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Beyond forecasting: Find your future in an uncertain energy market

Imagine if you could have seen North America’s shale gas phenomenon coming years ahead of the competition. What might you have done differently? Some companies might have avoided spending billions of dollars on liquefied natural gas (LNG) import facilities in the US. Some might have acquired acreage before hyperinflation escalated land values tenfold or more in some areas. Others would have reallocated capital to better position their companies for the onslaught of natural gas and natural gas liquids (NGLs). If you had seen it coming, would you have anticipated the global competitive advantage of US domestic industries, from manufacturing to fertilizer to plastics to coal, and the resulting changes to international flows?

Hindsight is 20/20, but there were indicators that pointed to the plausibility of a shale gas supply shock. What was missing from most leadership teams’ strategic planning processes was a systematic approach for identifying plausible scenarios and defining the leading indicators to monitor the market’s evolution toward them. Such a process would have helped executives not only to gauge the magnitude of the supply shock, but also make the most of its far-reaching effects.

Of course, predicting markets is difficult and entails risks. But the challenge is particularly acute in today’s energy markets, where vast new supplies of oil and gas are suddenly entering the market at the lower ends of the cost curves, sending shocks through the energy industry as well as other sectors that are energy intensive or rely on petrochemicals for feedstock. Hydrocarbons from unconventional sources—tight oil and shale gas, in particular—are changing the economic dynamics and competitive positioning with remarkable speed, even though no consensus exists on how much can be extracted economically, and thus how sustainable these supplies are. Still, the stakes are enormous, as the influx of these comparatively inexpensive fuel sources threatens to upend entire industries, shake up competitive positions and destroy the economics of previously profitable ventures.

The same indicators that might have helped executives see the shale gale coming years ago continue to send signals today. What can you learn from them about how to best position yourself for the years ahead? The key is to develop a rigorous process for identifying plausible future states for energy markets, based on supply potentials for gas, oil and renewables, and acting on leading indicators of movement toward one or more scenarios. Synergy has built a series of plausible scenarios based on analytical models of potential outcomes. Some include very surprising results, such as a global oil price of less than $60 per barrel, where oil-indexed pricing for natural gas would actually favour buyers.

In our experience, many companies need this approach for understanding the evolution of the energy ecosystem at a time of unprecedented uncertainty. Executive teams can extract insights by comparing multiple, plausible futures corner scenarios in our model and defining signposts to support better, real-time decision making, with the benefit of clearer, longer-range visibility. These signposts are sets of potentially disruptive changes in the marketplace that shape strategic decisions. In the energy industry, signposts can give foresight on supply and demand shocks. For example, the volume of North American tight oil entering the market would be a signpost that helps companies make strategic decisions about investment and substitution. Leading indicators such as capital expenditures in exploration, production and midstream infrastructure all help shed light on whether that signpost is imminent. It’s a forward-looking process that anticipates disruptive change and informs executives for better decision making. At its best, it can cast the headlights out one to three years further than competitors can see, offering an opportunity to create and sustain significant competitive advantage.