Though oil prices have ticked up recently in the wake of the OPEC deal, the lingering historic lows leave the global energy industry facing enormous challenges. Supply chains and logistics are now more important than ever before.
News of the landmark deal hit the business press like a storm. The surprise agreement naturally sent oil futures surging. Brent crude immediately jumped some six percent and is now trading again above US$50 a barrel – its highest level in months.
OPEC’s ‘agreement to agree’ is certainly good news for the energy sector because it will boost revenue, at least in the short term, not to mention investor confidence. As the oil rally spilled over into the stock market, energy companies led the way.
While all of this has been a welcome reprieve, let’s not forget that the industry is two years into the steepest, deepest and most prolonged price drop in recent history – an experience that has essentially accelerated the tidal changes already in motion. A higher oil price isn’t going to change that. As long-term trends gradually reshape the world’s appetite for energy, major energy companies are making short- and long-term investments they hope will allow them to profitably meet society’s future requirements for energy, and for other products derived from fossil fuels.
A challenge or an opportunity?
Obviously volatility is nothing new to the energy sector. Around the world, oil producers have kept their wells pumping, hoping that rivals will crack first under sustained price pressure. But costs are still under intense scrutiny. Behind the scenes, energy companies have been working hard to slash costs and shore up profitability. For instance, they’re exploring ways logistics and supply chain activities can add value to their operations.
That’s particularly true in the downstream sector, which is growing in importance and creating opportunities to diversify. For example, the price of many products, from gasoline to chemicals, has not fallen as far as crude oil. That temporarily increased the margins of downstream refining and manufacturing operations, providing a useful cash boost to oil companies. In some sectors, notably chemicals, the availability of cheap oil and gas has transformed commercial dynamics. Low-cost shale gas has made the U.S. one of the most competitive places in the world for chemicals production, for example.
And let’s not forget renewables. Traditional energy companies are becoming significant players in that industry, too. Offshore wind provides obvious opportunities for the industry to transfer the capabilities it developed building and operating production platforms in challenging marine environments. Oil companies are even vying to play a role in solving future renewable energy challenges. France’s Total and Norway’s Statoil are two examples.
Supply chains matter more
This combination of downturn and diversification has significant implications for all aspects of operations, and logistics is no exception. For decades the energy industry has relied on a contracting model in which services like logistics are split and tendered separately project by project. That has produced fragmented supply chains and underutilized assets. Now there’s growing interest in approaches that allow those assets to be shared between projects, business units and even between competitors. Doing that calls for new commercial models to ensure the benefits of greater efficiency are also shared.
While some energy companies have attempted to broaden their logistics supplier base, searching for lower prices, others have taken the opposite approach, which I believe is more sustainable: increasing the scope of the logistics services they outsource and partnering with service providers. These forward-looking companies are seeking ways to consolidate their many separate supply chains, co-locating materials in central storage hubs, for example.
I think further supply chain consolidation across many different types of operations – upstream and downstream, conventional and renewable – is likely. As energy companies seize opportunities to diversify, they are recognizing the benefits to be gained from looking across their operations. For example, the planning and implementation you need for large-scale wind and solar projects are similar to those required for upstream oil and gas. Downstream, logistics can play an important role, with the development of new go-to-market models and final-mile delivery solutions that provide a better customer experience.
Can energy succeed in this ‘new normal’?
At our recent DHL Global Energy Conference in Houston, Texas, we discussed how to operate in this ‘new normal.’ It’s obvious the industry understands what’s at stake and is working to tackle these challenges. The changes I’ve just described are evidence of that. Developing and testing new technologies – from electric vehicles and solar panel installations on warehouse to biofuels in aviation – are also receiving greater interest as the sustainability agenda becomes increasingly important.
What’s clear is that it’s going to take innovative thinking, partnerships and solid logistics and supply chain strategies to navigate the changing tides.
While the pending OPEC deal and recent increase in oil prices have certainly dominated the headlines, the global energy industry will continue to prepare for long-term structural change. As companies work behind the scenes to cut costs, shore up profitability and seize opportunities, many are taking a hard look at their logistics to help achieve each of these goals. I for one think it’s high time they did. In this ‘new normal,’ supply chains matter more than ever before.