LATEST -Scenario Planning in the Oil and Gas Industry

Scenario planning has been around in the oil and gas industry for almost 50 years. Scenario planning is useful where a long-term view of strategy is needed and where there are a few key factors influencing the success of the strategy, e.g. in the oil industry there may be a need to form a view of the business environment up to 25 years ahead, and issues such as crude oil availability, price and economic conditions are critical.

For example, Shell has been using scenario planning for 52 years to help deepen its strategic thinking. Developing and applying scenarios is part of an ongoing activity in Shell. It was the only major oil company to have prepared its management for dealing with the shock of the 1970s oil crisis through scenario planning and was able to respond faster than its competitors. Precision is not possible, but it is important to develop a view of the future against which to evaluate and evolve strategies.

Scenerio planning
LATEST -Scenario Planning in the Oil and Gas Industry

Scenario planning/ Scenario building attempts to create possible future situations using the key factors. The aim is to produce a limited number of scenarios so that strategies can be examined against them in terms of ‘what if …?’ and ‘what is the effect of …?’ (basically a form of sensitivity analysis).

A car manufacturer could assess the impact of a ‘Green Scenario’ or a ‘High Value Sterling Scenario’ on its
business. Financial models of the firm are often used in conjunction with this approach to assess impact on profit. Although these provide a useful approach, it is important not to become too committed to one
scenario; after all, they are only forecasts which might not in the event be valid.

Steps in Scenario Planning

 Identify key forces, using techniques such as PEST analysis (see later)
 Understand the historic trend in respect of the key forces
 Build future scenarios, e.g. optimistic, pessimistic and most likely.

The scenarios generated are then ‘plots’ to be played out making managers consider future possibilities and encouraging them to think about strategy more flexibly.
(a) We have to identify the factors that make scenario planning popular with oil industries.
(b) We have to suggest some alternative scenarios that an oil producer might consider in its strategic planning.

The factors that make scenario planning popular with oil industries

(a) Oil producers adapted scenario planning techniques from their original military applications (notably in planning for the aftermath of thermonuclear war) during the 1970s. This followed the oil price shock
when the Arab states then at the center of OPEC massively increased the price of oil and caused
inflation and recession in industrialized Europe and North America. This decision was itself justified in
part as a response to the perceived support of oil consuming Western countries for support of the
occupation of Palestine and Egypt.

It was a response to the high turbulence (e.g. political shifts, vulnerability to economic factors etc.) and
dynamism (e.g. speed of change of political landscape) in the oil industry. Furthermore the very long
investment periods in the industry necessitated long-term strategic plans based on assumptions about
the future.

Alternative scenarios that an oil producer might consider in its strategic planning.

(b) Possible scenarios would incorporate a combination of:
 War in the oil producing countries of the Middle East
 Aggressive energy politics by countries such as Russia and Venezuela, holders of large reserves of oil and gas
 High energy demand from newly industrializing countries such as China and India
 Increasing legislation in industrialized nations aimed at reducing use of carbon dioxide producing fuels
 Development of new energy sources such as clean coal, biomass fuel, wave and wind, and reemergence of nuclear power
 Discovery of new oil or energy reserves

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