Copy of Strategic thinking in the O&G industry in the wake of Global warming and Climate change

How does the strategic planning process look like?

?Businesses need direction and organizational goals to work toward. Strategic planning offers that type of guidance. A strategic plan is a roadmap to get to business goals. Without such guidance, there is no way to tell whether a business is on track to reach its goals.

?Strategic Planning is a process where organizations define a bold vision and create a plan with objectives and goals to reach that future. A great strategic plan defines where your organization is going, how you’ll win, who must do what, and how you’ll review and adapt your strategy.

?The strategic management process is about getting from Point A to Point B more effectively, efficiently, and enjoying the journey and learning from it. Part of that journey is the strategy and part of it is execution. Having a good strategy dictate “how” you travel the road you have selected, and effective execution makes sure you are checking in along the way.

On average, this process can take between three and four months. However, no one organization is alike, and you may decide to fast track your process or slow it down. Move at a pace that works best for you and your team.

The following four aspects of strategy development are worth attention:

The mission. Strategic planning starts with a mission that offers a company a sense of purpose and direction. The organization's mission statement describes who it is, what it does and where it wants to go.

?The goals. Strategic planning involves selecting goals. Most planning uses SMART goals -- specific, measurable, achievable, realistic, and time-bound -- or other objectively measurable goals. Measurable goals are important because they enable business leaders to determine how well the business is performing against goals and the overall mission.

Alignment with short-term goals. Strategic planning relates directly to short-term, tactical business planning and can help business leaders with everyday decision-making that better aligns with business strategy.

Evaluation and revision. Strategic planning helps business leaders periodically evaluate progress against the plan and make changes or adjustments in response to changing conditions.

What are the steps in the strategic planning process?

Most strategic planning cycles can be summarized in these five steps:

Identify. A strategic planning cycle starts with the determination of a business's current strategic position. This is where stakeholders use the existing strategic plan -- including the mission statement and long-term strategic goals -- to perform assessments of the business and its environment.

Prioritize. Next, strategic planners set objectives and initiatives that line up with the company mission and goals and will move the business toward achieving its goals. There may be many potential goals, so planning prioritizes the most important, relevant and urgent ones.

Develop. This is the main thrust of strategic planning in which stakeholders collaborate to formulate the steps or tactics necessary to attain a stated strategic objective. This may involve creating numerous short-term tactical business plans that fit into the overarching strategy.

Implement. Once the strategic plan is developed, it's time to put it in motion. This requires clear communication across the organization to set responsibilities, make investments, adjust policies and processes, and establish measurement and reporting.

Update. A strategic plan is periodically reviewed and revised to adjust priorities and reevaluate goals as business conditions change and new opportunities emerge.

Phase Duration

1-2 weeks (1 hour meeting with Owner/CEO, Strategy Director, and Facilitator (if necessary) to discuss information collected and direction for the continued strategic planning.)

Questions to Ask:

-Who is on your Planning Team?

-Who will be the business process owner (Strategy Director) of strategic planning in your organization?

-Fast forward 12 months from now, what do you want to see differently in your organization as a result of embarking on this initiative?

Outcome:

-Planning team members are informed of their roles and responsibilities.

-Planning schedule is established.

-Existing planning information and secondary data collected.

Step 1: Determine Organizational Readiness

Set up Your Planning Process for Success – Questions to Ask:

Are the conditions and criteria for successful planning in place at the current time? Can certain pitfalls be avoided?

Is this the appropriate time for your organization to initiate a planning process? Yes or no? If no, where do you go from here?

Step 2: Develop Your Team & Schedule

Who is going to be on your strategic planning team? You need to choose someone to oversee the implementation (Chief Strategy Officer or Strategy Director) and then you need some of the key individuals and decision makers for this team. It should be a small group?

Step 3: Collect Current Data

Collect the following information on your organization:

The last strategic plan, even if it is not current

Mission statement, vision statement, values statement

Business plan

Financial records for the last few years

Marketing plan

Other information, such as last year’s SWOT, sales figures and projections

Step 4: Review collected data:

Review the data collected in the last action with your strategy director and facilitator.

What trends do you see?

Are there areas of obvious weakness or strengths?

Have you been following a plan, or have you just been going along with the market?

Conclusion: Strategic Planning needs to be adaptive to survive changing or unanticipated conditions. An organization that develops and executes a strategic plan gain significantly from the experience and starting with a working model and then building a tangible plan can be more successful for your organization than having no plan at all. Over the life of your strategic plan, you may discover that some of the underlying assumptions of your strategy are flawed or incomplete. Often your organization’s mission and vision may remain the same while your objectives and goals will need to be revised or updated. When this happens, you will need to either adapt your strategy or begin the process over again. But don’t let it be a pitfall for you. Some organizations can maintain a strategic plan for a year or longer, while others have to respond to market changes more frequently. Whatever your situation, just be prepared to let go and switch strategies as necessary. Corrective action needs to be taken quickly to compensate for the dynamic business environment most organizations operate within.

Oil & Gas Industry - Key Success Factors

Today’s multinational, International Oil Companies (IOC’s) and National Oil Companies (NOC’s), both upstream and downstream of the oil and gas supply chain, are facing many challenges from the current economic climate. The current volatility of crude oil and natural gas prices has resulted in companies to reinvent themselves and to abandon the traditional strategic planning exercises.

Quality of Reserves and Replacement Strategy

The analysis covers the company’s existing proven and probable reserves, its quality and replacement strategy. Acknowledgment of reserve must be certified by a credible and independent appraisal. The assessment on life of reserve and its quality are key factors used to determine the company’s growth strategy, capital spending and future business performance. Replacement strategy will be more crucial for player with mature reserve.

Diversification

Diversification is crucial to reduce business risks including anticipation of the fluctuation of oil price. Following the long-term contract with the buyer for gas, a company that is able to produce oil and natural gas should have better revenue stability than the one that is exposed to high business interruption risks. Spread-out location of oil and gas reserve may help to lower business interruption risks.

Cost Position

The analysis covers the company’s lifting cost and finding cost. Those costs vary depending on the location and availability of infrastructure. A company with cost position advantages can mitigate oil price fluctuation and generate profits.

Operating Management

The analysis covers the company’s human resources, infrastructure, productivity, drilling success rate and cost structure. Condition and utilization of the equipment and the integration of technological improvements will also become important factors to achieve the company’s degree of efficiency in its operational activities.

The analysis on operating margins (EBIT and EBITDA) is also assessed by comparing the company’s ratios with other players in the same industry or other industry with similar characteristic, which is important in analyzing the company’s competitiveness. The analysis is helpful to measure operating efficiency.

FINANCIAL RISK ASSESSMENT

Financial Policy

The analysis includes a review of management's philosophy, strategy and policies toward financial risk (historical, current and future). It also includes examination of management's financial targets (growth, leverage, debt structure and dividend policy), hedging and other policies in an effort to reduce the company's overall financial risk (historical vs. future). The company's track record on fulfilling its previous financial obligations is also examined to determine the degree of its commitments and willingness and consistency to pay obligations on a timely basis.

Capital Structure

The analysis covers careful examination of the company's historical, current, and projected leverage (total and net debt in relation to equity and EBITDA), debt structures and composition (rupiah vs. foreign currencies, short-term debt vs. long-term debt, fixed rate vs. floating rate). Management of its liabilities is also thoroughly reviewed.

Cash Flow Protection and Liquidity

The analysis covers thorough reviews of the company's cash flow generation and capability to meet its short-term and long-term financial obligations. The degree of its debt-servicing capability level is measured by the company's interest and debt coverage ratio. The degree of its liquidity in fulfilling its short-term liabilities relative to its sources of cash is also thoroughly assessed. The sources of cash are assessed, which include cash balance, estimated cash from operations, unused credit facilities, and other sources of cash. The uses of cash other than short-term liabilities, such as capital expenditure, are also assessed.

Financial Flexibility

The analysis covers combined evaluations of all the financial measures above to arrive at an overall view of the company's financial health. Analysis of other related factors or figures that are not specifically examined above, such as insurance coverage, restrictive covenants in loan/bond agreements or parental linkage and support, are also covered. Other analytical tasks covered are the evaluation of the company's options under stress, including contingency plans and other capabilities and flexibility to deal with various adverse scenarios. Shareholder support and commitment are also greatly considered.

Strategic thinking in the O&G industry in the wake of Global warming and Climate change.

What are the critical factors?

International oil companies play a central role in the transition towards a low-carbon economy. These companies have the leadership and influence to advance technological alternatives or sustain the current dependence on fossil fuels.

We will discuss the decarbonisation strategies that European oil companies are performing in the wake of climate change. There are four main strategies adopted by companies:

- sustained carbon dependence

- carbon emissions compensation

- carbon emissions mitigation

- carbon independence.

Many European IOCs have adopted a proactive discourse and are positioning themselves as ‘energy companies’ to dissociate themselves from the oil regime. We will review the decarbonisation strategy of 10 European IOCs.

In recent decades, the quest for sustainability has framed companies' strategies to improve environmental performance.

Managers often think of corporate sustainability as the implementation of incremental changes to processes and products, such as the adoption of environmental management system certifications or a new ‘green line’ of products.?

However, reducing unsustainability is not the same as creating sustainability. This structure of incremental targets fits well with companies' routines, but marginal gains become insufficient in the face of climate neutrality.

Climate change mitigation demands significant change: GHG emissions must cease if we want to limit global warming to 1.5°C. Companies' whole functioning must be aligned with this goal while still allowing for a competitive advantage.

When a company discharges a toxic effluent into a river, the impact is local and immediate: whether that is changing the water appearance or causing the death of fish.

When companies emit GHGs, there are no immediate visible effects. The impacts might be diffused, non-linear and in timescales beyond managers' lifetimes.

Managers can look around and see a world where 80% of energy production comes from fossil fuels, which makes individual action seems meaningless and reduces the perception of urgency.?

Many companies use problem-solving techniques based on simplification and linearity that are unhelpful for dealing with systemic problems like climate change.

Managers can quickly lose focus on what climate change means to their business and choose to adopt partial solutions that only respond to more immediate calls. It is easier to focus on incremental targets established by climate policy than rethink the whole business.

The environmental strategy already distinguishes among businesses that adopt reactive approaches (e.g., reducing pollution only to comply with regulations) versus proactive approaches.

There are four types of decarbonisation strategies. The main distinctions of four strategies lie in their different degrees of impact on the natural environment and capacity to mitigate climate change.

The choice of sustained carbon dependence is the first strategy. Although companies accept climate change as a real phenomenon, they do not consider climate change a real threat to their business and decide to postpone the search for solutions or use political lobbying to undercut legislation aimed at curbing carbon emissions.

Companies might also adopt the strategy of carbon emissions compensation. In this case, companies seek solutions like carbon capture and storage (CCS), natural sequestration of carbon, clean development mechanisms or the acquisition of carbon credits.

Compensation strategies are risky when considering the impact on the natural environment: They have a limited capacity that would never sustain the world's current fossil fuel usage.

These technologies are more suitable for removing the enormous amounts of carbon that have already been released than justifying continuous emission.

The third strategy is carbon emissions mitigation, which companies have widely adopted. Companies implement adjustments or incremental innovations to reduce the carbon intensity of their production processes or products.

Examples of incremental change are transitioning to less carbon-intensive fuels, modifying products to reduce emissions or changing production processes to increase energy efficiency.

Emissions reductions can alleviate (reduce) the pressure on the natural environment, but they are not a definitive solution.?

Carbon independence is a proactive strategy. With this approach, the company abandons fossil fuels by recreating its core business or remodeling its process, eliminating GHG emissions while still meeting consumers' demands.

?Strategic thinking in the O&G industry in the wake of Global warming and Climate change. What are the emerging strategic priorities (External and internal)

European oil companies are performing decarbonisation strategies that in the wake of climate change. There are three critical parameters to determine the company's decarbonization strategy: total GHG emissions reduction, engagement incidents with renewables and investments in CCS. Those three parameters are adequate for delineating strategies because they comprise the whole range of mitigation actions that companies can perform.

Carbon-dependent and carbon compensation companies made the fewest investments in renewables.

Hellenic and Repsol have predominantly invested in renewable energy, while MOL, OMV and PKN Orlen have opted for alternative fuels (biofuels and hydrogen).

Carbon emissions mitigation companies (BP, Shell and Total) have performed considerably more investments in all four analysed technologies. They have also invested in R&D, mostly related to biofuels, CCS and hydrogen.

The carbon-independent company ERG has focused on solar and wind energy, with its investments directed towards the acquisition and building of new facilities.

Sustained carbon dependence

PKN Orlen and Hellenic Petroleum are the two companies that adopted a carbon-dependence strategy. The companies' investments in renewable technologies were marginal and mainly motivated by regulation compliance.

Hellenic has engaged with renewable energy as a way of mitigating its GHG emissions—mostly by constructing new photovoltaic facilities.

PKN has engaged with biofuels by reconverting two facilities in bio-refineries and conducting an R&D project on advanced biofuels.

Their decision was likely prompted by an increased demand for biofuels, stemming from new European regulations that demanded a share of renewable fuels mixed with fossil fuels. The two companies were also not involved with CCS projects.

The companies did not state the need to adapt to a future higher incidence of climate change-induced extreme weather events. Instead, they presented climate policy as a risk to their business, responsible for hampering their operations and reducing their competitiveness.

Carbon emissions compensation

OMV, MOL group, Repsol and Eni. Eni has achieved emissions reductions consistent with carbon mitigation companies, and made marginal investments in renewables, placing the company in between the carbon emissions compensation and mitigation strategies.

Repsol achieved a reduction in GHG emissions (?5.21%).?

OMV, Eni and Repsol have developed and acquired solar and wind projects to diversify their portfolio and prepare for a future where fossil fuels will not play a central role.

Unlike carbon-dependent companies, this group already recognizes that fossil fuels may not dominate in the future.

Eni, OMV and Repsol proposed similar actions to mitigate emissions: They counted on increased operational efficiency, carbon compensation and natural gas as a main low-carbon alternative. These three firms reaffirmed their interest in achieving net-zero emissions by 2050.

MOL developed a strategy in 2017 to face the reduced demand for fossil fuels based on the provision of services rather than the final product.

Apart from pressures derived from climate policy, IOCs in this category also recognised that a growing societal awareness of climate change can impair the future demand for fossil fuels or reduce investments.

The three companies comprehend that more recurrent extreme weather events can impact their business. They have started to develop adaptation plans for their operations and supply chains.

These companies clearly understand that climate change is a major global issue that they need to address.

Apart from the risks that climate change poses, these firms also treated climate change mitigation as a strategic growth opportunity that they planned to exploit by entering the electricity provider's market.

Carbon mitigation companies highlighted the same actions mentioned by carbon compensation firms: increasing energy efficiency, adopting carbon compensation technologies or mechanisms, developing low-carbon products, and evaluating alternative energies.

Companies in this group promoted natural gas as the main low-carbon alternative, because it does not require significant modifications to their operations.

These companies have achieved emissions reductions beyond regulatory compliance (on average, 32%) and more extensively engaged with renewables.

However, they have demonstrated their disinterest in a carbon-independence strategy. Their annual reports state that ‘oil and gas will remain central to our business for many years’ (Shell, 2017) and that ‘the world will continue to need supplies of hydrocarbons’ (BP, 2017)

However, renewables presented a higher growth in 2020 while oil, natural gas and coal presented significant declines (BP, 2021b). BP admitted in 2021 that it underestimated the growth of wind and solar power in its energy outlook reports over the five precedent years (BP, 2021a).

The presence of such powerful companies can limit the entrance of players focused solely on expanding renewables as fast as possible.

Carbon independence

ERG was the only company among those analysed that performed a carbon-independence strategy. Instead of investing in low-carbon technologies such as hydrogen, biofuels or CCS, the company strategically transitioned to the renewables market.

In 2007, ERG decided to leave the oil industry and invest solely in renewables. The company has performed the transition mostly by acquiring wind farms in Europe and photovoltaic plants in Italy.

This transition was done gradually over 10 years. In 2017, it sold its last assets in the oil industry and exited that market. The company is also in the process of selling its natural gas assets.

ERG made its first investments in wind farms in 2008 and gradually entered the hydraulic and solar businesses. The company was the first wind farm operator in Italy and has since become one of the leading suppliers of renewable energy in Europe.

Being a carbon-independent company, ERG reduced its emissions by 84% in the period analysed. Unlike all the other analysed companies, ERG sees no risk in regulations targeted at fighting climate change.?

The company is also well positioned to profit from all the government incentives for increasing renewable energy generation. ERG is developing plans to adapt to more frequent extreme weather events, which are the primary risk that the company associates with climate change.

The analysed cases underscore that oil companies are pursuing different decarbonisation strategies o address climate change. The companies communicated similar goals and intended actions but had not applied them with the same levels of success. Most companies are aware that the hegemony of fossil fuels will end soon, leaving their business susceptible to increasing governmental and societal pressure. However, ERG was the only company that transitioned away from fossil fuels and adopted a carbon-independence strategy.

The main factor that differentiated ERG from the other analysed companies is its smaller size, but this seems insufficient to explain its pursuit of a carbon-independence strategy.

Larger companies tend to be capable of influencing regulations and political activity, limiting consumers' options or convincing investors that there are no suitable alternatives to fossil fuels. This power affords them the ability to delay a full reorientation.

Lee (2012) analysed 241 Korean companies and identified that larger companies adopted more proactive strategies while smaller ones pursued a ‘wait-and-see’ approach. Likewise, other study (2018) analysed a global sample of 116 automotive companies and confirmed that larger companies are the ones that usually adopt carbon-independence strategies.

Carbon compensation and carbon mitigation companies continuing to promote natural gas as an alternative low-carbon fuel.

The oil and gas industry currently satisfies more than 57% of global energy demand. The industry is viewed as a major cause of climate change and environmental problems and is under significant pressure to transform to a more sustainable way of operating.?

At the same time, the industry has the capacity and resources to re-shape the traditional energy business.

Approximately half of the investigated companies produce their own scenarios of the development of energy markets and publish outlooks, while the other companies build scenarios based on those produced by the International Energy Agency (IEA).

From strategy planning (Chevron, ENI, Gazprom) to contributing to public discourse (BP, Equinor). Some companies (Royal Dutch Shell – further Shell) also investigate possible paths to achieve climate goals.

Population, economic and energy consumption growth, technological development, and policies are commonly stated as the most important factors that influence the development of the global energy system.

?

The macroeconomic factors, such as oil prices, for oil and gas companies to diversify and transit are important for stability.

Companies underlined various factors that are distinctive to them. For example, BP and ExxonMobil highlighted the importance of consumer behaviour and preferences. ENI focused on reputational issues, while CNPC paid attention to exploration and production investment growth. Equinor emphasised on political systems, regulations, reinforcement, and markets to change investment and consumer behaviour.?

Only four companies – BP, Gazprom, OPEC, and Petrobras – directly specified GHG emissions as a factor that affects the development of the global energy system.

Among the factors that influence the strategic choices of oil and gas companies, eight of the twelve companies underlined the importance of macroeconomic indicators and energy markets dynamics. Six companies directly indicated the importance of the oil price.?Five companies pointed out the issue of legislation, while three companies highlighted the factor of geopolitics. Climate, environment, and sustainability issues are significant factors that affect companies' strategic choices (nine of the 12 companies).

The latest sustainability reports of major oil and gas companies show that no company has ignored climate change.

BP and Shell were early to recognise the climate challenge as well as related new business opportunities, while others, such as ExxonMobil, have been slow to acknowledge the need to adjust to the changed operating conditions. Two companies, Chevron, and ENI described climate change as a high-level risk.

The actions are quite similar between the companies, such as GHG emissions reduction and increased investment in low-carbon and renewable energy.

Only a few companies aim to expand the scope of action by helping consumers to reduce their emissions (Shell). Five of the 12 companies aim for larger outreach, including leadership roles in the energy transition, expressed, for example, as to “re-imagine energy” (BP), “play a decisive role in the energy transition” (ENI), and “set an example for the oil and gas industry” (Equinor).

The majority of O&G companies cooperate with stakeholders, whereas three (Equinor, Petrobras, Shell) aim to earn a social license to operate, two (BP and ExxonMobil) focus on consumer preferences, and two (ENI, Shell) specifically refer to reputational risks?

A notable finding is the consensus that the oil and gas industry still plays a role in 2050 – none of the 113 respondents chose the “negligible presence” alternative.

47.8% of respondents found “oil price and its volatility” to be the factor that has the strongest influence on the strategic choices of oil and gas companies. “Climate policies” was the least frequent answer (8%). Among the answers specified by the respondents themselves were “shareholder activism”, “a vision of perspectives”, and “new discoveries and technologies”. Several respondents listed geopolitics, governmental policies, and taxation.

None of those who saw that the oil and gas industry will be strongly present in 2050 considered climate policies as the most important factor affecting the strategic choices of the companies. 15 out of 20, named the increasing competition from renewables as the strong factor affecting the strategic choices.

More than half (55.2%) found the oil price and volatility to be the strongest factor.

Regarding the main barrier to the sustainable energy transition one notable detail is that “overreliance on fossil fuels” was chosen 15 times by the respondents from Eastern Europe and Russia out of 18 times in total.

How the companies can contribute to solving global energy challenges.

The answers show a notable pattern related to the geography of the respondents. The significant difference in distributions is explained particularly by the difference between three categories: “America”, “Eastern Europe and Russia”, and “Central, Western, Southern, and Northern Europe”.

The respondents from Eastern Europe and Russia tended to perceive climate policies as a threat to the oil and gas industry to a significantly lower degree than the respondents from the other regions. The same applies to the effect of public debate on the strategic choices of oil and gas companies.

The respondents from America were significantly more tend to see climate policies as a threat, and to agree that the public debate affects the choice of oil and gas companies more strongly than respondents from the other regions.

The respondents from Central, Western, Southern and Northern Europe clearly differentiated between the two questions. On one hand, this group agreed with the respondents from America that the public debate on climate change strongly affects the choices of oil and gas companies. On the other hand, climate policies were not perceived as a threat – a response that is similar to that of the respondents from Eastern Europe and Russia.

In Eastern Europe and Russia, climate policies may not be perceived as a threat simply because such policies are not yet mature enough to be seriously affecting the activities of oil and gas companies.

In contrast, climate policies in America and the rest of Europe are much more developed and consistently applied so that the oil and gas business have to react and adjust.

In US, climate policies are perceived as a threat to a much higher extent than in the rest of Europe. This may be dependent on the socio-political context in which companies operate.

Public debate is more critical for those that are not ready to contribute to the energy transition beyond the scope of the customary oil and gas business (for example, diversifying portfolio into renewables).

Oil and gas companies, along with developing their core business, test other available sustainable pathways. Some companies undergo deeper structural changes. Some companies seek to initiate change and aim for climate and environmental leadership, which may provide them with a first-mover advantage in new market conditions.

Oil and gas companies are more eager to invest in sustainability, climate change mitigation and renewable energy sources in a stable macroeconomic environment.

A stable oil price is of higher importance for the oil and gas companies, which actively diversify their business, invest in renewables, and support sustainable technologies.