bedrock of the regional economy. But, if the next generation is not ready and willing, the corporations have only themselves to blame. 

Motion: Millennials are Not Ready to Take Over the Oil & Gas Industry from the Baby Boomers 

Are baby boomers with decades of experience and cool heads best placed to tackle today’s challenges, or will millennials who think outside the box and embrace the far-reaching benefits of digital data and technology thrive? As clean energy becomes a key feature of all oil-centric Gulf governments’ roadmaps, who can leverage the booming renewables market to support Industry’s strained budgets, such as affordable solar enhanced oil recovery (EOR) technologies? 

The US’ Energy Information Administration’s (EIA) forecast that global energy consumption will soar by 48% between 2012 and 2040 is feeding Industry’s concerns that there will not be enough financial agility to ensure the world’s energy demand is easily met. Amid such multifaceted challenges, which generation has the tools and skills to identify firm stepping stones that will guide Industry towards a prosperous 2017 and beyond? And how can the skill sets of both generations be merged to create cost-effective solutions? 

BABY BOOMERS
BORN: < 1963
PROS: Productive, Hardworking, Mentors
CONS: Less Adaptable, Less Collaborative
 

MILLENNIALS
BORN: 1980 – 1995
PROS: Enthusiastic, Tech-Savy, Entrepreneurial, Opportunistic
CONS: Lazy, Unproductive, Self-Obsessed

Handing the Reins to Millennials is Asking For Trouble 

Baby boomers have been raised with a strong work ethic and have a willingness to perform and succeed instilled in them by their parents who are a product of a post WWII era. They have been raised to believe that they must contribute to society and know how to work within a mechanism. Be it small, or large companies, they respect the professional hierarchy and work within their remits. This also partly describes Generation X – who fall between baby boomers and millennials – though Generation X showed the first signs of asking more critical questions about the meaning of their work-life balance. 

“Millennials present themselves as having a more principled approach to their life and work and financial gain is rarely the only reason they stay in a job." 

 
Then, enter the millennials. They have all the educational opportunities and tend to be very attracted to the information industry. They are excellent at finding nuggets of new information, presenting new concepts and they know how to talk the talk. But, they also tend to say no more easily. They present themselves as having a more principled approach to their life and work and financial gain is rarely the only reason they stay in a job. They ask questions that baby boomers and those in Generation X may not have asked.What are my vacation days? How many hours will I be working? Almost nine in ten (87%) of 7,700 millennial respondents representing 29 countries worldwide in a Deloitte study last year believe that the success of a business should be measured in terms of more than just its financial performance. 

Millennials also prefer to save the world through the work of non-government organizations (NGOs), or social entrepreneurship. They believe in climate change, which in itself may cause a problem considering the negative image of the oil and gas industry communicated by environmentalists.  A McKinsey study in 2016 revealed that 14% of millennial respondents said they would not want to work in the oil and gas industry because of its negative image – the highest percentage of any industry. Millennials are also deeply impatient when it comes to working up the ladder of command. They want to be chief executives overnight. The energy industry of today has a strict hierarchy, some unfortunate gender bias and requires staff to go remote places, with the latter hampering millennials’ very social nature. All signs point to an obvious conclusion: millennials are far from ready.

Industry Ignores Millennials’ Creativity at Its Peril

The archaic narrative of the oil industry needs rewriting and fast. The plot must be spearheaded by passionate millennials; those in their twenties and thirties who think creatively and push the boundaries. The talent shortage in the global oil and gas industry is no secret; half of the world’s petroleum engineers alone will retire in the coming decade. Add to this the tens of thousands of redundancies in the energy sector that dominated headlines last year as the financial strain of lower oil prices since mid-2014 emerged. Some of the layoffs will backfire, as they did during the last major crash in oil prices in the 1980s. Then, the industry shed significant numbers of talented employees and failed to recruit in advance of what was an inevitable demand in human resources, thus creating a significant shortage in talent. 

“Baby boomers truly do not have the technological skills required to deal with the millions of data points being created every day around the world. Knowing how to use an iPad does not make someone tech literate.” 

I am now a baby boomer and when I joined the industry in the 1980s, I was surrounded by young colleagues who were also bursting with non-conformist ideas. I was proud to be brainstorming solutions for an industry that faced major roadblocks; challenging fields, rising energy demand, soaring costs and a shortage of innovative technologies. Does that sound familiar? This is the scenario that millennials cautiously eyeing a career in the oil and gas industry today face.

From now, the market needs millennials with tech skills who can challenge baby boomers’ traditional way of thinking. Big data – rapid analysis of extremely large data sets to identify patterns and trends – is not just another buzzword. It is driving major change in the industry. Baby boomers truly do not have the technological skills required to deal with the millions of data points being created every day around the world. Knowing how to use an iPad does not make someone tech literate. In 2013, IBM estimated that 90% of the data in the world had been created in the previous two years alone. The millennials already in the industry need to step forward and help companies’ recruitment by sharing their stories and giving the industry a much-needed stamp of credibility. Meanwhile, those of us with grey hairs must guide millennials into an industry that I know they are ready to lead. Millennials are the solution, not the problem. 
 

The audience voted their opinion using an electronic system before the debate began, with the results displayed at the end of the debate. The audience were asked to vote a second time following the debaters’ closing statements. The winning team is the one that swayed more audience members between the two votes.