Futures Scenarios: snake oil or good oil?

By Robert Hickson 06/08/2013

The Economist, drawing upon research by Bain & Company and others,  suggests that the “Big Oil”  companies – Shell, BP, Exxon Mobil, Chevron, Texaco and Total – are not so  big and powerful as they seem.

In the 1950s the big oil companies controlled 85% of oil reserves. Now, 90% are controlled, in whole or part, by national oil companies – Saudi Arabia, Russia, Iran, Kuwait, Brazil– which are increasingly less reliant on the oil companies for technology and production management expertise. Some of these companies are now competing with Big Oil to provide services to other oil-producing countries.

Outsourcing over the last few decades has also meant that smaller companies have developed the expertise to extract oil (and gas) and can work with national oil companies, shutting out the big guys.

So, The Economist contends, the big oil companies are forced to go to the most challenging places or reserves to make their living. They are, it seems, beyond Peak Profit. But not so very far past if you peruse the top of the Fortune 500 list.

If demand for oil slows in emerging economies (because of adoption of less gas-guzzling means of transportation, and increasing use of renewable forms of energy), then the big oil companies could face, for them, serious problems.

My first thought on reading The Economist article was “Have Royal Dutch Shell’s famous scenarios failed?” These now famous scenarios helped Shell think beyond short time frames and prepare for uncertainty. The first Shell scenario in the early 1970’s enabled Shell to consider the possibility of an oil crisis, and allowed the company to be well positioned to respond. They have undertaken energy scenarios on a regular basis since then, though with less prescient and tangible outcomes. The most recent – New Lens – came out in March this year. These re-iterate the “Stress Nexus” of water, food and fuel supplies in a rapidly changing world.

But Shell’s scenarios aren’t about predicting, they’re about preparation.  Earlier scenarios didn’t predict the global financial crisis, the shale gas boom in the US, nor a retreat from nuclear power by Germany.

As a recent analysis in the Harvard Business Review describes (Registration required) their purpose has always been to “support strategic conversations” and make management comfortable with planning for uncertainty.

… a sustained scenario practice can make leaders comfortable with the ambiguity of an open future.

New Zealand, and many other, organisations have indulged in futures scenarios on a one-off basis. Sometimes this has probably helped strategic planning for a few years, but then the effect is lost (or made worse, if old scenarios are used without refreshing them). Its easy to do bad scenarios. The HBR article notes that their regular use has perhaps enabled Shell to more quickly respond to changes. That’s hard to tell – Exxon Mobil has lower revenue but greater profits and I don’t know if they put as much effort into scenarios as Royal Dutch Shell.

Nonetheless, many companies and countries have followed Shell’s lead and used scenarios to aid strategic planning. Rohrbeck and Schwarz find that strategic foresight can be valuable due to ” … an enhanced capacity to perceive change, an enhanced capacity to interpret and respond to change, influencing other actors, and through an enhanced capacity for organizational learning.”

So I wouldn’t write off Shell (or any of the other big oil companies) just yet. They have all been quietly diversifying into other areas.

As Wilkinson & Kupers conclude in their HBR article, scenarios

 can aid in navigating complexity and conflict—managing disagreement while avoiding the extremes of groupthink and fragmentation. At Shell and elsewhere, scenarios have helped leaders prepare for futures that might happen, rather than the future they would like to create.

New Zealand can do with more of that.