Energy Management

Why energy supply and demand is so divisive – and how it could change

Meeting the world’s energy needs in the 21st century looms as one of the most complex, overarching issues of our time.

By Kevin Price, Product Director, Infor EAM

Energy supply and demand: why is it such a divisive issue? The problem is that it is not just about individual consumption; oil and gas supply and demand is a central issue not only to the health of the global economy, but the global ecosystem as well. It’s not surprising that the rhetoric surrounding energy consumption often mentions the fate of the planet and the survival of humanity.

The United Nations (U.N.) has estimated that the world’s population would reach 7.2 billion by early 2014 and that 82 million people would be added each year, with 25 percent of this growth occurring in the least developed countries. At current rates, the total population of the planet will reach 8.1 billion in 2025 and 9.6 billion in 2050, according to the UN.

All of these people will require affordable energy options—especially those in the underdeveloped countries. The U.N. also estimates that 40 percent of the world’s population depends on traditional biomass fuels for indoor cooking and heating, fuels which are comprised of animal dung, firewood, charcoal, and crop residue. This commonplace practice accounts for 2.7 percent of the world’s total disease burden, killing roughly 4 million people each year and worsening global deforestation and soil erosion. This practice also causes increased greenhouse gas emissions.

More than 20 percent of the world’s population–1.3 billion people–lack electricity, and millions more have access to electricity but are unable to pay for it.  Those deprived of affordable energy also lack running water, basic sanitation, food, medicine preservation, and protection from the elements. At the same time, a vast new middle class is emerging in the developed world, with total population expected to grow by more than 250 percent, according to the Organization for Economic Cooperation & Development (OECD).

It’s easy to see that meeting the world’s energy needs in the 21st century looms as one of the most complex, overarching issues of our time. This challenge is compounded when intertwined with sensitive environmental controversies and geopolitical strife. And yet, somehow, the energy sector must meet these challenges in ways that:

  • Are cost-effective for consumers yet allow a decent return for producers
  • Help support global energy security without undermining global trade—or the economies of nations critical to the world’s energy supply stability
  • Optimize environmental stewardship to balance energy affordability with environmental impacts

Historical events that shaped today’s market

Meeting the growing energy demand and managing the resulting consequences that flow from that effort are not new or simple challenges. More than a century ago, the demand for better illumination nearly drove several species of whales to extinction before petroleum products provided a better alternative. The 1911 decision by Winston Churchill, as First Lord of the Admiralty, to switch British warships from coal to oil sowed the seeds of future conflict over Middle Eastern oil. In 1954, the Suez Crisis demonstrated the first modern example of Middle Eastern nationalism as a threat to Western oil supplies.

The Arab oil embargo of 1973 and the Iranian revolution of 1978–79 sent shock waves through the world’s economies, underscoring how critical oil was to sustaining the economic health and well-being of all consuming nations. Before 1973, almost all of the global supply of oil outside the Communist bloc was in the hands of the private sector, almost exclusively European companies and US. After the 1970s oil crises, two-thirds of that private oil ownership moved to state oil companies, mainly in the Middle East.

The rise of the Organization of Petroleum Exporting Countries (OPEC) and energy nationalism also changed the dynamics between oil suppliers and oil consumers. Instead of being governed solely by market forces, the world’s most critical supply of energy was now subject to the political and economic circumstances of the suppliers. Consequently, the real price of oil today is more than fourfold what it was in 1972.

Changing consumer perceptions

The only way to change negative and divisive perceptions on today’s energy market is the development of a realistic, measured energy strategy—one that recognizes the challenges for all energy sources yet eschews the rhetoric and political posturing by focusing on economics and environmental impacts. The oil and natural gas industry will play a pivotal role in helping the world develop solutions to these seemingly conflicting energy, economic, and environmental goals.

A decade ago, the widespread expectation was that oil and gas resources were entering into a permanent period of scarcity. But advances in technology, know-how, and best practices for the North American petroleum industry have turned the global energy picture on its head. This has been achieved by rendering vast, hitherto intractable, “unconventional” oil and gas resources economically recoverable. In less than a decade, scarcity has turned to plenty. Discovery risk has been reduced essentially to zero. And now the unconventional oil and gas revolution is on the brink of being exported to other countries with similar untapped unconventional resources.

The scope of these resources has dramatically altered the oil and gas landscape. Some analysts believe that the center of world energy is shifting to North America and away from the conflagrations of the Middle East. And consumers’ confidence in the industry may be bolstered by the belief that prices will ultimately fall and conflicts will ultimately ease.

Yet there remain enormous challenges for oil and gas companies. These new commercial resources are extremely expensive to develop, and costs continue to grow with respect to regulatory compliance, taxes, equipment, services, and labor. Additionally, the industry is facing a shift change, in the form of aging industry veterans handing the reins to tech-savvy but green youngsters in the absence of a bridging generation—the “lost generation” that fled or avoided the oil and gas industry from the late 1980s to the early 2000s.

Rebuilding plant operations and maintenance strategies so that they revolve around up-to-the-minute data is a key component of remaining competitive in this new environment. Yet industry experts estimate that most oil and gas companies don’t have a system in place, outside of spreadsheets or paper documents, to capture this critical data. The generally accepted percentage of companies that do have such a system is 20% – meaning that only about one-fifth of companies in the oil and gas industry are capturing data from platforms, rigs, and the field at the point of occurrence. Modern enterprise asset management (EAM) systems track real-time data that is accurate and immediate, enabling decisions about how to operate in the safest, most cost-effective, and most productive way–decisions that will have a profound impact on future growth and profitability. 

Deploying an enterprise resource planning (ERP) system is one method that oil and gas companies can use to counter the growing concerns that companies face from the shifting market. An ERP can be used extensively within the upstream oil sector to help manage local variations in language, currency, and business standards when it comes to financial management. By utilizing a more flexible procurement process, companies are able to ensure a consistency through joint venture cost allocations. This can provide a cost-effective option for reducing complexities and managing ongoing processes.

Other key benefits via an ERP system can be generated from service management, lean manufacturing, quality management, and wholesale distribution. With an ERP system providing greater visibility into the entire customer lifecycle, companies are able to make more informed decisions and improve quality to increase productivity and reliability. Taking action when it comes to factors that reduce the complexity of the manufacturing supply chain will ultimately reduce long-term risks and protect future investments. An ERP is certainly not a cure-all solution; however, it can serve as a significant solution for minimizing risks when dealing with the oil and gas market.

It all adds up to a business environment in which oil and gas operating companies, and the service and supply firms that support them, must make business decisions increasingly at the economic margin, by monitoring costs, optimizing supply and service logistics, flattening organizational structures, and eliminating information and data silos. Whether these decisions impact consumers positively or negatively will be of paramount importance in this new energy era, and the only certainty is that changes will be played out on a world stage with extreme scrutiny.