Innovation a must to remain resilient
The need for innovation is more relevant in the GCC energy industry than possibly anywhere else in the world, says Walid Fayad
By Walid Fayad, executive vice president of Booz Allen Hamilton
It’s set to be a diverging year for the energy industry. On one hand, new forms of cleaner and renewable energies are gathering pace – driven along by a spirit of new enterprise and a renewed sense of environmental and social stewardship.
Conversely, for the hydrocarbon industry 2016 looks set to be another year of uncertainty, with record low oil prices precipitated by tapering demand and inflated supply. But amidst the gloom there is hope. Innovation – both of technology and process – is long overdue in the oil and power industries, and its application this year will separate winners from losers in the new energy economy.
The need for innovation is more relevant in the GCC than possibly anywhere else in the world. This region accounts for nearly 40% of the world’s oil production and while economies such as the United Arab Emirates are working rapidly to insulate themselves from oil dependency, the transition will not be overnight. The UAE has announced that it will invest over $82bn in a new plan to build the country’s knowledge economy, with a post-oil vision but it is the short term oil revenues that will fund this diversification programme. It is important that the oil money continues to flow.
It will be one of the greatest challenges the industry has faced in recent times, as the reality ‘new normal’ begins to bed in. And the worst is not over yet – additional US and Iranian supply this year is predicted to push oil down further to between $20 and $30 according to the International Monetary Fund. It also predicts that the market downturn will result in a $287bn loss in oil exports or around 21% of the combined GDP for GCC suppliers, in 2015.
The challenge is how to retain viability? Amid this gloom, where are the margins? And, as profits are squeezed, is enough investment being made into energy infrastructure, the security of intellectual property and the capacity of utilities?
According to our analysis, 2016 will be about five key trends for the energy industry. Those trends are:
Compliance not enough to thwart cyber threats
Cybersecurity is predicted to be one of the biggest trends in the energy industry in the coming years and now instead of merely reacting to threats, technology has advanced far enough to identify and mitigate issues and crises well before any significant impact. This will drive a shift towards predictive technologies to protect assets and infrastructure, and not just to meet compliance standards. While the fight for greater efficiencies and workable margins is a significant one, mitigating malicious cyber criminality will be critical.
Opportunity, innovation will move from the West to the East
As emerging markets dramatically increase their demand for energy and energy infrastructure, the flow of new opportunities (i.e., business expansion, new jobs) and overall innovation will shift from the West to the East. The International Energy Agency reports that emerging economies will account for more than 90% of net energy demand growth by 2035. As a result, domestic players in Western economies will face more competition for talent in key areas, and will fall behind their multinational counterparts unless there is policy focus in those countries on infrastructure renewal and innovation.
Digital transformation, changing customer expectations will leave some utilities behind
The IDC Energy Insights finds that by 2018, 70% of utilities will have launched major digital transformation initiatives (including everything from outage notification and bill payment to helping customers buy energy products and services, and make energy part of their connected homes). These changes come as customer expectations rise in connection with access to energy information, services and control. Seizing on digital transformation will separate those utilities that thrive by converting historical customer intimacy into business advantage and those that struggle just to keep what they have. In particular, utilities that learn how mobile and digital strategies can go beyond operational cost savings to create customer value (often in the context of new business models) will make the leap.
Low prices accelerate use of advanced analytics
As oil prices linger at relatively low levels, companies operating within the hydrocarbon field will make moves to further reduce the extraction, or lifting cost for their source product. At the same time, they will continue to identify ways to reduce overhead costs through the use of analytics, the cloud and leveraging their Big Data to become more data-driven organisations. Innovation will be the driver, both operationally and at the enterprise level, to thrive in this market environment.
The ‘great crew change’ signals skills gap
In a challenging price environment, companies are offering incentives to accelerate staff retirements and are struggling to discover how to do more with less. New technologies are part of the answer in oil and gas, as companies are working to automate manual processes and do so in a way that reduces effort, streamlines functions, and improves results. For utilities, the demographic shift in the workforce comes with a skills gap—the demand for next generation IT skills is rising faster than the talent pool in most companies, forcing new ‘build’ (via training) or ‘buy’ (via acquisition, aggressive recruiting).