Oil prices have soared, tumbled and rebounded in recent months, leaving exasperated budget planners guessing what will come next. Professors at Thunderbird School of Global Management have some answers. They can’t predict the price of oil next quarter, but they do see other trends that will shape the future of the world’s most global industry.
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Ed Barrett, Andrew Inkpen, Kannan Ramaswamy and Michael Moffett are part of a team of Thunderbird professors who work closely with energy companies such as ExxonMobil in executive education programs that Thunderbird Corporate Learning delivers on three continents. The Ph.D. scholars said one reality of global oil unlikely to change anytime soon is the price volatility that made headlines in 2008 and the first part of 2009.
“People have very short memories,” Moffett said. “The oil and gas industry has been characterized by enormous price volatility throughout its history.”
The falling dollar, rising energy demands from China and India, catastrophic hurricanes along the Gulf Coast and disruption of Nigerian oil production led to a peak price of $147 per barrel in July 2008.
But that price didn’t last long. Brent Crude tumbled below $34 per barrel by December as consumer demand dropped in the global recession.
Moffett said the energy industry has grown up with similar twists and turns of fate that can be traced as far back as the 1860s. Natural disasters, economic downturns and political upheavals come with the territory as exploration teams push into remote locations around the world that other industries simply ignore.
“They’re doing business and conducting activities and operations in some of the most difficult, dangerous places on earth,” Moffett said. “Whether it’s in Central Africa — in war-torn areas with huge disease threats, violence threats and lack of infrastructure — all the way to deep offshore Brazil.”
Barrett said the influence of oil and gas extends into every country on earth.
“A lot of times when people talk about going global, when you drill down, they’re talking about doing business in cosmopolitan cities like Singapore, London, Tokyo or Shanghai,” he said. “You’re likely to find new oil in places like Turkmenistan, which, as best as I can tell, is on nobody’s vacation list.”
Barrett has studied global oil and gas for more than 20 years and has led the effort to establish Thunderbird Corporate Learning as a world leader in executive education with special expertise in the industry. Besides ExxonMobil, Thunderbird partners include multinational oil and gas companies such as Chevron, Shell, British Petroleum and TNK-BP, along with oilfield services providers such as Baker Hughes, Integra and Smith International.
State-owned enterprises such as the Oil and Natural Gas Corporation of India and the National Oil Corporation of Libya also tap into Thunderbird for executive education.
“We are focused on managing in a global setting,” Barrett said. “To understand what is different about global, you’ve got to be involved with people who are global, who have to wrestle with the issues on a regular basis.”
Living with uncertainty
Ramaswamy, a native of India who now has U.S. citizenship, has spent much of his career studying emerging markets and the business challenges they face. He said this research led naturally to a specialization in the energy sector.
“It is probably an industry that is tailor made for our mission at Thunderbird to educate global leaders who create sustainable prosperity worldwide,” he said. “The resources in this industry are concentrated in the developing world, and the customers are concentrated in the developed world. It’s a fascinating industry to look at.”
Inkpen, who came to Thunderbird in 1995, said the discovery of energy resources in remote locations has required the development of a new set of management skills to deal with the political and operating uncertainties.
“God didn’t make much oil in France,” he said. “So you’ve got to go find it where it is.”
Oil and gas companies have plenty of practice executing massive projects in unstable political environments. Inkpen gives the example of the Nobel brothers from Sweden, who helped turn Baku on the Caspian Sea into the oil capital of the world more than 100 years ago.
Azerbaijan and other countries in the region later became ensnared in the Russian Revolution, and the emerging Soviet Union confiscated private oil wells and factories after the war started in 1917.
Other countries have made similar seizures. Iran kicked out British Petroleum in the 1970s, for example, and Venezuela took control of ExxonMobil assets in that country as recently as 2007.
“Doing business in difficult environments goes back to the beginnings of the commercial oil and gas industry,” Inkpen said.
Although some things remain uncertain, one oil and gas trend that seems assured is continued development of resources in Africa, the former Soviet Union and the Middle East. Inkpen said these three regions will expand as the hotspots for the industry on the production side of the global value chain.
This will require oil and gas managers to pay close attention to cross-cultural communication issues — especially in places where corporate strategy involves doing local hires to “indigenize” the company.
“You have to make that work,” said Barrett, who taught for more than a decade at Southern Methodist University’s Maguire Energy Institute in Dallas before moving to Thunderbird in 1990. “You have to make a combination of highly technical people from Europe, America, Singapore or Australia learn to work with not-so-technical people from Turkmenistan who just came out of a socialist economy.”
He said an increased emphasis on doing business in unstable regions also will create challenges in corporate governance — especially for companies from developed nations that must follow high ethical and legal standards. Contracts that are binding in the United States, for example, are not always binding in different parts of the world.
“You’ve got to succeed while being very clean in an industry that deals in parts of the world that are not always seen as being — in a political sense — clean,” Barrett said. “It’s either frustrating or exciting, depending on the day.”
Increased emphasis on renewable energy also will shape the future of the industry. But Barrett said major breakthroughs are still years away. “You can’t shut the country down while we try to figure out how to deal with the issue,” he said.
Another major trend is the emergence of national oil companies as more than just guardians of their resources. Petrobras in Brazil, for example, has emerged as a world leader in deepwater drilling.
“Some of these national companies have become truly global companies doing a lot of business outside their own countries,” Inkpen said.
Lifting the resource curse
Ramaswamy said multinational oil and gas companies that want to thrive in the future must learn to understand these state-owned companies, which often care about social performance as much as the bottom line.
“The challenge is moving from a culture that is shareholder value driven to stakeholder value driven,” Ramaswamy said. “National oil companies function in a different world.”
He said he has gravitated in his career toward working with these national companies. “That is where we make the greatest impact, by giving them exposure to the right kind of tools, techniques and strategies,” Ramaswamy said. “It’s a great role for Thunderbird to play.”
Unfortunately, Ramaswamy said, many underdeveloped countries with rich endowments of oil and gas have failed to tap into these reserves fruitfully for their populations. Industry observers call this the “resource curse.”
“Many national oil company advocates believe that the international oil companies are here to rape, pillage and plunder their resources,” Ramaswamy said. “Well, that’s a one-sided perspective that originates in nationalism. The other side of the story is the fact that many of the national oil companies are not adept at managing the energy resources they control.”
He said state-owned oil and gas companies seeking a role model might look at the Abu Dhabi National Oil Company in the United Arab Emirates.
“They have done a good job of managing resources, investing in the right kinds of things, building the right kinds of partnerships with foreign oil companies and helping to uplift the local population,” Ramaswamy said.