ThoughtStream: Shifting dynamics: Industrializing economies are moving markets

Marcus Richards

November 27, 2013

ThoughtStream: Opinion

The shift in oil demand from industrialized to emerging economies is one that we at Dana Petroleum know only too well.

An impressive North Sea success story with modest but ambitious beginnings in Aberdeen in the mid-1990s, Dana grew fast, becoming 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 (KNOC). KNOC was on the lookout for exploration and 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.

Dana Petroleum was acquired by KNOC in 2010, as part of an ambitious plan to reach 1.2MM bbl production by 2030.

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.

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. 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.

In October, China reached the position of world’s largest importer of crude oil, surpassing the US for the first time.

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.

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.

As NOCs continue to expand beyond their home markets, they will naturally compete head on with international oil companies (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.

Secondly, in an increasingly complex energy market, complementarity and common ground will be crucial. 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.

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. OE

This is a version of Mr. Richards’ talk at Chatham House’s The Changing Dynamics of Global Energy Markets Conference in November, in London.

Marcus Richards is group chief executive of Dana Petroleum. Until mid 2009, he held the role of senior vice president in BP corporate headquarters covering upstream E&P and downstream refining businesses. During his 27 year career to date, he has held a number of business leadership, functional and technical roles, with a significant proportion of his career spent outside the UK and Europe, including assignments in the US, Australia, China and Indonesia. He holds a BSc (Hons) and PhD, and is an alumnus of Harvard University. He is also a visiting professor at Aberdeen’s Robert Gordon University.