Terra Incognita – A Navigation Aid for Energy Leaders Presentation to UH-GEMI Refining Conference November 2006
Terra Incognita –A Navigation Aid for Energy Leaders
Presentation to UH-GEMI Refining ConferenceNovember 2006
Terra Incognita
1 Private and Confidential
Terra Incognita – A Navigation Aid for Energy Leaders
1. Global energy complex is entering its third phase change2. Demand trends are not sustainable - China and India rise to materiality changes
everything3. IOCs want to produce but have limited access; NOCs have access but want to
conserve their resource4. Society’s ascent of the Maslow hierarchy increases expectations of energy
companies – security and climate must be addressed5. Previous shareholder value propositions are unpersuasive
• But IOC capex has barely increased from depressed 1990s levels6. Old strategies are threatened7. The industry must reframe its purpose and boundaries8. New business models will emerge and old ones will be discarded9. This will require new strategies, execution and leadership
• And this will affect deeply the Gulf Coast Refining business10. The “phase change” demands a different approach to strategy development
Terra Incognita
2 Private and Confidential
Global energy complex is entering its third phase change
U.S. Energy Consumption
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1850 1875 1900 1925 1950 1975 2000
Year
Perc
enta
ge o
f Tot
al M
arke
Total Coal
Wood Waste Alcohol
Liquids
Gases, Nuclear,Renewable Energy
Electricity NetImports
Terra Incognita
3 Private and Confidential
0102030405060708090
100
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
The conventional investment cycle may be overridden by the phase change
2004 $/BWorld Oil Prices 1965 – 2030
(This is not a forecast!)
?
Terra Incognita
4 Private and Confidential
China and India rise to materiality changes everything
World Population (Billion in 2005)
1.1
1.2
1.3
2.8
China IndiaMore Developed Less Developed
Oil Consumption(MMBD in 2005)
2.5
49.3
7.023.7
China IndiaMore Developed Less Developed
Terra Incognita
5 Private and Confidential
IOCs want to produce but have limited access; NOCs have access but want to conserve their resource
Liquids OutputLOC7.6%
INOC14.3%
NOC40.1%
NSC10.8%
IOC27.2%
Liquids Reserves
IOC8%
NSC13%
LOC3%
NOC70%
INOC6%
Source: PIW’s Top 50: How the Firms Stack Up (www.energyintel.com)
Top 50 Share of Global Total = 79% Top 50 Share of Global Total = 84%
Terra Incognita
6 Private and Confidential
Society requires attention to two big externalities
Global Hydrocarbon Reserves
125
6540
0
100
200
300
400
500
Oil Gas Coal
Mto
e
020406080100120140
R/P
(Yea
rs)
Russia China & India North AmericaMiddle East Other R/P
0
1000
2000
3000
4000
5000
MMT
Coal Oil Nat Gas
1990
2010
2030
CO2 Emissions - North America
0
1000
2000
3000
4000
5000
MMT
Coal Oil Nat Gas
1990
2010
2030
CO2 Emissions - China
• 61% oil reserves in Middle East
• 67% natural gas reserves in Middle East and Russia
• 50% of coal reserves in North America, China and India
Terra Incognita
7 Private and Confidential
Old strategies are threatenedIOCs have lost competitive position to INOCs and NOCs for mature conventional resources in traditional places
Embryonic
Unproven
Embryonic
Unproven
Growing
Unconventional
Growing
Unconventional
Mature
Conventional
Mature
Conventional
Aging
Depleting
Aging
DepletingCompetitive position
Maturity
Clear leaderClear leader
StrongStrong
FavorableFavorable
DefendableDefendable
WeakWeak
NOC
NOC
Low:Medium:High:Competitive intensity:
Develop
Selective investment
Prove viability
Divest/close
Response
IOCDepleter
IOC
Consolidator
IOC
New EntrantNew Entrant
INOCNew Entrant
Terra Incognita
8 Private and Confidential
Prior shareholder value propositions are unpersuasive99-05 ROACE vs TSR
R2 = 0.0077
0%
10%
20%
30%
40%
15% 17% 19% 21% 23% 25% 27% 29% 31% 33%
Return on Average Capital Employeed(%, Average)
Tota
l Ret
urn
toSh
areh
olde
rs(C
AG
R, %
) Production growth has replaced ROACE as a
predictor of shareholder returns
99-05 Production vs TSR
R2 = 0.6662
0%
5%
10%
15%
20%
25%
30%
35%
40%
-5% 0% 5% 10%Production
(Percentage Change, Average)
Tota
l Ret
urn
to S
hare
hold
ers
(CA
GR
, %)
ENI
Murphy
Petro-CanadaPetrobras
TotalHess
Marathon
XOM BPChevron Shell
Terra Incognita
9 Private and Confidential
IOC Capex has barely moved from depressed 1990s levels
0
2
4
6
8
10
12
14
16
18
1980
1985
1990
1995
2000
2005
Cap
ex in
200
5 $/
B o
f Pr
od/ R
un Upstream
Downstream
Real Capex per barrel of production or refinery runs for XOM, BP, Shell and Chevron
Terra Incognita
10 Private and Confidential
“If a problem cannot be solved, enlarge it.”Dwight D. Eisenhower
Terra Incognita
11 Private and Confidential
Electricity On
Demand
Emissions Control
Societal Needs
Crude Oil Natural Gas Coal
Bio-fuels
Wind, Tides, Currents,
Waves, Solar
NuclearEngineered
Crops
Hydrocarbons
Carbon Neutral
ICEFuel Cell
Gasoline & Diesel
Gasification
Combined Cycle
Chemical Separation
Syngas
Hydrogen
Fischer TropschRefining
CO2 Flue Gas
PC
Sequestration
Nuclear Waste Transportation
Bio-refiningChemical
Processing
Transmission
Batteries
Transmission
Personal Mobility
The industry must reframe its purpose and boundaries…
Terra Incognita
12 Private and Confidential
Electrons On
Demand
Emissions Control
Crude Oil Natural Gas Coal
Bio-fuels
Wind, Tides, Currents,
Waves, Solar
NuclearEngineered
Crops
ICEFuel Cell
Gasoline & Diesel
Gasification
Combined Cycle
Chemical Separation
Syngas
Hydrogen
Fischer TropschRefining
CO2 Flue Gas
PC
Sequestration
Nuclear Waste Transportation
Bio-refiningChemical
Processing
Transmission
Batteries
Transmission
Personal Mobility
The new map opens up new business model possibilities
Terra Incognita
13 Private and Confidential
The refinery of the future will be more flexible to achieve lowest variable costs
Source: CRA International
The New Refinery Extends its Product Markets into Chemicals and Power
syngas
H2
Coke
EOR/Sequestration
Diesel
Gasoline
Aromatics
Ethylene/Propylene
Lubes
Bitumen/ Hy Crude
Natural Gas
FCC Coking
Refinery
Gasification Complex
Ethylene Cracker Complex
Aromatics Complex
Hydro-treating/ cracking Complex
Fischer Tropsch
CO2Power
C2-C5+
BTX
wax
H2naphtha
intermediates
C2-C5+
C1
raffinate
Solids
Terra Incognita
14 Private and Confidential
Global refining must be retooled to accommodate oil sands and convert more resid to transportation fuels
0
1000
2000
3000
4000
2001 2005 2010 2015
Projected Canadian Bitumen Production
The JV between ConocoPhillips and EnCana is the first announced to integrate previously un-integrated players
Un-IntegratedIntegrated to refineries
mbd
ROW (ex FSU)
OECD
0
2000
4000
6000
8000
10000
12000
14000
16000
1975 1985 1995 2005
Residual Fuel Oil Consumptionmbd
High oil prices will cause residual fuel oil demand destruction
Terra Incognita
15 Private and Confidential
Distributed manufacturing will challenge commodity refiners
ImportedCane-Ethanol
Coal-to-Liquids
Major Uncertainties
• Crude oil price• Natural gas price• Light-heavy spreads• Refinery investment
cycle--------------------------------------• Vehicle efficiency• Public transportation• Plug-in hybrids• Ethanol subsidies• Cellulosic ethanol• Greenhouse gas limits• FT/ CTL learning curve• Sequestration costs• Product flows/ blending
Synbit
Extra-HeavyCrude
Terra Incognita
16 Private and Confidential
Organization Design will need to balance functional excellence with integration benefits
Supply and Trading
TraditionalMature
Emerging Country
DevelopmentDeepwater Unconventional
Resources
Risk Management
Supply ChainIntegration
Trading
BasinOps
Refinery Ops
- OECD Basins- Other mature operations
- “Non-integrated”refineries (Europe/NA)
M&A
Portfolio Strategy
Development/Offshore Project
Offshore Production
Resource Development
Renewables
Integrated Chains
-Integrated Refineries
-Storage, Transport, Processing, etc-LNG- Acquisitions
and Divestitures
EstablishedMarket Retail
- Retail in OECD, otherestablished markets
Traditional
Expanding NOC’s
Russia
Self Sufficient
- Nigeria- Algeria
- Norway- China
- Saudi Arabia
-Solar-Wind-Biomass
-Heavy Oil-Coal-Shale-Stranded Gas
CEO
Exploration
ILLUSTRATIVE
Terra Incognita
17 Private and Confidential
The “phase change” demands a different approach to strategy development
Today’s Strategic
Challenges
Far From Agreement
Close to Agreement
Close to Certainty
Far From Certainty
TraditionalStrategicChallenge
ImplicationsExplore multiple futuresChallenge mental modelsSeek new insightsApply multiple lensesDevelop leadership alignmentEstablish clear directionDeal with ambiguityPlan for experimentationRigorously test business logicArticulate strategic metricsEmbed learning processesEmphasize organizational capability
Direction: Position downwind of major trends; redefine corporate boundaries; Refine business model
Execution: Secure commitment; access opportunities; deploy resources; organize; address stakeholder needs
Leadership Convey purpose; shape values & culture; establish decision rights; motivate and renew people
Terra Terra NovaNova
Terra Terra IncognitaIncognitaTerra FirmaTerra Firma
Terra Incognita
18 Private and Confidential
“The winds and waves are always on the side of the ablest navigators.”
Edward Gibbon, Decline and Fall of the Roman Empire
Terra Incognita
19 Private and Confidential
Chris RossCRA International1600 Smith Street
Houston, TX 77002(713) 646-2211