Scenario storytelling in the oil and gas sector

This article was first published in the October 2015 international edition of Accounting and Business magazine.

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When I qualified as an accountant in the early 1980s there were two secure places to start one’s career: banking and the oil industry. So I went to work in group internal audit at BP. The two years and many foreign trips during very profitable times for the company left me with fond memories.

While the oil and gas sector is very different from many other industries, it highlights the importance of certain techniques in strategic and financial decision-making for senior accountants in any sector: economic analysis, game theory and storytelling.

Once, when I went for a job at a business school, I was asked as a trick question what the oil price would be in 10 years’ time. It was a silly question, as there is generally – apart from an underlying long-term upward trend – just as much a likelihood of it going up or down. I answered that you need to model the systems that impact on the price. The process that you would use would be ‘scenario storytelling’ – that is:

• Understand the key variables, such as the world demand for energy, world GDP growth, urbanisation, energy conservation, the need for travel, social and demographic trends. You also need to understand the availability, convenience and relative price of substitutes, and the rate of depletion of existing reserves of oil and gas. Finally, you need to understand the joker in the pack: shale gas obtained through fracking.
• Get inside the heads of the key players such as OPEC, the cartel of oil producing countries. These players can be split between the ‘hawks’ and the ‘doves’. The former (such as Iran) want higher prices through restricting production; the latter (such as Saudi Arabia) prefer to keep production up and prices low.
• Look at ‘transitional events’ that could bring volatility – such as wars, major terrorist attacks, changes in leadership and governments, and disasters such as BP’s Deepwater Horizon oil spill in the Gulf of Florida in 2010 or the nuclear accident in Fukushima, Japan, in 2011.
• Role-play how the different players might behave to develop a series of scenarios.

Role-playing as game theory

Scenario storytelling can be a lot of fun. I once used this technique to model the deregulated gas market in the UK. We successfully predicted that many peripheral companies would shy away, British Gas would be slow to exploit the market, the government would put up petroleum revenue tax and there would be good profits to be had. Here, role-playing was essentially game theory based on identifying perceived pay-offs inherent in the agendas of multiple stakeholders.

The intention with scenarios is not to forecast very specific results, as that would intrude in the creative part of the process. It is no accident that the practice of envisaging scenarios was invented by the oil industry (by Shell). Some of the biggest uncertainties in this sector can be addressed by relatively soft management techniques – not by purely quantitative modelling. However, scenarios can be challenging, as most managers – even those who are strategic planners – find storytelling difficult. As the head of strategy for one of the world’s largest banks once suggested, the difficulty arises ‘because we are so used to thinking in bullet points’.

One of the latest big issues in the oil and gas sector to hit the news and that would lend itself well to scenario storytelling is fracking – extracting oil from shale. The controversial techniques it uses, involving water, sand and chemicals being put through oil-bearing rocks under compression, has raised concerns – real or imaginary – over health, pollution and even seismic stability. Fracking is now happening on a significant scale and may cause – if it hasn’t already – the ‘tail to wag the dog’ in the oil price market. It is now plausible that the US could become oil-independent at some point. I expect that the large oil companies are scenario storytelling this hot potato, as they assess the likelihood of high, medium, low or ‘rollercoaster’ oil prices.

Tony Grundy is an independent consultant and trainer and lectures at Henley Business School