Four potential scenarios on the minds of the Canadian energy sector
Updated: Jun 14, 2021
Scenario planning is about brainstorming potential future realities. It pushes companies to forecast scenarios that aren’t only plausible, but unthinkable to prepare for both the best and the worst. And the COVID-19 pandemic has made us realize that nothing is beyond the realm of possibility. Through scenario planning, companies can create a long-term strategy that is validated and stress tested for uncertain and complex environments to prepare for risks like COVID-19 that are bound to happen again.
I recently shared how scenario planning can help broaden the mindsets of leaders to consider a wide set of alternatives for the future. After recently speaking with industry leaders in the Canadian energy sector, there were four broad scenarios they identified as top of mind. Understanding what these look like, key features, where they intersect and how to prepare will be critical to plan for recovery and capitalize on future market trends and drivers. These four scenarios include:
Speed breaks (slow recovery): While there is less market volatility, this scenario involves a very gradual return to pre-COVID-19 crude oil and natural gas demand levels due to surplus of supply from Saudi Arabia and Russia along with ongoing insolvencies and write downs in the oil and gas market. One CEO of a upstream crude oil company predicts that the slow recovery will eventually be boosted as the population grows, increasing oil demand to maintain a standard of living. Industry leaders are optimistic in this scenario, but they recognize that a slow recovery comes with its challenges. They predict the sector will face ongoing scrutiny and caution, consolidation among fewer large players and ongoing cashflow and capital constraints. Companies will need to balance supply and demand driven by external factors outside of their control.
Ground hog day (ongoing instability and nationalization): Categorized by ongoing social, political and economic volatility. Industry leaders predict that production at oil and gas sites will get shut-in if demand reduces during down cycles — and ramped up again as demand recovers — while paranoia-heightened support for Canadian products will push the nationalization agenda. While the energy transition is expected to be slower overall in this scenario, companies will need to consider the impact of multiple waves of volatility and develop the appropriate shock absorbers to weather the storm.
Drill, baby drill (rapid recovery): In this scenario, supply and demand balance returns to pre-COVID-19 levels along with a lack of capital investment, driving a relatively quick price recovery. Leaders predict this scenario will be categorized by global demand recovering after a period of high volatility and uncertainty as air and ground transportation levels rebound and M&A activity starts to pick back up. The energy transition in this scenario is expected to be much slower than originally anticipated. Companies will need to ramp up capital investment, revisit hiring plans and consider opportunities for growth.
See you in Paris (accelerated energy transition): Categorized by the pandemic accelerating the energy transition, this scenario sees a potential wholesale switch to natural gas and LNG as cleaner fuels and a greater emphasis on renewables. The CEO of one mid-sized oilfield service company said that, “the transition might speed up” and “a focus on LNG and gas is going to be important.” Companies will need to consider the flexibility and adaptability of energy needs and work with governments to look for opportunities to drive diversity and divergence into new portfolios such as electrification. The head of strategy at a large Canadian utility as an example said, “the future is going to include a lot more electrification of vehicles”.
Of these four scenarios, a slow recovery is most likely to play out with the “lower for longer” sentiment prevailing in discussions throughout the industry. While many executives initially felt COVID-19 would pass by the summer months of 2020, most have come to the realization that we’re in this for the long hall. The CEO of an industrial services company agreed and said that "we don’t expect to see a rebound anytime soon based on current occupancy rates, run rates, office building utilization and travel demands".
With long-term uncertainty caused by COVID-19 and other issues such as the energy transition, electrification, supply demand challenges and broader social license sentiment, organizations will need to exercise strategic flexibility to identify major changes in the external environment and quickly commit resources to a new course of action. Doing the prep work now will allow the organizations to manage uncertainty, build stronger and more resilient strategies and be prepared to initiate a timely response to deliver lasting growth.
Authored by Lance Mortlock (Senior EY Strategy Partner & Haskayne School of Business Executive Research Fellow).
Thank you to all of those who shared their thoughts and experiences. For more information on how to evolve your scenario planning strategies, please connect with me directly. And look out for my new book “Disaster Proof” in the New Year, which explores scenario planning in a post-pandemic future.