an opinion editorial written exclusively for ANZMEX 

5 January 2021
By Chris Sladen

Energy matters – Staying smart

No sooner has the year-end report for 2020 been submitted, now your bosses are clamouring for your 2021 performance contract! As we head into 2021, I have been wondering whether to change the title of Energy Matters to Really Matters. This is because 2021 will be all about what really matters – in the short term. What really matters is that staff are tired, battle-weary and run ragged by the pandemic, anxious and unsure about the future, their future, their kids future; there is no point bombarding staff with an impossible-to-achieve performance contract.

If there is one thing that 2020 taught us, it is that writing a performance contract can sometimes be a total waste of time. All those ridiculous stretch targets that you spent ages preparing, and your management were obsessed by, and staff felt obliged to accept, were completely pointless before the end of January. Sometimes you have to take things just one day at a time. The final weeks of 2020 signalled a difficult start to 2021. The pandemic is still controlling news flow. So why bother again in 2021?

The answer is that 2020 was a year of massive disruptions, an unforeseeable upheaval, and quest for survival, a year in which every energy company reviewed its operating model, and many energy companies and services companies disappeared forever. 2021 is not 2020, it is a year positioned for recovery, adjustment, and growth, but still with some large upheavals, ups and downs. By failing to prepare, you are preparing yourself to fail! A good performance contract executed now will always be better than a perfect plan produced sometime in future months. It is not about telling people how to do things; it is about telling them where you want them to get to and offering them the space and support.  Yes, it is about planning to get ahead, however, a common mistake is to plan too far ahead. Numbers that forecast many years off into the future are likely futile and just one of many possibilities; make sure you do not believe them too much.

This is definitely a year all about keeping it simple – any performance contract the size of a book never sits well in any corporate culture; it will just lay unopened on a shelf or be filed in an unused computer folder. Here is my suggested list of things to factor into your 2021 performance contract:

Expect oil price fluctuations. The pandemic-induced recession is far from over. And with no supply shortage in oil, and plenty of shut-in production and shale wells available, it is difficult to envisage oil prices getting back to the early 2020 levels of US$ 60+/barrel. Do not forget that OPEC+ is a fragile cartel; price fluctuations can be expected within a US$ 35-60/bbl range. Many oil companies will remain vulnerable to price downturns which also impact product prices and margins. Meanwhile many of the large NOCs in the Middle East, Russia & China need US$ 55+/bbl to balance their books and would prefer a flat US$ 55/bbl through the whole year. So US$ 45-55/bbl appears sustainable.

A rapid growth in demand, perhaps the largest on record ever, with supply unable to keep pace could see prices soar later this year but this is not a most-likely scenario. For most, 2021 Capex expenditures are running at the deeply slashed 2020 levels or less, however oil services contractor prices are now low, so the volume of work that can be carried out for the same money is larger, for a while. Still, postponing of new giant projects is building up the chances of a production shortage over the next few years, but that does not really matter for this year’s performance contract.

Refiners have fewer levers to pull after demand crashed in 2020 with low margins for much of the year. Permanent plant shutdowns will continue in 2021 with consumption patterns shifting towards Asia and the Far East. If enough plants close, that should bolster margins.

Expect natural gas to be popular. Natural gas demand should remain healthy and underpin prices. The LNG sector hopes to begin investing again in 2021 with optimism returning about new projects following a very subdued 2020 when the focus was on steady production. The shale drilling sector is set to bounce back as gas demand picks up, with plenty of rigs lying idle but ready to restart. Competition for that work will be strong.

No let-up expected in the energy transition and decarbonisation. The speed at which the energy pivot takes place will depend on the choices that companies, governments, and societies make, and a healthy pipeline of green and electrification projects reaching final investment decisions. Wind and solar should set the green power pace again. But options such as geothermal, green & blue hydrogen and nuclear are determined to not get left behind.  They all intend to play in the Premier League; they are part of building back greener. Lithium and EVs will again feature prominently with heavy investment in battery manufacture. Expect to see lots more EV charging points too. Carbon emissions trading schemes are set to feature much more prominently as the pivot continues. Even so as the world emerges from recession, natural gas will underpin base-load power generation and overall recovery will be largely hydrocarbon-led (including coal!).

Rival oil companies announced bold moves in 2020 to cut oil and gas production and increase renewables spending. With so much else going on with recession and recovery, it is unlikely that an aggressive trend will emerge in 2021 and no oil company particularly wants to retreat prematurely from the oil business. Some oil companies are concerned about investing larger sums into greener businesses that are not as lucrative as traditional fossil-fuel divisions. It is an issue of pace.

President-elect Joe Biden comes to office with what has been called a transformational plan to curb climate change and cope with its unavoidable consequences. This includes creating a carbon-free electricity sector by 2035. That would be an astonishing achievement. Time will tell.

Stay abreast of big politics, as well as local politics. In 2021 you have to be prepared for the impact of the Biden factor, impact from the OPEC+ cartel (which now meets monthly), the Brexit fallout (the devil is in the details), the tactics of China, Russia & India, a revival of the Iran nuclear deal, and the 15 nations who are signatories of the new Asia-Pacific free trade deal known as RCEP. Trade deals, protocols, continuity agreements, regulations and tariffs are set to evolve rapidly and create a lot of news flow. It is important to utilise accurate information and insights, adjusting quickly as the year evolves. Steer clear of gossip and fake news; make sure you know what the energy influencers and decision makers think.

There are many elections of different types that can impact the energy sector in 2021 that should be factored in and be ready to adjust to the results, including Argentina, Ecuador, Iran, Mexico, Peru, Russia, and Trinidad. Other elections in Germany, India, Japan, the Netherlands, Scotland, and USA could reveal important signals of ideological change.

Do not be complacent about recovery. With so much impact in 2020, and a path to global recovery far from clear, if there is one word to sum up heading into 2021, it must be uncertainty. It is going to be foggy. It’s nice to have a 10-year plan, but it is just a plan. Draw distinctions between uncertainties which are known and have acceptable variable outcomes (e.g. prices), ones you know about but may have unknown outcomes (e.g. trade negotiations) and the ones you don’t know about with unknown outcomes (e.g. a new pandemic).

It will take some time for the new coronavirus vaccines to turn the pandemic around. They will not fix the world’s issues overnight; virus protection will take time to build. It is difficult to envisage mass vaccinations having significant regional or global impact until 3Q.

Be prepared for the pandemic to continue disrupting the energy sector. The worst thing you can do is pretend that the uncertainty is finished. We remain in uncharted territory with the future very unclear. There are bound to be large swings, both positive and negative; there is still a lot of rebalancing. Supply chains for energy contractors remain fragile impacting timely delivery – they merit your attention. We should expect problems at least into 2Q and issues globally at least through to 2022. Escaping the pandemic fuelled recession will be patchy and slow. Beating the pandemic will take years not months. At least 6 months of massive vaccination programs are needed to make a meaningful dent in the numbers. Low inflation has been factored into economic policies and financial markets; expect governments to continue borrowing heavily, central banks buying up debt and stock markets continuing to soar even as the pandemic rages. Predicting the end of low inflation is difficult but something to monitor closely and any surge in inflation would cause havoc in the bloated energy debt markets. 

Seize the opportunities. In 2020 only 3 large economies recorded overall growth – China, Taiwan and Egypt. With others returning to economic growth this year, energy use should surge, particularly fuels for travelling. Out of the 2020 crisis will come many opportunities. Ticking off a few doable things may well end up better than shooting for those giant projects that are hard to deliver; they are also the opportunities more likely to get budget cuts and delays.

Social and climate issues are likely neglected by many as greenhouse gas emissions increase again; countries are focused on paying down the massive debts and borrowing incurred during the pandemic. The business world is still there though, and it is a case of being focused on a few of those opportunities and making them count. It is just too easy to blame any setbacks onto the pandemic, recession, or climate change and many will use it as an excuse for poor performance. Don’t become someone like that! Keep a tight grip on all-important cash flow. Tough times do end… and normally the tough teams end up winning. 

Speed and adaptability remain key. Given the devastation of 2020, energy companies have to find a path to rebuild, strengthen and grow. 2020 finished with so much attention on demand destruction, building back greener and recession. Companies that emerged from past recessions in sound shape typically have several traits in common – fast to reduce debt, fast to divest unwanted assets, fast to make acquisitions, fast to cut overheads and fast on organic growth. Doing this will position you to outperform competitors for many years to come. 

Leverage the energy conference circuit. So important in setting mindsets and industry direction, this was thrown into disarray in 2020 but now in 2021 seems back on track. So much business gets sorted on the fringes of conferences and this looks set to return. The landscape is rapidly evolving for live and event communications, audiences, now more than ever, are willing to engage in immersive event experiences and virtual event solutions. Make sure you get with the technology.

In addition to your local events, there are key global events and summits that shape the sector already set in the calendar: Davos Energy Week 19-21 January, CeraWeek 1-5 March, World Future Energy Summit 5-7 April, Russian International Energy Forum 21-23 April, OTC 3-6 May, World Energy Congress 19-21 May, Middle East Energy 14-16 June, Offshore Europe 7-10 September, and World Renewable Energy Congress 13-18 September. The outcomes will impact your activities. Things then come to a head at COP 26 due to be held in Glasgow, Scotland on November 1-12. The energy world will be watching to see if this is a tipping point moment for politicians and energy businesses to agree climate action.

Show commitment to your people. Staff are full of anxiety and worn down; they want to be reassured, to see that you have values that you believe in and put into practice. Make sure your emergency response plans are completely up to date and you can easily contact all your staff. Hurricanes, earthquakes, wildfires, volcanic eruptions, floods, droughts, typhoons, and tsunamis don’t know there is a pandemic. In times like these, gratitude and saying ‘thank you’ can reduce negativity and stress, and dramatically improve relationships. The importance of listening and teamwork has never been greater. Keep checking in on your staff to ensure they are OK. Remote working can be lonely and some struggle to stay motivated; others won’t leave their home desk, to prove they are at work; neither is productive.

At some point there will be a post pandemic bounce back in which workers return to their offices. With staff having not worked in offices for a long time, there is an opportunity to bring in the many changes, perhaps often postponed, to coincide with when you return – the paperless office, eliminating disposable plastic waste, less travel more video conferencing, energy efficient lighting, get some decent office plants, cross-cut shredder to properly dispose of confidential data, flexitime, more conscious choice of healthy food ordered in for internal meetings, change the office fridge for one that does not smell like a wet cat, and get a carbon neutral program that involves employees and giving back to the community. Planting trees – a nature-based solution – is something everyone can be involved in and feel good about.

And how about removal of those unnecessary management suites and offices which create boundaries, hierarchies and destroy a true open plan office and team working. Remember, 2020 proved that you can work out of your bedroom, attic or on the kitchen table.

And, most importantly, bring focus to health. Health and safety of staff, suppliers and customers must be at the top of the list. This demonstrates your commitment. Whether it is ensuring your staff get vaccinations, or have the right PPE, and customers are comfortable coming to your facilities – without getting this right your business is bound to struggle. There is also the challenge of mental health, the longer the pandemic grinds on, and months tick by, so the issues are growing. Over 80% of employees are now turning to artificial intelligence chatbots, rather than their boss, to deal with workplace mental health issues. Manage your own stress too! Few people enjoy large Zoom calls; make sure you have one-on-one video chats with each of your colleagues.

Then there are all the other pieces that cannot be forgotten, such as security. And security assurance, right across the energy value chain. Cybersecurity is only going to get harder; you need to build cyber-resiliency. With so much else going on this is not one to take one’s eye off. There have been big reminders throughout 2020 with cyber-hacking of the US Government, Oxford University vaccine studies, Mexico’s economy ministry, Twitter, Marriott, the Greek banking system and just over a year ago, Pemex. Phone scams around green energy grants are also popular now. With so many working from home in 2020, or having to distance from each other, big gaps have grown in safety and operational training. As things get back towards a new normal making up this backlog and ensuring systems are secure should be a priority.

So, what really matters?  The energy industry has changed forever, make no mistake. Getting through 2021 intact, healthy, proving that you can deliver the performance contract and being positioned to build is what really matters; it becomes a real test of your leadership and commitment, and you still have to take risks. Getting your 2021 performance contract right, making sure those around you understand the risks to delivery, and continually checking progress against it can get you through the uncertainty so you can go on to build back bigger and better. Keep it specific, easy to measure, clearly attainable and realistic. Stay flexible on timelines. Have regular reviews so that you can make mid-course corrections. You need to leverage your experience, insight, and innovation – if you feel you don’t have them, go and surround yourself with people who do. If you surround yourself with great people, its odds-on you will be a great leader. If you fail, then you will never get to implement a long-term plan, there never will be any strategic development, however good you may be.

Good luck!


About the author:

Chris Sladen runs an advisory service offering insights to inform, shape a decision, policy & regulation, and guide the next steps for energy ventures, acquisitions & divestments, energy transition and climate strategies. Chris has a unique global experience having worked in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, Europe and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris has published extensively over five decades. Chris’ articles for Energy Matters reflect his experience and enthusiasm and are not paid for in any way.

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ANZMEX ORG A.C. is a politically neutral business council with no political affiliation. The views expressed in this column are not necessarily representative of the official views of ANZMEX or any of its officers or staff.