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Terra Incognita A Navigation Aid for Energy Leaders. Presentation to UH-GEMI Refining Conference November PDF

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A Navigation Aid for Energy Leaders Presentation to UH-GEMI Refining Conference November 2006 Terra Incognita A Navigation Aid for Energy Leaders 1. Global energy complex is entering its third phase change
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A Navigation Aid for Energy Leaders Presentation to UH-GEMI Refining Conference November 2006 Terra Incognita A Navigation Aid for Energy Leaders 1. Global energy complex is entering its third phase change 2. Demand trends are not sustainable - China and India rise to materiality changes everything 3. IOCs want to produce but have limited access; NOCs have access but want to conserve their resource 4. Society s ascent of the Maslow hierarchy increases expectations of energy companies security and climate must be addressed 5. Previous shareholder value propositions are unpersuasive But IOC capex has barely increased from depressed 1990s levels 6. Old strategies are threatened 7. The industry must reframe its purpose and boundaries 8. New business models will emerge and old ones will be discarded 9. This will require new strategies, execution and leadership And this will affect deeply the Gulf Coast Refining business 10. The phase change demands a different approach to strategy development 1 Private and Confidential Global energy complex is entering its third phase change U.S. Energy Consumption 1.00 Percentage of Total Marke Total Coal Wood Waste Alcohol Liquids Gases, Nuclear, Renewable Energy Electricity Net Imports Year 2 Private and Confidential The conventional investment cycle may be overridden by the phase change 2004 $/B Private and Confidential World Oil Prices (This is not a forecast!) ? China and India rise to materiality changes everything World Population (Billion in 2005) Oil Consumption (MMBD in 2005) China More Developed India Less Developed China More Developed India Less Developed 4 Private and Confidential IOCs want to produce but have limited access; NOCs have access but want to conserve their resource Liquids Output Liquids Reserves INOC 14.3% LOC 7.6% IOC 27.2% INOC 6% LOC 3% IOC 8% NSC 13% NSC NOC 10.8% 40.1% NOC 70% Top 50 Share of Global Total = 79% Top 50 Share of Global Total = 84% Source: PIW s Top 50: How the Firms Stack Up (www.energyintel.com) 5 Private and Confidential Society requires attention to two big externalities Global Hydrocarbon Reserves CO2 Emissions - North America Mtoe R/P (Years) MMT Coal Oil Nat Gas Oil Gas Coal CO2 Emissions - China Russia China & India North America Middle East Other R/P 61% oil reserves in Middle East MMT % natural gas reserves in Middle East and Russia % of coal reserves in North America, China and India Coal Oil Nat Gas Private and Confidential Old strategies are threatened Competitive position IOCs have lost competitive position to INOCs and NOCs for mature conventional resources in traditional places Maturity Embryonic Embryonic Unproven Unproven Growing Growing Unconventional Unconventional Mature Mature Conventional Conventional Aging Aging Depleting Depleting Response Clear Clear leader leader Strong Strong Favorable Favorable IOC New Entrant IOC NOC NOC INOC IOC Consolidator Depleter Develop Selective investment Prove viability Defendable Defendable New Entrant New Entrant Divest/close Weak Weak Competitive intensity: High: Medium: Low: 7 Private and Confidential Prior shareholder value propositions are unpersuasive ROACE vs TSR Total R eturn to Shareholders (CAGR, %) 40% 30% 20% 10% R 2 = % 15% 17% 19% 21% 23% 25% 27% 29% 31% 33% Return on Average Capital Employeed (%, Average) Production growth has replaced ROACE as a predictor of shareholder returns Total Return to Shareholders (CAGR, %) Chevron 8 Private and Confidential Marathon Shell XOM Production vs TSR 40% 35% 30% 25% 20% 15% 10 % 5% 0% BP Murphy Hess Total R 2 = Petro-Canada Petrobras -5% 0% 5% 10% Production (Percentage Change, Average) ENI IOC Capex has barely moved from depressed 1990s levels 18 Capex in 2005 $/B of Prod/ Run Upstream Downstream Real Capex per barrel of production or refinery runs for XOM, BP, Shell and Chevron 9 Private and Confidential If a problem cannot be solved, enlarge it. Dwight D. Eisenhower 10 Private and Confidential The industry must reframe its purpose and boundaries Gasification Crude Oil Natural Gas Coal Refining Fischer Tropsch Syngas PC Hydrocarbons Gasoline & Diesel Combined Cycle ICE Fuel Cell Hydrogen CO 2 Flue Gas Chemical Separation Societal Needs Personal Mobility Batteries Electricity On Demand Transmission Emissions Control Sequestration Transmission Nuclear Waste Transportation Bio-fuels Chemical Processing Engineered Crops Bio-refining Wind, Tides, Currents, Waves, Solar Nuclear Carbon Neutral 11 Private and Confidential The new map opens up new business model possibilities Gasification Crude Oil Natural Gas Coal Refining Gasoline & Diesel Fischer Tropsch Combined Cycle Syngas PC ICE Fuel Cell Hydrogen CO 2 Flue Gas Chemical Separation Transmission Personal Mobility Batteries Electrons On Demand Emissions Control Sequestration Bio-fuels Chemical Processing Engineered Crops 12 Private and Confidential Bio-refining Transmission Wind, Tides, Currents, Waves, Solar Nuclear Nuclear Waste Transportation The refinery of the future will be more flexible to achieve lowest variable costs The New Refinery Extends its Product Markets into Chemicals and Power Ethylene/Propylene Ethylene Cracker Complex BTX Aromatics Complex Aromatics C2-C5+ C2-C5+ naphtha H2 raffinate Natural Gas Bitumen/ Hy Crude FCC Coking Refinery intermediates Hydrotreating/ cracking Complex Gasoline Diesel C1 Coke wax Gasification Complex H2 syngas Fischer Tropsch Lubes Solids 13 Private and Confidential Source: CRA International Power CO2 EOR/Sequestration Global refining must be retooled to accommodate oil sands and convert more resid to transportation fuels Projected Canadian Bitumen Production mbd Residual Fuel Oil Consumption mbd Un-Integrated Integrated to refineries OECD The JV between ConocoPhillips and EnCana is the first announced to integrate previously un-integrated players ROW (ex FSU) High oil prices will cause residual fuel oil demand destruction 14 Private and Confidential Distributed manufacturing will challenge commodity refiners Synbit Major Uncertainties Coal-to-Liquids Extra-Heavy Crude Imported Cane-Ethanol Crude oil price Natural gas price Light-heavy spreads Refinery investment cycle Vehicle efficiency Public transportation Plug-in hybrids Ethanol subsidies Cellulosic ethanol Greenhouse gas limits FT/ CTL learning curve Sequestration costs Product flows/ blending 15 Private and Confidential Organization Design will need to balance functional excellence with integration benefits ILLUSTRATIVE CEO Portfolio Strategy Supply and Trading Traditional Mature Deepwater Emerging Country Development Unconventional Resources Risk Management Basin Ops Exploration Traditional Resource Development Supply Chain Integration Trading - OECD Basins - Other mature operations Refinery Ops - Non-integrated refineries (Europe/NA) Established Market Retail - Retail in OECD, other established markets M&A - Acquisitions and Divestitures Development/ Offshore Project Offshore Production - Nigeria - Algeria Expanding NOC s - Norway - China Self Sufficient - Saudi Arabia Russia -Heavy Oil -Coal -Shale -Stranded Gas Renewables -Solar -Wind -Biomass Integrated Chains -Integrated Refineries -Storage, Transport, Processing, etc -LNG 16 Private and Confidential The phase change demands a different approach to strategy development Far From Agreement Today s Strategic Challenges Implications Explore multiple futures Close to Agreement Traditional Strategic Challenge Terra Firma Terra Nova Terra Incognita Challenge mental models Seek new insights Apply multiple lenses Develop leadership alignment Close to Certainty Far From Certainty Establish clear direction Deal with ambiguity Direction: Execution: Leadership Position downwind of major trends; redefine corporate boundaries; Refine business model Secure commitment; access opportunities; deploy resources; organize; address stakeholder needs Convey purpose; shape values & culture; establish decision rights; motivate and renew people Plan for experimentation Rigorously test business logic Articulate strategic metrics Embed learning processes Emphasize organizational capability 17 Private and Confidential The winds and waves are always on the side of the ablest navigators. Edward Gibbon, Decline and Fall of the Roman Empire 18 Private and Confidential Chris Ross CRA International 1600 Smith Street Houston, TX (713) Private and Confidential
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