Dana Petroleum group CEO Marcus Richards believes the oil industry is seeing a structural shift. He gave his personal views at a UK Chatham House event:
I would like address the questions raised by the shift in oil demand to industrialized economies in terms of energy security, looking particularly at how that shift is affecting market structures and investment.
This shift is one that we at Dana Petroleum know only too well.
Image: A Dana Petroleum employee offshore.
An impressive North Sea success story with modest but ambitious beginnings in Aberdeen in the mid-1990s, Dana grew fast. From a start-up with a small team of about 30 people with a focus on acquisitions and exploration, Dana became an emerging international oil and gas company with a footprint in the UK, Norway, the Netherlands, Egypt and North and West Africa.
In 2010, as Dana was pondering avenues for future growth, it was acquired by the Korea National Oil Corporation - or KNOC, as it is known.
KNOC was on the lookout for exploration & production targets that would help meet South Korea's energy security needs and support the development of its emerging oil and gas sector. For that, it needed two things: reserves and expertise.
As a high-income developed country with almost non-existent native reserves, South Korea is one of the world’s top energy importers. It is the second largest importer of LNG behind Japan, the third largest importer of coal and the fifth largest importer of crude oil.
Match that with one of the highest growth rates in the developed world, an economy driven by industrial exports and a growing concern with increased competition in the world's energy market, not the least from neighboring China.
You will now start to understand Korea's drive to seek overseas exploration and production opportunities.
But the simple control of reserves is not, in itself, sufficient. Although South Korea is home to some of the largest and most advanced oil refineries in the world, the world's leading shipping industry and some of the most innovative technology firms on the planet, it had only an emerging knowledge of oil & gas exploration and production sector.
Dana, therefore, had more than reserves to offer. It had access to capability. Dana Petroleum was acquired by KNOC in 2010, as part of an ambitious plan to reach 1.2MM bbl production by 2030.
The company has gone from strength to strength and modified its business model in line with a new strategic agenda - from an entrepreneur and investment vehicle to a non-operated company to a company with operations across the full E&P value chain. It is an example in microcosm of the changing dynamics of the market.
Looking back, we can say that South Korea was at the forefront of a trend that saw successive historical producers in the UK North Sea change hands to serve the growing appetite of emerging economies for resources, technology, skills and expertise.
China's CNOOC and Sinopec are now among the largest oil and gas producers in the UK North Sea, through their acquisitions of whole or part shares in Nexen and Talisman.
The Abu Dhabi National Energy Company has also created a significant footprint through TAQA’s acquisition of upstream and midstream assets of Shell and BP, among others. This trend will undoubtedly be here to stay.
Oil demand in the developing world is projected to overtake that in industrialized countries for the first time this year.
Image: TAQA Bratani's Tern platform in the North Sea.
This is a tipping point in the geography of oil demand and will no doubt have profound implications for the dynamics and structure of world energy markets.
Last December, the International Energy Agency warned of "violent structural changes" in world energy markets, as the shift in oil demand from west to east rapidly accelerates.
Only last month China reached the position of world's largest importer of crude oil, surpassing the US for the first time. Many commentators are calling this a paradigm shift.
Although this shift is fuelled by the spectacular growth and industrialization of China and India, it is by no means limited to these two countries.
In Southeast Asia, energy demand has expanded by two-and-a-half times since 1990, its rate of growth among the fastest in the world. Economic and demographic trends point to further growth, lifting the region’s energy use per capita from just half of the global average today.
At a time of declining or stagnant demand from developed economies, it is becoming increasingly clear that virtually all the net growth in global energy consumption will, in the next few years, come from emerging economies.
In 2012, China and India alone accounted for nearly 90% of the net increase, according to the BP Statistical Review.
As will no doubt be discussed during the next two days, this west to east shift in demand occurs at a time when world energy markets are adapting to the emergence of shale gas exploration and the geopolitical consequences of an energy-independent US.
"Violent structural changes" is the deliberately evocative language chosen by the IEA to describe the current and upcoming transformations in world energy markets.
Our industry is fundamentally changing shape, a structural shift that is altering the balance of power amongst industry players.
I believe that one of the key changes, and one that is in part a consequence of the shift in demand to the emerging economies, is the increasing prominence of National Oil Companies, or NOCs.
NOCs now control around 90% of the world's remaining oil and gas reserves. Our sector has historically required three ingredients for success:
So have the rules of the game changed?
As NOCs continue to expand beyond their home markets, they will naturally compete head on with IOCs and independents to access new reserves. But in doing so, they are changing the dynamics and rules of the business. I think that this has a series of consequences for the structure of world energy markets and the new patterns of investment in them.
Firstly, resource diplomacy will become the default way of seeking new opportunities in oil and gas.
IOCs, a growing variety of independents, of different size and focus, service companies and NOCs themselves, will be increasingly competing to build partnerships with governments and with each other to explore new opportunities.
In many cases, patterns of investment will completely bypass international majors, with more NOCs being able to tap into technology and expertise through alliances with service companies or other NOCs.
This will be done in close cooperation with the NOC's own government, through resource diplomacy, and will often be integrated into the overall political, diplomatic and trading relationship between the countries concerned.
The bilateral relationship between Brazil and China is a case in point. From 2005 to 2012, China invested US $18.2 billion in the Brazilian energy sector and, until recently, Brazil represented the single largest destination for Chinese energy investments.
In parallel with this surge in Chinese investments, Sino-Brazilian trade and political relations have intensified rapidly over the past decade.
China became Brazil's largest trading partner in 2009. National oil and energy companies from Brazil and China have signed several technology co-operation agreements in recent years, as have universities from both countries.
Image: Marcus Richards, group CEO, Dana Petroleum.
This means that IOCs now need to reinvent themselves if they are to continue to compete on the global stage. They will need to think very differently about how they can access opportunities. And for that, relationships with NOCs will be crucial.
To a large extent, the successful IOC will be the one that manages to build strong partnerships with governments and NOCs first of all, but also with service companies and other independents. Creating mutual advantage will be the key.
Which brings me to my second point: in an increasingly complex energy market, complementarity and common ground will be crucial.
We are therefore in a period of the industry’s development where partnership and collaboration are increasingly important. Where competition will give way to complementarity as IOCs, NOCs and service companies become ruthlessly clear about their strengths, their weaknesses and how they can work together.
Smaller players, more flexible, agile and entrepreneurial in approach, will play an ever-increasing role. The rise in prominence of NOCs will challenge the conventional approaches of the IOCs. And the growth and increasing breadth of the service sector will create a range of potential new operating models.
Collaboration will also bring considerable efficiencies, with operators sharing supply chains and using the principles of lean manufacturing to optimize the planning, scheduling and execution of activities to drive safe, reliable and profitable operations.
Funding structures will also evolve, as NOCs can draw on sovereign wealth in the form of direct funding or guarantees.
In the private sector, effective new funding structures will be needed to promote investment in this new context, enabling a growing variety of small and medium sized companies to compete in the market place and invest in key projects through funding consortia or the expansion of local markets sources.
Finally, I think the current trend also means that we are likely to see more consolidation within the industry, as independents join forces and NOCs continue to acquire independents to build their position and capability in key markets.
This consolidation will not only provide access to hydrocarbons, it will also create opportunities to acquire talent. With global competition to recruit the best people at an all-time high, M&A will offer a direct route to build technical expertise.
This is a very personal view of someone who has spent over 30 years in the oil and gas industry and has witnessed significant transformations in the past.
Most of us realize that the shift in oil demand from developed to industrializing economies and from west to east is one of those transformations that opens a new chapter.
What that new chapter will tell us is something that none of us can, at this stage, fully predict.
What I think we can all agree on is that the new reality will be more complex and challenging, undoubtedly requiring more creative solutions than in the past.
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