There is really no need to waste a good crisis. If you look in the right places, there is plenty of potential to build business in today’s energy market, along with many new ways to generate value from the supply chain.

A number of new opportunities present themselves because the global market has now reached an inflection point – we are witnessing oversupply of hydrocarbons; cost parity and substitution between hydrocarbon and renewable energy sources; and a strong environment agenda.

Turning price parity into an advantage

Oil is being overproduced by some 1 million barrels per day. Companies and countries are running out of storage space. And the oil price is still very low, with little chance of anything other than gradual improvement while production and demand remain so utterly out of whack.

The prices of traditional energy sources are getting much closer to the prices of renewables, almost reaching parity. At the same time, global market demand is shifting to low carbon production – in other words, from coal, oil and gas to renewables, which is enjoying double digit growth right now. In fact, the renewables subsector is starting to stand on its own without subsidies, at least in emerging markets. Here, renewable energy sources fit well into future energy concepts – new economies are adopting decentralized power generation models (able to quickly adopt mini and micro grids) without having to accommodate the legacy models of developed economies.

Making the most of low carbon

When the logo of a Big Oil corporate turns green, this sends a clear signal to the global market. Companies in the energy industry are busily strengthening their environmental credentials and building up their low carbon qualifications.

Technology is playing an important role in the development of green capabilities. Batteries were previously the ‘missing link’ in the potential of renewables, but now they have greatly advanced, and production is taking place on an industrial scale, manufactured by companies such as Tesla and Daimler-Benz. Battery costs came down some 35% in 2015. And there’s strong demand for a key component, lithium (which doubled its spot price at the end of 2015), boosting lithium extraction operations in the salt plains of Bolivia.

These various developments present a vast range of opportunities for the supply chain as well as a compelling case for partnering with a logistics provider. This support will enable energy companies not only to optimize costs but also to obtain environmental and sustainability credentials, demonstrating how to become less carbon intensive and sharing value with the communities they operate in.

Opening doors to outsourcing

As energy companies cut back on CAPEX and operational activities, trying every possible way to mitigate for depressed revenues and profits, their long-held reluctance to outsource is disappearing fast. Cost pressures are forcing companies to change their position dramatically.

Being open to outsourcing presents another opportunity. Oil and gas companies have clung to a procurement-driven contracting model since the 1990s, which was great at the time. Back in those days, the work scope was fragmented into a myriad of small parts. Projects were put out for bid by a procurement organization seeking the lowest price for each element and expecting this to achieve both the lowest project cost and the highest project value. But this typically resulted in a proliferation of logistics providers and contracts, all serving the same upstream asset and delivering cargo to the same destination often from similar origins.

It’s clear that procurement-driven contracting is no longer fit for purpose. To achieve both better costs and better performance, energy companies should consider shifting to an outsourcing model that bundles a broader range of services for[KM1]  multiple upstream partners, ultimately achieving end-to-end service provision. The conversation with a logistics provider should focus on central coordination, consolidation of logistics flows, and better utilization of logistics assets.

Being ready to deal with uncertainty

Many energy companies are in merger and acquisition (M&A) talks, with new deals emerging all the time. This means that logistics providers must be ready for fundamental account change at any moment – newly merged entities often experience operational chaos, so steady and strong logistics provision will be required more than ever.

New levels of agility have changed fundamentals of the industry.  Shale oil and gas business, for example, now has shorter investment cycles which means companies can re-enter the market very quickly when required. Similarly, a number of low-cost producers like Iran have spare capacity and are capable of coming online quickly. For supply chains, this means everyone must be prepared for surges in service demand in certain geographies.

So what can we safely predict will happen next? Unfortunately there is little consensus on where the global energy market is going. This is clearly illustrated by contradictions between sources in the oil industry, renewables, and NGOs. For example, in its Outlook 2040, ExxonMobil has predicted a 2% adoption of electric cars. Meanwhile, Bloomberg New Energy Finance predicts 35% (which, by the way, would equate to millions of barrels of oil that are not needed). They can’t both be right.

Energy companies must make the most of new supply chain opportunities and stay vigilant, accepting that change is the new constant.

Published: April 2016

Image: DHL