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Embrace the power of integration and diversification in a time of industry volatility

Nov 14, 2017
7 min read
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By: Musabbeh Al Kaabi, CEO, Petroleum & Petrochemicals Mubadala Investment Company

Earlier this year hedge fund manager, Pierre Andurand, forecast that oil would return to US$100 a barrel. The prediction caught the attention of the market but ran against the conventional wisdom that to survive, the petroleum industry must prepare for prices to remain at half that level. It is a call that positions the French-born trader against some of the biggest trends that have come to dominate the oil market outlook, from the US shale oil revolution to the rise of electric cars, which has led most investors and analysts to believe oil prices will be capped between $55-$60 for the foreseeable future.

I am not going to get drawn into predicting where oil prices will end up. Inevitably, our projections of the future are rarely accurate and we will most likely see things evolve in a completely different direction.

A different indicator of the health of the industry is the level of investment and M&A activity. The first eight months of2017 almost set a new record, with over 600 deals worth a total of $195 billion. This was led by the US, where 250 transactions worth $114 billion were agreed upon. There has also been significant activity in Europe where Total bought Maersk Oil and Gas A/s for $7.45 billion. The volume and value of these transactions indicates a more realistic view from sellers about the valuation of their assets, something that was missing in the immediate aftermath of the price fall, when owners were maintaining prices in anticipation of a more rapid turn-around.

The past year has been full of discussion on the energy price, the impact of technology on the market and scenarios about the future.

When we consider peak oil, the consensus has changed over the last four years with institutions and companies such as the IEA, OPEC, Shell and Statoil predicting that demand will peak somewhere between 2030 and 2040. If true, it is not that far away!

Discussions about peak oil are important and interesting, but perhaps we spend too much time looking at these topics and we ignore the positive changes that technology and diversification can bring in a volatile market. We need to embrace the evolution and understand the new possibilities they bring to the market both today and in the future.

For example, from 2007 to 2017, 212 new petrochemicals producers entered the industry. This is an increase of 20 percent, which is surprisingly high given the barriers to entry in this capital-intensive market. In the next five years, based on capacity announcements, that number is expected to increase by around a further 50 companies. In recent years, the growth in demand for petrochemicals has been about 1.33 times that of GDP. We are also seeing the Middle East quickly becoming a leading hub for petrochemicals, especially focused on the growth markets of Asia, and driven by technology and NOCs embracing diversification. These are developments we find very exciting.

Elsewhere, one very interesting deal saw Shell buying one of Europe’s biggest electric vehicle charging companies, New Motion.

It is fascinating to see one of the world’s oldest and most enduring energy companies diversifying away from oil. I remember fifteen years ago when oil and gas companies started moving into renewables, many people said it would not work and it would not be profitable.

Yet only last month DONG, the Danish oil and gas company, completed the divestment of its upstream oil and gas business to INEOS to focus on renewables. This is real strategic change being driven by technology, which is creating a new energy landscape. The truth is that many companies have gained a competitive edge for being brave enough to embrace these technological changes and for diversifying their portfolio.

While renewables still face the challenge of intermittency and integration into our power delivery networks, a lot of money is being invested in research into storage and load management solution - who knows what progress can be made? The growth in diversification and the increasing success in using new technologies demand that we keep an open mind when looking for investment opportunities.

I believe we are at a very interesting point for the sector where we are seeing the integration of technology delivering significant change in the energy mix. Here in the Middle-East, energy demand is predicted to increase by 8 per cent year-on-year, so we need a diversified mix of energy sources to meet our growing needs. In addition, these changes will support countries in the region in their efforts to increase efficiency while decreasing energy intensity.

Of course, we must not forget the innovation that is happening in the electric vehicle industry. Companies like Tesla are bringing real change and revolutionising a100-year-old industry. The large manufacturers are following suit and China has announced its commitment to EVs and the phasing out of the combustion engine. Yet there are still challenges to be overcome, including the current limitations of the world’s power generation and distribution infrastructure. At present in the United States electric cars represent about 1 per cent of vehicles sold which amounts to 0.2 per cent of the total automobile fleet. They are not yet putting pressure on the electrical grid, but as adoption of EVs increases, careful management of power grids and significant additional charging infrastructure will be required.

Even with an acceleration in EV sales, transformation of the global vehicle will take time and, as a result, I believe the internal combustion engine will be with us for some time to come. Add to this that 27 per cent of the world’s electricity is currently generated from oil and gas (IEA 2017), I expect our industry will remain an important part of the global energy for several decades into the future.

At the same time, technology and innovation are having a significant place in our “traditional” industry. Big Data and Artificial Intelligence are driving efficiency and have a growing role in providing petroleum companies with a competitive edge. The reality remains that while oil and gas are the commodities, it is the technology that enables us to find and extract hydrocarbons more efficiently, and process them into products that the market desires.

The inertia of global energy systems can be very long. It is debatable when it will be feasible to phase out oil, but we are witnessing a transformation of the energy system. We need to embrace evolution and understand what is happening, and seek out the possibilities this offers to the market.

We need to take advantage of technology and data science, which is driving the changes in the energy mix. This is where the investment opportunities are today, which can maintain our leading position in the global energy market tomorrow.

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