When history is written, then President Trump’s decision on 8th May to abandon the Joint Comprehensive Plan of Action (JCPOA) agreement with Iran may well be seen as a historic turning point.
In fact the origins of President Donald Trump’s aggressive stance against Iran may lie in his ‘Energy Week’ speech on June 29 which saw a historic change in U.S. foreign policy doctrine and language, when the world heard from President Trump for the first time in addition to America First, a new U.S. rhetoric of Energy Dominance.
U.S. Secretary of State Mike Pompeo on Monday, May 21, threatened to place “the strongest sanctions in history” on Iran if its government doesn’t comply with Trump Administration policies. He called for a new nuclear agreement with Iran following Trump’s withdrawal from the 2015 nuclear deal. He said that the Trump administration prefers for it to be a treaty that is ratified by the U.S. Congress.
In response, Iran’s foreign minister criticized the U.S. secretary of state, tweeting that he saw U.S. diplomacy as a “sham” that was “imprisoned by delusions & failed policies.” Minister Zarif wrote: “It repeats the same wrong choices and will thus reap the same ill rewards.”
An Iranian VIP delegation participated at the pre-eminent European annual Flame natural gas conference in Amsterdam last week, during which speakers and delegates from Mediterranean Sea to Iran, Korea to Kazakhstan (Caspian Sea) and the U.S. to Russia discussed gas market and infrastructure development while elsewhere, heads of state and diplomats were meeting to address the JCPOA fallout, called for depoliticizing the energy industry.
Energy dominance & America first
I asked Chris Cook from University College London who participated at the Flame as speaker about the U.S. new policy on Iran. He said: “I first analyzed the U.S. Energy Dominance doctrine announced by Trump on June 29, 2017 in an article published on August 2, 2017 and since then this U.S. strategy has become much clearer.”
He added: “ Firstly, the oil price has been re-inflated from around $45/bbl (Brent) & $42/bbl (WTI) to over $80/bbl & $75/bbl respectively as so-called ‘funds’ crowded in, buying over one million barrels of oil futures contracts of 1,000 barrels each. The outcome for China – who historically overtook the U.S. as the greatest global net buyer – is that they are now paying an additional $30/bbl for 8m barrels per day of imports….this represents an astonishing $250m per day or $7.5bn per month to producers, and this massive cost has recently placed China in a trade deficit for the first time.
Secondly, just weeks after Gary Cohn (the architect of Energy Dominance) and Rex Tillerson left office within a week of each other, a fundamental shift in the foundations of global markets took place, on or around April 18, 2018. At this point unprecedented changes took place in the oil market ‘curve’ (forward pricing structure) while oil and the dollar began to rise together, which is extremely unusual. Meanwhile, the currencies of many emerging and developing nations, including Iran, have fallen dramatically against the U.S. dollar.”
Oil prices and U.S. dollar?
Mr. Cook is correct since while historically, crude oil prices have had an inverse relationship with the U.S. dollar the recent trends has seen crude oil prices increasing as the U.S. dollar rallied along with it. In fact, by looking at the U.S. dollar rate against other currencies and the crude oil prices, it can be seen that the rally in crude oil prices over the last year has mostly coincided with a decline in the U.S. dollar. But, over the last six weeks, oil prices and the U.S. dollar are rallying in the same cycle: this coincidence has only occurred 11 times since 1983 and is drawing the attention of market commentators & analysts such as Mr. Cook.
Mr. Cook says: “In my analysis, this sudden shift is a result of a new direct linkage of the dollar to the oil price through opaque Enron-style tripartite ‘prepay’ funding of U.S. shale oil reserves. If I am correct (and I invite your readers to bear witness to my forecast) then when (not if) oil prices fall the U.S. dollar will fall with it.”
He continues: “In that context, I do not expect major consumer nations such as China and India to continue to accept market prices set by producers indefinitely. China launched a new physically delivered Shanghai crude oil contract on 26th March 2018 and has accumulated over 700m barrels of strategic oil reserves in the last three years. If I were in China’s position as the largest buyer of oil in the market, I would switch my purchases to Shanghai; invite producers and traders to sell priced against the benchmark contract I had created; and in the event that producers refused to sell, simply draw upon my reserves until they capitulate.”
Declaring war on Iran?
By what the U.S. foreign minister declared on 21st May there is no doubt that the U.S. Iran strategy is to weaponise the dollar by using access to the dollar clearing system to coerce compliance by any country with U.S. secondary sanctions. The effect was evident at Flame, as Total announced they could not risk sanctions, and would have to pull out of Iran’s South Pars natural gas Phase 11 project unless they receive a U.S. exemption, which U.S. foreign minister announced on May 21 that will not be granted.
Meanwhile, discussions continue at the EU Central Bank level as to how Iran may access the euro clearing system. But European companies operating internationally, particularly those who operate in the U.S., point out that simply obtaining Euro payments and finance would not resolve their problems in relation to U.S. control of a dollar system on which they largely rely, and access to U.S. markets.
Whereas the relationship between Russia and Turkey has long been strategic, Russia’s relationship with Iran has tended to be tactical, due to competition in respect of gas supply where Russia zealously protects its market in Europe. However, the recent evolution of energy markets suggests that this relationship may be changing in important respects from competition to cooperation.
Dr Ali Vakili – who recently retired from Ministry of Petroleum as a senior, highly experienced and influential Iranian energy official – was among the Iranian VIP delegation to Flame and in his first engagement since retiring as Senior Advisor to Petroleum Minister Bijan Zangeneh and Managing Director responsible for fuel efficiency together with his colleague Mahmood Khaghani outlined how Iran’s strategic energy policy has long been to use natural gas to replace petroleum products wherever possible. Statistics show that as Iran’s natural gas production has grown, it has almost entirely been used domestically, with relatively restricted exports to neighboring countries including Turkey, Armenia, and to Iraq.
As documented in the Tehran Times in the past, at a major conference in Ashgabat in December 2014, Mr. Ramazani, former Director at the NIGEC, gave an early insight into Iran’s evolving energy strategy, as he pointed out that it made more economic sense for Turkmenistan to convert gas to power locally and dispatch electricity regionally in a new High Voltage Direct Current (HVDC) Caspian Energy Grid, than to export gas thousands of kilometers into Europe, as envisaged in the U.S. & EU sponsored Southern Corridor initiative which aimed to displace Russian and Iranian gas supply.
Iran has 3.5 million cars fuelled by compressed natural gas (CNG) as well as fleets of buses and commercial vehicles. Iran has also massively increased domestic use of natural gas instead of naphtha as a petrochemical feedstock. The original Iranian rationale for domestic use of gas was national security (oil product import substitution). However, as Mr. Cook suggests: “With oil prices at current levels it now makes commercial sense for CNG vehicles to displace diesel & gasoline fuelled vehicles. In fact this point was driven home at Flame by VW’s Group Head of Strategy, Jasper Kemmeyer in his plenary presentation on VW’s strategic move into what VW call CNG Mobility.”
America first or energy first?
During a joint presentation at the Flame, Mr. Khaghani and Mr. Cook put this question at the Flame workshop. Mr. Khaghani began by outlining how during decades of high level experience in Iran’s Petroleum Ministry he had developed what became known as Iran’s energy diplomacy in the Caspian region.
In particular, he outlined innovative Iranian energy swaps, such as the Caspian Oil Swap of Turkmenistan, Russia, Kazakhstan and the Republic of Azerbaijan’s oil into North Iran for Iranian Oil delivered out of the Persian Gulf. Perhaps his proudest achievements were the supply of gas to Armenia in exchange for power to Iran, and the supply of gas to Nakhchivan which was termed Energy for Peace.
While historically producers of upstream oil and gas compete for sales, Mr. Khaghani and Mr. Cook proposed in respect of downstream heat/cooling, mobility & power that is in the interests of all to cooperate in respect of costs. They brought to the attention of the Flame participants that Western energy infrastructure and commodity markets in oil and gas which are capital intensive are now evolving into smart markets in energy services based on intellectual capital rather than finance capital.
Three weeks earlier in Moscow at the invitation of Russia’s Deputy Energy Minister for Oil & Gas, H.E. Mr. Kirill Molodtsov, and Mr. Cook outlined how generic swaps of gas flow may be combined with issuance of simple credits (GasCoins) by gas producers as financing instruments returnable in payment for gas supplied.
Following an article published in Tehran Times, the GasCoin concept has attracted a great deal of attention in Iran and Mr. Cook during his presentation at the conference in Moscow fleshed out the concept by explaining how such GasCoin instruments may be practically implemented through a Gas Clearing Union (GasClear). As he explained: “This consists of suitable guarantee (Protection & Indemnity/P&I) agreements for mutual assurance of performance, so that gas producers accept each other’s’ credits, and then account to each other, with administration and risk management by a trusted service provider.”
During a conversation he said: “In this way, a GasCoin, if driven by key gas producers such as Iran and Russia through the Gas Exporting Countries Forum (GECF) could mobilize the next Energy Fintech wave of financial technology, building on the current flood of unsustainable Blockchain/Coin initiatives.”
Mr. Khaghani and Mr. Chris Cook in their joint presentation at the Flame on 15th May 2018 suggested that “such a GasClear system is complementary to the existing energy commodity market and opens the way for payments through issuance, exchange, return and settlement (‘clearing’) of energy credits. The beauty of energy credits is that they are not bound by any national government currency or unit of account e.g. $ or €.”
Mr. Cook says: “The same GasClear platform may then be used by investors and consumers to invest directly in gas supplies and even gas savings. In this system, the role of banks is transformed from capital intensive middlemen who take credit risk, to a new and smart role as a risk service provider & administrator who manages credit risk and performance.”
Gas first and the European Union?
We saw only recently how important the Nordstream 2 gas pipeline route through the Baltic Sea is to Germany and Russia, and that U.S. resistance to it is based purely upon narrow commercial considerations of export of cheap shale gas. Both Russia and Germany are well aware that even at the height of the Cold War, the USSR reliably supplied gas to Germany who equally reliably paid for it, and it is ironic that the well documented breakdowns in supply via Ukraine involve difficult and often opaque relationships between oligarchs, particularly in Ukraine.
It was also interesting to hear from officials of the EU Commission that the politically motivated Energy Union initiative originated by Donald Tusk as President of the European Council to aggregate EU energy market power to better negotiate with Russia is, in their view, completely un-implementable. However, according to Mr. Cook: “The ongoing market trend from commodity transactions to services applies as much to energy markets as to all others. I believe that there exists an opportunity to create complementary networked Energy Tech financial infrastructure – a Eurasian Energy Clearing Union – in which all regional nations may participate.”
So, Iranian VIP delegation and Caspian Energy Grid founders participated at the Flame were offered the opportunity to lead the creation of smart markets in energy – where credit is accounted in the positive value of energy rather than the negative value of debt. This enables a new pathway – through energy economics rather than dollar economics – to a Transition through Gas to a low carbon economy.
In such an energy credit clearing system, Mr. Cook says: “Banks would no longer create credit (because they are not energy producers) but may manage transparent credit creation by producers. This opens the way for the € unit of account to be fixed against an agreed amount of energy and for the Euro to explicitly follow Denmark onto an energy standard (based on provision of energy as a service).”
He suggested: “In terms of institutions, countries like Iran could create a new Energy Treasury, in which representatives of oil and energy ministries participate in overseeing issuance by energy companies, alongside representatives of Iran’s Central Bank, who could not of course issue energy credits, but whose role would be as an independent monetary authority.”
Chris Cook concluded: “The current trend which sees oil and the dollar rise together may be an anomaly and the usual relationship between oil prices and the U.S. dollar exchange rate against other currencies may shortly resume. But, if as I suspect the U.S. has essentially fixed the dollar to oil then we may expect the oil price to fall as and when U.S. dollar falls.”
First published in our partner Tehran Times
Hydrogen Could Be A Key Player In The Recovery And Resilience Plan
Thanks to the contribution of vaccines, the Covid-19 pandemic is slowly beginning to abate and gradually lose its aggressiveness, with the consequent reduction of its impact on people’s health worldwide.
However, while the health effects of the pandemic appear to be fading, the negative economic effects of a year and a half of lockdown and forced closure of many businesses are being felt heavily at a global level and seem bound to last well beyond the end of the health emergency.
With a view to supporting and encouraging the “restart” and revival of the economy, the European Union has launched a “Recovery and Resilience Plan”, allocating a huge amount of funds that shall be used in the coming years not only to help countries in difficulty with contingent measures, but also to stimulate economic and productive growth capable of modernising production models with specific reference to environmental balance, which is increasingly facing a crisis due to the use of non-renewable, highly polluting energy sources.
Italy will receive over 200 billion euros in European funds to develop its own projects to get out of the economic-pandemic crisis and rightly wants to use them not only to plug the leaks caused by the various ‘lockdowns’ in the national productive fabric, but also to implement a series of strategic projects capable of making not only the productive sectors, but also the public administration and the health and judicial systems more efficient.
In short, the “Recovery and Resilience Plan” that is currently coming to the fore may prove to be a powerful driving force for Italy’s development and modernisation.
The projects submitted by Italy to the EU institutions include an initial allocation of over 200 million euros – out of the 47 billion euros planned for the next decade – to promote research and development in the field of renewable energy and particularly in the hydrogen sector.
Hydrogen is potentially the most abundant source of “clean” energy in the universe. It is versatile, safe and reliable; when obtained from renewable energy sources, it produces no harmful emissions to the environment.
Nevertheless, it is not available in nature in its gaseous form – which is the only one that can be used as an energy source – as it is always bound to other elements, such as oxygen in water and methane as a gas.
The traditional processes used to “separate” hydrogen from oxygen in water and from methane use up large amounts of electricity, which makes the processes not only very expensive, but also highly polluting, with the paradox that, in order to produce a clean energy source, the environment is “polluted” anyway, especially if – as has been the case until recently – the electricity needed is produced with traditional non-renewable energy sources (coal, gas and oil).
The best source of hydrogen in gaseous form is the sea. Electrolysis can easily separate hydrogen from oxygen and store it in gaseous form for use as an energy source.
The electrolytic cells used to develop the process use up large amounts of energy and, fortunately for us, science is finding a way to produce it without polluting, using solar, wind and, above all, sea wave energy.
The use of marine energy creates a sort of “circular economy” for hydrogen production: from the practically inexhaustible primary source of ocean water, hydrogen can be extracted with the energy provided by wave and tidal motion.
Forty per cent of the world’s population live within 100 kilometres from the sea and this shows the potential of sea wave and tidal energy as an engine for sustainable development in economic, climate and environmental terms.
Nowadays modern, non-invasive tools are available to extract electricity from sea waves, such as the “penguin”, a device manufactured in Italy, which – placed 50 metres deep – produces electricity without harming marine flora and fauna.
Another example of Italian scientists’ intelligence and creativity is the Inertial Sea Wave Converter (ISWEC), a device housed inside a 15-metre-long hull which, occupying a marine area of just 150 square metres, is able to produce 250 megawatts of electricity a year, thus enabling to cut emissions into the atmosphere by 68 tonnes of CO2.
With these devices and the other ones that technology will develop over the next few years, it will be possible to power electrolytic cells for the production of hydrogen in gaseous form on an industrial scale, at levels that – over the next 15 years – will lead to the production of at least 100,000 tonnes of “green” hydrogen per year, thus enabling to reduce air pollution significantly, with positive effects on the economy, the environment and the climate.
In the summer of 2020, the European Union launched a project called the “Hydrogen Strategy”, with a funding of 470 billion euros, intended for research and production projects capable of equipping EU countries with electrolysis tools to produce at least one million tonnes of “green” hydrogen by the end of 2024.
The fight against CO2 emissions continues unabated: in the United States which, after Trump’s Presidency, has reaffirmed its commitment to reducing emissions; in China which, in its latest five-year plan, has forecast a 65% reduction in carbon dioxide emissions into the atmosphere by the end 2030; in Europe, which has always been at the forefront in the creation of devices for producing wave and tidal energy and exports its technologies to the United States, Australia and China.
According to the Hydrogen Council, an association of over 100 companies from around the world that share a common long-term vision for a transition to hydrogen, in the future Europe and China will compete and cooperate in the production of sea wave and tidal energy and in the related production of “green hydrogen”.
With its 14th five-year plan, China, in particular – after having been for decades, during its whirling economic development, one of the main sources of CO2 emissions into the atmosphere and of global pollution – has undertaken the commitment “to develop and promote the harmonious coexistence between man and nature, through the improvement of efficiency in the use of resources and a proper balance between protection and development”, as clearly stated by its Minister of Natural Resources Lu Hao.
It might sound like the sweet-talk and set phrases of a politician at a conference.
In the case of China and its Minister of Natural Resources, however, words have been turned into deeds.
As part of the Roadmap 2.0 for Energy Saving Technology and New Energy Vehicles, China has set a target of one million fuel cell vehicles and two million tonnes of hydrogen production per year by the end of 2035.
The China Hydrogen Energy Industry Development Report 2020 forecasts that, by the end of 2050, hydrogen energy will meet 10 per cent of energy requirements, while the number of hydrogen fuel cell vehicles will rise to 30 million and hydrogen production will be equal to 60 million tonnes.
With a view to giving substance to these prospects, China has established the “National Ocean Technology Centre” in Shenzhen and developed – with the Italian “International World Group” – the “China-Europe cooperation project for energy generation and hydrogen production from sea waves and from other renewable energy sources”.
These are concrete projects in which – thanks to Italian creativity and Chinese rationality and pragmatism – we must continue to invest and work, not least to give the third industrial revolution a cleaner face than the coal-stained one of the second industrial revolution.
These projects appear to be in line with those envisaged both at European and Italian levels by the ‘Recovery and Resilience Plan’, which should guide us out of the economic doldrums of the pandemic. They deserve to be financed and supported as they can not only contribute to the recovery and revival of the economy, but also to the reconstruction of a cleaner and more liveable world (thus showing that good can always come out of evil).
The ‘energy crisis’ and its global implications
A particular news caught my attention this morning regarding energy crises. Before going into the depth of the news, I would like to introduce you to the concept of energy crisis and its global implications. As introduced by Garrett Hardin in 1968; the tragedy of commons that the resources of world are limited, if the resources are used excessively soon there will come a time when they will become scarce. These resources can only be sufficient through cooperation of people among each other; there’s no other solution. The tragedy of commons is the best way to explain the concept the energy crises.
Now, the population world is growing at an exponential rate and with the growing population there is a need to provide a better lifestyle to the upcoming generations. In a struggle for raising that standard of living, more and more resources of developed world are being utilized. The McKinsey Global Institute forecasted that by 2020 developing countries will demand 80 percent more energy which proved to be true as is evident in recurrent fuel shortages and price hike globally. A MIT study also forecasted that worldwide energy demand could triple by 2050.
Besides petrol, there is also a rise in demand for natural gas with only few reliable reserves all over the world. The natural gas reserves are mostly unreliable because they are usually found in deep oceans and mere accessibility can cost a lot of expense. Henceforth, the supply is limited, the price has fluctuated greatly and recent technological development has reduced dependence upon natural gas by providing alternatives such as fuel efficient or electric cars. Similarly, electricity supply systems are also not very reliable because there have been power blackouts in the United States, Europe and Russia. There have also been chronic shortages of electric power in India, China, and other developing countries.
If we specifically observe the Iraqi oil crises to understand the whole energy crises shebang, then according to today’s news in TRT World, in Iraq alone, $150bn of stolen oil cash smuggled out since 2003. Iraqi oil exports are even 30-40% below prewar levels. The acting president of Iraq is furious because insane amount of corruption is being carried out in Iraq where substantial quantity of oil is being smuggled. President Barham Saleh presented a legislation to parliament, where, under law any transaction over $500,000 would be scrutinized. This step, if materialized, can be very crucial in preservation of oil reserves in Iraq after the Saddam Hussein regime.
In United States, presidents have constantly been avoiding energy problems because they are very controversial. The recent Texas electricity outrage was a one that had been warned about. Before the Arab Oil Embargo Nixon in 1970’s was reluctant about energy and said ‘as long as the air conditioners are working normally, there is no energy crisis’ but after this incident Nixon began to change his tone and said on television that “energy is number one issue”. Then came Carter, who got a number of legislations passed on the issue of energy even when his own party was against it. In the 1970’s the prevalent thought for United States was that the world would run out of energy resources very soon so they started investing more in nuclear armament as an alternative. In 1990’s the combined cycle plants that used natural gas to create electricity were really efficient and economical that even gas at a high price could be competitive, also ethno-industry was crated at that time.
Then, the threat of climate change is also one of great relevance in the context of energy crises. The nonrenewable energy resources such as oil, water and coal must be used carefully and lack of which can be hazardous. It can cause drought, famine, disease, mass migration that will eventually lead to a conflict such as explained in the tragedy of commons theory. The now developed nations exploited natural resources to build its wealth. The resources such as wood, coal, oil and gas where on one hand are very economical, on the other hand they can be the originators of carbon emissions. Climate change also led to loss of biodiversity as well as environmental hazards.
Even though the developed world i.e. north provides a significant amount of assistance to the global North i.e developing countries, they cannot be a replacement for the shortage of resources. Also, they also face extreme price hike in the energy resources even though the developing nations are the ones owning the resources such Iraq for oil. Besides expensive resources, these developed nations also give rise to domestic and political tensions in the third world countries. Organizations like Al-Qaeda have openly declared their intent to attack oil facilities to hurt the interests of US and its close allies.
All in all, the pertaining threat of energy crisis has global implications. One person’s’gain is another person’s loss but this can be made inevitable if cooperation takes places. Sharing is caring and in this context sharing can prevent from future wars and hurricanes, floods and droughts and famines. The extent of seriousness of the problem must be taken into consideration not only be academicians but by policy makers as well.
Stay in Oil or Race to Green Energy? Considerations for Portfolio Transformation
Oil and gas (O&G) companies face a conundrum: capture the remaining value in hydrocarbons, or decide if, when and how much to invest in new, low-carbon energy business models.
The global O&G industry has the opportunity to redeploy as much as $838 billion, or about 20% of cumulative capital expenditures over the next 10 years, to further optimize their hydrocarbon business and/or pursue new growth areas including new energy ventures.
Of low carbon business models, market sentiment is currently strongest for renewable power with growing interest in green hydrogen and carbon capture as well.
Why this matters
In the wake of COVID-19 disruptions and an accelerating energy transition, O&G companies face a conundrum: stay and capture the remaining value in hydrocarbons or embrace new energy business models. Deloitte’s new “Portfolio transformation in oil, gas and chemicals” research series provides valuable insights into portfolio transformation and offers key considerations for companies making capital allocation decisions and exploring future business models.
Finding the right recipe for portfolio transformation
While companies understand the imperative to change, they are grappling with how much to invest and most vexing, in which green technologies? After all, while the high-growth phase of the oil market may have come to an end, oil demand is still projected to remain above 87 million barrels per day by 2030, even in accelerated energy transition scenarios.
How much to redeploy? $838 billion may be a starting point
To determine how much capital to redeploy, O&G companies could start with capital that is not earning the desired return. Deloitte analyzed 286 listed global companies and revealed that in a base case scenario, these companies could have the opportunity to optimize up to 6% of future O&G production which may not generate a 20% return at an average oil price of $55 per barrel. In other words, about $838 billion, or about 20% of future capital expenditures (CAPEX) across the global industry could be redeployed to optimize these projects and/or pursue promising green ventures. The findings suggest that the opportunity to redeploy will not decrease, but rather increase if oil prices stay above pre-pandemic levels. Among the company groups, supermajors, on average, have a potential to redeploy up to 36% of their future CAPEX.
Where to invest? Solar and wind most frequently mentioned
After performing text analytics and sentiment analysis on thousands of news articles to glean a directional sense of which low-carbon and new energy solutions are attracting the most media attention, the study found renewable power (solar and wind) had the highest share (47% among all green energy models). The tide also seems to be turning for green hydrogen (8% share of mentions).
“A confluence of factors, including climate, the pandemic, supply-demand imbalances, changing trends in end-markets, and growing appetite for sustainability investments, has given oil, gas and chemicals companies the need to progress faster around portfolio transformation. Many companies are eager to act but are seeking guidance on the speed and extent to which they expand into new, potentially high-growth areas, be it in new regions, markets, products or technologies. By taking a strategic, purpose-driven approach, companies can sustainably and profitably build a future-ready portfolio.”- Amy Chronis, vice chairman and U.S. oil, gas and chemicals leader, Deloitte LLP
Debunking myths: Turning hindsight into foresight to navigate portfolio transformation
While many O&G companies have transformed their portfolios over the years, not every change has been successful. The Deloitte analysis dispels conventional wisdom about strategic shifts and offers insights and important considerations about portfolio building in the O&G industry.
Myth 1: Agility and flexibility always deliver gains
- Reality: Of the more than 286 upstream and integrated companies analyzed, only 16% of companies that made frequent changes to their portfolios delivered top-quartile financial performance.
Myth 2: Being big and integrated guarantees success
- Reality: Only 28% of big (revenues above $10 billion) and integrated companies figured in the top-quartile.
Myth 3: Oil has lost its luster
- Reality: Oil still delivers significant value for many. Two-thirds of oil-heavy portfolios deliver above-average performance.
Myth 4: Every “green” shift is profitable and scalable
- Reality: Of portfolios that have become greener, 9% delivered top quartile financial performance, underscoring the importance of a strategic, purpose-driven approach to portfolio transformation.
Myth 5: Shale’s pain makes onshore conventional plays an obvious choice
- Reality: Between 18-45% of non-shale portfolios analyzed delivered below-average performance.
Keys to building a future-ready O&G portfolio
There are four components of a forward-looking portfolio: growth engines, cash generators, profit maximizers, and divestment of value strains. Optimizing the energy transition is not just about selecting the correct technologies in which to invest; it also involves upgrading business models to incorporate new metrics, dynamic planning and AI-based analytics to become more agile. Companies should also consider strategic alliances to maximize their strengths and gain from others.
Chemicals and specialty materials (C&SM) face similar urgency for transformation
As the chemicals industry navigates its own portfolio transformations, focus is key. Deloitte’s analysis of more than 200 chemical companies over a 20-year period showed that focused companies — those that prioritize certain end-markets and product categories and derive at least 60% of the total revenue from that category — outperformed diversified chemical companies. In fact, focused chemical companies organically grew revenues at twice the rate, generated 70% higher return on invested capital (ROIC), and delivered 60% higher shareholder returns.
The top-performing chemical companies typically change their portfolio mix more frequently than others —usually changing their portfolio once every business cycle and remaining focused on their over-arching business strategy, be it low cost, differentiated products, or exceptional service.
Keys to building a future-ready C&SM portfolio
The study recommends C&SM companies make critical portfolio choices that create value. The ongoing disruption in end markets requires leaders to make conscious decisions about their competitive advantage and play in products and service categories where they can build and maintain that advantage. Moreover, given the growing emphasis on sustainability, chemical companies should consider investing in recycling technologies and incorporating renewable and recyclable materials in their product offerings.
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