Oil's dominance as the world's primary fuel will be challenged in the next decade, and the structure of the energy industry will continue to undergo substantial change.
These themes emerged at a Canadian Energy Research Institute's international oil and gas markets conference late in 1998.
Middle East exporters' future depends on their ability and willingness to generate the necessary political clout to constrain output in order to maintain real prices, says Peter R. Odell, professor emeritus of international energy studies at Erasmus University, Rotterdam. If they cannot do this, an alternative structure for international oil markets will need to be developed.
The new system would likely be based on the precept of ordered markets, says Odell. A free-for-all pricing system is barely conceivable, he says, except as a short-term phenomenon.
Other predictions for the future of the oil industry were that new business models would create companies that focus on value creation rather than production, and that technological advances and environmental concerns would trigger a shift away from petroleum as the world's primary fuel source.
Global trade patterns
Odell analyzed historical global oil demand patterns and outlined possible scenarios for the future.Plentiful oil and gas supplies and restrained pros- pects for increased use mean that countries with low-cost production-particularly in the Middle East-will increasingly question a supply system that limits their contributions to total demand and their real returns on export revenues.
The Middle East could try to re-establish its earlier domination of oil trade, says Odell. This could lead to the specter for oil importing countries of a collusive arrangement between Middle East producers and international companies, as existed in the early 1970s.
In response, many countries might take action to protect their nationally oriented energy industries, and non-Middle East exporters might seek alternative formal regional relationships. These regional blocks would include: the Western Hemisphere, Europe (including major trading areas in Russian and the Caucasus), and East Asia/Australasia (excluding China, which might not be able to join the East Asia/Australasia block in the short term for political reasons, such as disputes over oil rights in the South China Sea).
Some areas, such as much of Africa and the Indian Subcontinent-neither rich enough as potential producers nor important enough as users to join a block-would remain dependent on the Middle East as a residual supplier.
Odell concludes that the time is right for a consumer-producer dialogue, leading to an international organizational structure that would achieve supply and market certainties in the increasingly important world community beyond the Americas and Europe.
New business model
Arden Brummell of Global Business Network, Calgary, said rationalization, deregulation, technology, and new thinking are creating a range of new competitors in the energy industry.In the future, the overwhelming trend will be greater diversity, as increased knowledge and greater customer focus complement the traditional emphasis on production. Brummel, a former strategic planner with Shell Canada Ltd. and Royal/ Dutch Shell said that, historically, production and engineering have dominated. But the focus n
ow is on providing new products and services to demanding customers in highly competitive markets.
He said four main forces are now driving the industry and creating new opportunities: technology and applied knowledge; deregulation; increased competition for customers; and new players, rules, and business models.
Brummell expects some companies to remain focused on the traditional supply value chain, from production through transmission, refining, and generation, to distribution and final customers. Within the value chain, some will strive for integration, he says; others will focus on one segment of the chain, such as exploration and production.
But new types of companies will emerge, utilizing new technology and new business models to create new combinations of competencies that create value for customers. They will be driven by making deals and adding value, not by operating assets, said Brummell.
They will be constantly buying and selling assets, contracts, and technologies. They will thrive on innovation, change, and risk-taking.
They may operate with very little capital or large amounts, but the capital will not be production capital. It will come from financial resources and information technology designed to leverage information processing, risk assessment, communication, communication speed, and market intelligence.
They may seem like strange energy companies, says Brummell, but they will be no more strange than the first gas marketers a decade ago.
Alternate fuels
Paul Mlotok, a principal with Global Business Network, said the price of crude oil has one significant rebound left, but its market share is under pressure from technological advances and environmental concerns.He forecasts increased use of energy-consuming devices over the next 5 years and expects demand growth to exceed efficiency improvements. In 10 years, however, efficiency improvements will begin to outpace demand growth, he says.
Advances in electric engines and fuel cells will cause a switch from internal combustion engines, and there will be a move to cleaner-burning fuels such as methanol, with fewer pollutants and higher hydrogen-to-carbon ratios.
Mlotok declined to predict when the change will take place but said a signal that the transition is occurring will be a wide recognition that public attitudes have changed.
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