Oil & Gas

Energy challenge became more complicated

Once again, the year’s biggest energy story was about disaster.

The Fukushima nuclear accident in Japan followed by roughly a year the Deep Water Horizon oil spill in the Gulf of Mexico. The energy supply drama was heightened by disruption in the oil flowing from Libya during the Arab Spring.

These developments revealed not just the potential environmental impact of supplying the world’s energy needs, but the complexity of the endeavor. They demonstrated the category’s exposure to the swings of geopolitics and of public opinion and pointed to the one area of consensus—there’s no easy answer.

Adding further complication, an ongoing shift in the industry business model potentially diminished the power and profit potential of the major companies.

Traditional production-sharing agreements between oil and gas companies and the nations in which they work, increasingly are being replaced with service contracts that limit the company’s stake to a dollar per barrel price.

The changing practice reflected a power shift away from the energy companies and toward the nations asserting authority over their assets. These nations usually control national oil companies capable of routine exploration. They engage the major multinationals only for the most extreme and risky projects.

Undertaking the most difficult challenges

This evolving industry profit model, where profit depends on undertaking the most challenging work, may benefit certain brands such as ExxonMobile, which are respected for technical expertise.

The pursuit of especially challenging projects also explains in part why the major brands are rushing to explore reserves in Russia and the Arctic, most likely the Bering Sea, following recently resolved border disputes between Norway and Russia. Norway’s Statoil has been active off of Greenland, Finland and Russia. BP initially led the way with its failed attempt to link with Russia’s Rosnef.

Leading oil and gas companies also focused on the fast growing markets of Asia. Chevron, in particular, set up extensive resources in Australia as a relatively convenient base for exploring Asian reserves. This kind of exploration requires investment that may not produce a return for a long period of time, if ever. Last year, for example, Shell began production in Qatar, turning natural gas into stable oil products, such as diesel fuel and lubricants. Shell began investing in the relevant technology more than thirty years ago.

With few exceptions, such as Statoil, the majors brands did not focus substantially on alternative clean energy, relative to their investment in fossil fuels, although Shell pursued bio fuels. Instead, companies moved toward gas exploration. Natural gas has become the “bridge” energy to renewables. But it’s never that simple in this category. The search for gas reserves in shale involves other environmental risks: the possibility of groundwater contamination; and the fact that extracting gas depletes another resource that’s scarce in many parts of the world—water.

Building brands worldwide

With public attention somewhat diverted by economic concerns, brands felt less pressure to communicate about the contentious issue of supplying the world’s energy needs while protecting the environment. Because of the importance of public opinion when negotiating government contracts, most brands engaged in debate, operated blogs and participated in online forums with policy makers, politicians, journalists, analysts and other influencers.

Shell’s “Let’s Go,” Chevron’s “We Agree,” and Statoil’s “Energy Realities,” conveyed a similar message: We’re working responsibly to solve the challenge of meeting the world’s energy needs. BP worked to rehabilitate its reputation by investing heavily along the Gulf coast to repair damage to the environment, businesses and communities, and by extensively publicizing its investment using social media.

ConocoPhillips announced intentions to split into two companies: one focused on less profitable downstream refining and retail businesses and the other on upstream exploration. The new structure may reflect the evolving economics of the industry. In a service contract arrangement retail distribution is less necessary.

Brand communication seemed less of an issue in fast growing markets where energy companies often enjoy more positive reputations. Most Brazilians, for example, regard Petrobras as a local hero driving the nation’s economic rise. The Petrobras brand value declined as Brazil’s economy faltered, however. The government of Brazil owns a majority stake in the publicly traded company.

Similarly, the Russian public appreciates Gazprom and Lukoil as major contributors to national wealth and job creation. But brand and brand communication is increasing in importance even for state-owned companies as they expand beyond their national borders to regions where they are less well known.

Russia’s Gazprom is a strong competitor in Central Europe and Lukoil operates in countries throughout the world, including the US. PetroChina works in Russia, South America, the Middle East and Southeast Asia.

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