Santayana, the philosopher once said that “those who are not willing to learn from history are doomed to repeat it.” Our forecasters are repeatedly wrong about the future price of oil and gas, about capital spending, LNG demand, operational spending, and practically anything concerning future industry conditions. Rivers of money are spent by oil and gas companies to get the wrong results year after year.
From 1980 to 2000, the US Department of Energy did not once forecast correctly the price of crude within a margin of error of 10%. It did almost as poorly in the area of natural gas. The International Energy Agency (IEA) in Paris did no better. Neither did the investment bankers.
Managers in the oil and gas and technical services industries have no choice but to try to anticipate the future, to try and shape it and balance long-term objectives against short-term ones. They also need numbers for their budgets and legal obligations. However, classical forecasting is obviously not the answer.
What, then, is the answer? In my view, it is a strategic planning process that takes into consideration dynamic factors that can at any time alter the course of a particular future. This type of strategic planning is necessary because we cannot forecast or prophesize the future price of crude or capital spending. How do we define this type of strategic planning? Simply put, we mean a continuous process for making decisions with varying degrees of risk and with some consciousness and knowledge about their futurity.
The essence of effective strategic planning in the hydrocarbon industry is to make present decisions with some knowledge about their desired impact on future events. Importantly, this means a strategic planning process that does not try to eliminate risk or even minimize it. Instead, the process should lead to enhanced capability for the company to take greater risks and the right risks, since risk taking is the only way for a company to attain the highest financial returns.
The strategic planning system requires the monitoring of a number of dynamic factors that can alter our vision, our foresight on the oil and gas industry. They are:
- Inter-fuel competition
- The trend toward increasing costs and diminishing results
- The growing importance of energy politics
- The changing role of petroleum companies – IOCs, NOCs, independents.
A fifth universal dynamic factor – the invisible elephant in the room – is the demographic shift occurring in the developed countries currently leading to serious technical resource shortages. This dynamic factor must be considered in the strategic planning process. These critical shortages are hindering both operators and contractors, leading to projects that are frequently behind schedule and over budget. It is no exaggeration to say that there are more problem upstream projects in our industry that at any time within the 25-plus years of my career.
To sum up:
First, classical forecasting doesn’t work and cannot predict the future. The evidence is irrefutable. It offers false hope and we all know that hope may be a good breakfast but it is a very poor supper. A better approach is to use a strategic planning process that systematically monitors and takes into account the key dynamic factors impacting future events.
Second, we need to understand that we have more money than the technical resources to efficiently complete our desired projects. There are more projects than what our technical capacity will allow us to do. Therefore, we need to do a better job of setting project priorities. You may have 10 projects you want to launch, but should only launch seven. Launch the right seven with the resources to do the job properly.
Third, to be successful in this trying environment will require clear and decisive leadership. Clarity and decisiveness however are liabilities if you have nothing to say and not the will power to act. Let us hope that clear thinking and decisive leadership triumphs.
J.P. Chevriere
CEO, Transmar Consulting
This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to Eldon Ball at[email protected].
