Technological Innovation and the Future of the Oil and Gas Industry

One of the great puzzles in the oil market is why prices, notwithstanding the battering of recent months, are so high. This Talk will look at a range of explanations for high prices and will focus on the special role of national oil companies (NOCs). While the role of the state has declined in nearly every sector of world economic activity, the pattern in the oil and natural and gas industries has been quite different. Statecontrolled oil companies—so-called National Oil Companies (NOCs)—remain firmly in control over the vast majority of the world’s hydrocarbon resources. NOCs control up to 89% of the world’s oil reserves, 82% of gas reserves, 64% of oil production, 48% of gas production, and 43% of refining capacity. But the NOCs vary widely in their performance. Some help define world class benchmarks through their own operations and in alliance with outside partners—such as Brazil’s Petrobras, Norway’s Statoil, Saudi Arabia’s Aramco and Abu Dhabi’s ADNOC. Others lag far behind—among them Venezuela’s PdVSA and Mexico’s Pemex. Firms in the Persian Gulf vary widely over a short geographical space because their political and management contexts vary so markedly—a reminder that the situation “above ground” probably matters a lot more than the size and quality of geological resources “below ground.” The Talk will explore the many causes for this huge variation in performance. Chief among them are two. One is the relationship that is crafted between a NOC and its host government. The NOCs that have the most difficult struggles with performance are those whose host governments are so intrusive in governance that the firm is unable to make the strategic choices needed for success in exploration and production. Second is the management of risk in the deployment of capital. Technology is crucial to risk management, and with the world oil market being in the middle of a rapid shift away from the “easy oil” of the last century, to more complex new fields as well as mature fields, the role of technology and risk management will grow. In addition to these profound changes in the oil market, there are similar changes under way in the markets for all other major sources of primary energy. In natural gas, liquefied natural gas (LNG) has already coupled remote supplies and regions of demand to the point where elements of global gas pricing are now evident. The Talk will discuss these profound changes and explore their implications for the kinds of firms that are poised to succeed in the global gas market. Among the pivotal countries, Russia deserves special attention. Traditionally, analysts have looked at the areas of the world with the richest gas resources, and assumed that those nations will dominate the industry. More likely is that the most successful firms will be those that can combine upstream access to hydrocarbon resources with the ability to master costly and complex gas delivery technologies and final marketing. The Talk will also include a review of major gas sources and pricing arrangements in the U.S. market, which has become an anchor for some elements of world gas pricing. Similar changes are under way in the pricing and trade in coal, and the full globalization of the coal market could be the most important trend of the last two decades. In many countries, notably the emerging Asian giants, coal is the key source of primary energy, and coal pricing is moving offshore to global markets. There are wildcards in the world coal supply that are as puzzling as the wildcards in oil and gas supply. Among them is the question of whether Indonesia will be able to sustain its position as a leader in coal exports. The globalization of coal is the result of a cluster of innovations—some technological and other organizational—that are similar to those that have globalized the gas industry.