A Sustainable Future for the Oil Industry

By Vance Scott
Partner and North American Energy practice leader
June 2009

National oil companies—those owned by governments—hold 85 percent of the world’s reserves. Many of these companies are working today to become more than mere suppliers. They are developing their own technology to become more self-sufficient, with the hope of reaping larger profits from their reserves. As a result, many observers of the oil and gas industry believe that the industry’s investor-owned companies—the global corporations that hold the other 15 percent of the world’s oil and remain the innovative and technological leaders in the industry—will slowly fade away, eventually replaced by oilfield service companies who can provide the necessary expertise.

However, we see a different endgame. The nationalized companies, the investor-owned firms and the oilfield service providers have a strong, natural interdependency that offers benefits to all parties. Together, these groups can meet the “triple bottom line” of economic, social and environmental imperatives that will guarantee a sustainable energy future, one in which all parties forego some short-term gains for a more secure future.

Exploit or Invest?
There are two paths the industry can take: short-term strategies based on exploiting proven strategies and technologies, or long-term investment in new resources, technologies and innovations. The “exploit” strategy will maximize immediate returns, but down the road profitability will erode as reserves decline and carbon-based taxes becomes more prevalent. The “invest” approach is risky and expensive up front, as companies pay to find unproven alternatives. Yet these investments will pay off down the road, forming the basis of a sustainable and profitable future.

Each participant has particular challenges in balancing these strategies. Investor-owned companies feel pressure from financial markets that push for immediate results. Nationalized companies, particularly those in developing countries, are relying on oil funds to improve local living conditions and build sustainable economies, and investment strategies often come at the expense of those short-term needs. For both sides, the “exploit” strategy is clearly appealing, as it offers immediate results to placate investors or citizens. Yet, it is not a sustainable strategy for the long term; the costs—economic and environmental—will inevitably rise, so both national and investor-owned companies must invest to be viable into the future.

A Model for the Future
In our model of a sustainable energy industry, all of the industry’s current parties collaborate to set the boundaries that drive the oil and gas sector toward the “triple bottom line.” This is easier said than done—while the sides have long worked together, there is a history of mistrust. The national companies were formed out of a frustration that national resource owners were not receiving their fair share of oil profits. The investor-owned companies have been afraid to share their technology with the national companies, afraid that it would be misused or stolen.

That is why it is important to set a strategy that strikes the right balance between current goals and those that demand long-term investment. In this balance, the players must “give to get”; everyone brings something to the table, and everyone receives something in return. The investor-owned companies and national companies from countries that are net consumers of oil pass along technology and capital, and the net-exporting national companies offer sustainable, low-cost energy. Governments collaborate to set policies that balance that “triple bottom line” of profit, social and environmental needs.

With the trade-offs, all sides benefit. Investor-owned companies and net-consuming nationalized companies will gain new access to reserves and will have the technology to be viable long into the future. Resource-rich nationalized companies from net producing nations will extend the life of their resource base and develop alternative catalysts for their economies. This will help improve living conditions and education for their people and ensure sustainable economies.

Humankind has faced and met many challenges throughout history, but creating a sustainable world may be the biggest test yet. Considering the consequences, all the players in the oil and gas industry must work together to meet this challenge.

Vance Scott is a partner in A.T. Kearney’s global energy practice and was just named to Consulting Magazine’s list of Top 25 Consultants for 2009.

For more information, please contact the author.

The views expressed in this paper are those of the author(s) and do not necessarily represent the views of A.T. Kearney or the Global Business Policy Council. The views are not meant to suggest specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion.