5Qs with Accenture's Arthur Hanna

Q1: What do you think are the main challenges in Asia Pacific's hot capital projects market, and what do you think oil companies should be doing to overcome them?

Arthur Hanna: What we are currently seeing in terms of oil and gas capital projects in the Asia-Pacific region is unprecedented in our industry--the scale and technical complexity of some of these projects in places like Australia, Malaysia and India are immense. In Australia, for example, I believe there are about 94 advanced projects in the energy and minerals sector, with a few projects in the gas sector, estimated to cost $30-$43 billion each, which is just incredible.

I think the challenges in the Asia-Pacific capital projects market are well-known. The project environment in Australia, for example, is tough today. Regulation is now seen as complex and fluid, the threat of new taxes is affecting planning and budgeting, and there is a perception of a lack of integration between government departments which is adding significant slippage to project timelines. On top of this, labour and equipment costs are soaring, productivity is sub-optimal, and managing diverse sets of stakeholders can be problematic.

I think there are challenges across the whole energy industry with labour, not only the availability of labour being tight but also with companies trying to balance that relationship between developing local content and keeping the project on time and on budget. Local content challenges are not only particular to IOCs, NOCs in Asia Pacific are also under pressure to use regional workforces for capital projects in their locality.

I think the energy industry has made considerable progress in how they approach and develop major capital projects, but there is still some way to go, particularly compared to other industries. Where Accenture is seeing high performance in this area is where companies are running major projects increasingly like a large-scale business, with a vision, clear, targeted outcomes and KPIs that drive high performance. Standard capital project management practices are no longer going to be enough given the complex industry landscape in Asia Pacific.

Companies need to place greater value on planning, set up processes and systems to reflect the business vision and mitigate risk, and develop a complete project talent strategy. A talent strategy would not only encompass the use of technology to enable workforce flexibility but would build into the project, ways of capturing knowledge. Ultimately, what energy companies need to focus on is how they are using processes and technology to measure the performance of their project--a big part of being able to do this is to create a general culture of operational excellence with a focus on what is leading practice.

Q2: What do you see as the increasing role of gas as a future fuel--conventional and unconventional, and what role do you see the Asia-Pacific region playing in this outlook?

Hanna: I would agree with many industry commentators that the outlook for natural gas, both in terms of supply and demand is extremely strong. Today, this robust outlook is increasingly becoming focused on two key areas--LNG and unconventional supplies, including shale gas, tight gas and coal bed methane.

I believe the Asia-Pacific region will continue to play an important role in the outlook for the natural gas industry, both in terms of supply and demand, and this is particularly true for LNG. For many of the IOCs, LNG is now an important profit centre and the role of gas in their portfolios has grown dramatically, so they are helping drive the development of the gas business in this region. For the NOC's, particularly in nations like Indonesia and Malaysia, LNG has long been a crucial business. Over the past few years, we have seen the entry of Qatar in a big way onto the LNG scene. Qatar today has the world's largest liquefaction capacity, but will possibly be overtaken by the new LNG supply centre of Australia some time after 2015.

In Australia, we are seeing the only projects in the world combining unconventional gas supplies from coal bed methane being developed for export as LNG. In terms of demand, we are seeing both China and India increase the amount of LNG they are using each year, and this is on top of growing demand from the traditional large Asia-Pacific LNG users in Japan, South Korea and Taiwan.

I think if I were to address how the Asia-Pacific region will influence the further development of natural gas, I would point to a few key trends, most of which are already underway:

• Energy policy (Japan): We know now that Japan has made a policy decision to phase out nuclear energy, meaning that Japan will join Germany as the second major economy to turn away from nuclear energy since the Fukushima incident. We saw gas demand in the Asia-Pacific regions tighten considerably as a result of Fukushima, and policy changes such as this will continue to support the strong outlook for gas as a fuel for power generation in this region.
• Unconventional gas (USA): The growth of unconventional gas production in the USA is having a double impact on the Asia-Pacific region. Firstly, as LNG demand decreases in the US, it is freeing up cargoes for supply to other regions including Asia Pacific, making LNG more competitive. Secondly, as the US (and Canada) looks to start exporting LNG, the Asia-Pacific market is a focus for those exports, which are becoming cost-effective either from the Pacific side of Canada or via the Panama Canal from the US Gulf Coast.
• Shale gas (China): While no one is expecting a so-called shale gas revolution in any other country to happen in a similar way to that of the US, what is expected is a focus on shale gas developments in Asia-Pacific countries with large reserves--notably China. Earlier this month1, China made an important policy announcement that foreign joint ventures would be allowed to bid for shale gas exploration licences in a new tender process, effectively allowing foreign energy companies to play a greater role in developing China's potential reserves of shale gas

In my view, the region has always been at the forefront of developments in the natural gas industry, and today is no different. Asia Pacific is developing important supplies of natural gas, whether it is via the large-scale LNG projects in Australia, many of which are using brand new technologies such as floating LNG and coal bed methane to LNG for export or through an emerging focus on shale gas development in countries like China.

Asia Pacific is also, through important policy decisions, ensuring a secure supply for natural gas demand. We have over the past few years seen a host of new countries anxious to secure new LNG supplies such as Singapore, Thailand, Pakistan and New Zealand, as both the economics and technologies around natural gas allow them to build gas into their energy demand outlooks. Through a combination of strong supply and demand and policy development, the future for both conventional and unconventional natural gas looks secure in Asia Pacific.

Q3: What do you see as the aspects of future growth of National Oil Companies (NOCs) and how do you see this affecting the global energy landscape?

Hanna: Much has been written about the increasing growth and maturity of the NOCs and the Asia-Pacific region has many NOCs which fit into this category. In this region, NOCs are growing through the combined development of their own economies as well as their abilities to secure assets abroad. We have, in particular, seen the Chinese and Indian companies becoming more international in their bid for new sources of supply. We are also seeing Asia-Pacific NOCs developing better technical capabilities. This is not only allowing them to undertake increasingly complex projects, such as Petronas' RAPID project currently underway in Malaysia, but is also enabling them to contract to service companies with greater confidence.

We are also in a climate where NOCs can finance their own investments, which is important in today's uncertain economic outlook. Many NOCs are semi-privatised, listed on key stock exchanges and adhere to the same financial controls as IOCs. As a result, they are combining good financial management with the ability to self- fund many of their operations. Added to this is, of course, their ability to rely on their government for financing.

So I would say that we are in a world where the model of the inefficient NOC is practically gone. Many NOCs, even those still fully state-owned, have realised that good governance and independent decision-making are key to a well-run company. Many NOCs, like Aramco and Statoil, are structured so their company operations are kept separate from the ministry. This helps them with running their companies more efficiently.

One of the main ways that the so-called evolution of the NOCs has affected the energy landscape is that it has resulted in a reduced reliance on IOC expertise. However, in my view, I think this is sometimes overplayed. Here in Asia Pacific, there are countless examples of NOCs and IOCs partnering together, bringing the best they have to bear to many projects. A good example is the agreement Shell signed with Petronas last year, where Shell will help Petronas not only develop several new fields in Malaysia, but also employ the latest enhanced oil recovery technologies at a number of existing fields to increase production and extend their life. Partnerships like this bring together the need of some NOCs for support with complex capital and operational project management and technology with a desire by the IOC for access to reserves.

There is no doubt that there has been a shift in balance in our industry, with the growth over the last two decades of many NOCs. I view that as positive; our industry is becoming more challenging, the economic outlook is uncertain, costs are rising, and reserves are technically more difficult to develop. The growth of the NOC and their partnerships with the IOCs will help our industry deal with such challenges for the better.

Q4: What do you see as the key focus areas for operational excellence for oil companies as investment and economies contract?

Hanna: The oil industry is under constant pressure to grow reserves and production in an environment of higher costs, and larger and more complex projects. We are also seeing a refining industry which is basically in crisis in the more developed nations of the world. Over the past couple of years, this pressure has been compounded by a worsening investment climate generally as economic growth has stalled in many regions. What I have seen generally with the oil companies which I have worked with over the years is that the companies that can "ride the storm" and emerge in a stronger position are companies which focus on operational excellence.

I think operational excellence focuses on two key areas for oil companies. The first is around pursuing structural advantages including operating model. The second is execution advantages. Or it can be a mix of both.

One of the key areas of execution advantage I can see today in our industry is a focus on rigorous process execution across the company, which drives better results. For example, in upstream, in the more mature oil and gas producing areas, there is the ongoing challenge of being able to fully exploit oil and gas fields to their maximum potential. Here, imprecise or redundant decisions and activities can result in rising costs, unnecessary downtime, suboptimal production rates and increased maintenance and safety issues. I think companies that really focus on operational excellence are today looking at ways to optimise production and their production processes to help them avoid such issues.

Why is production optimisation so crucial to high performance? It not only allows energy companies to realise the opportunity to get the most out of their oil and gas assets, it can transform the way companies operate upstream. Production optimisation does this by allowing an energy company to build visibility and efficiencies into its systems. It enables the company to improve collaboration, both internally and with their partners, make better decisions, and create leading practice work processes--with the added bonus of reducing operating costs and improving production levels. Production optimisation is a key building block of operational excellence in the upstream and is increasingly, in my view, becoming a competitive differentiator.

Q5: Earlier this year, Accenture and the World Economic Forum released a joint report suggesting that countries need a new energy architecture. What do you mean by that?

Hanna: When we talk about a new energy architecture we are defining an energy architecture as the integrated system of energy sources, carriers and demand sectors shaped by business, government and society. Our existing energy architecture has become increasingly expensive, with the past decades reversing a 100-year decline in resource prices. It is having an increasing environmental impact, remaining highly dependent on fossil fuels whose combustion accounted for 84 percent of greenhouse gas emissions in 2009. And it is increasingly under pressure from growth in demand, especially in the developing world, which will account for 90 percent of energy demand growth to 2035.

In sum, meeting the challenges of the "energy triangle"--economic growth and development, environmental sustainability, and energy security and access--has become increasingly difficult.

If we are to respond to the emerging dynamics of an increasing demand for energy, climate change and resource scarcity a major transformation is required in the way we produce, deliver and consume energy--a "New Energy Architecture".

The World Economic Forum and Accenture New Energy Architecture initiative is a neutral platform that aims to help decision-makers accelerate reforms that will support the development of an affordable, secure and sustainable energy sector in their country, enabling an effective transition to a New Energy Architecture. Our report lays out a useful conceptual framework for the factors and tradeoffs that countries must consider as they shape energy policy and chart a path to the future. Each country must work with its own resources and constraints--focus on practical, cost-effective solutions that produce results--to determine the best approach. There is no single way forward.

We do not expect this transition to take place overnight. The energy architecture is large and complex, and enormous legacy systems remain in place. Striking the right balance between economic growth, environmental sustainability and energy security will entail tradeoffs and difficult choices for government policymakers and society. Indeed, for many countries, there is likely to be a gap between what is desirable and what is doable. History shows that once a new energy technology is proven, it takes about 30 years for it to achieve 1 percent of the overall market. For example, biofuels are just now reaching 0.5 percent of total energy demand, after decades of development and government support. Wind may get to the 1 percent mark in the next few years, nearly three decades after the first big wind farms were built in Denmark and the US.

Earlier, I mentioned Japan's decision to phase out nuclear energy by 2040. This does not mean that Japan's nuclear energy industry will disappear tomorrow. In fact, existing nuclear plants will operate until they reach a lifespan of 40 years (and might then require maintenance and upgrades). What is going on in Japan is an example of the complexity and scale involved in such a transition. It will require an incremental approach on the part of all stakeholders, particularly if they are to manage such impacts as the write-down of legacy assets.

But what is certain is this: An energy transition is already underway, and understanding, preparing for it and embracing will make it much less disruptive.