Oil and Gas | Geopolitical developments add to category complexity
Brands engineer some profits, despite low oil prices
Even in normal times, oil and gas is the most geopolitically sensitive of all the categories examined in the BrandZ™ Top 100 Most Valuable Global Brands. The brands manage long-term investment risk, technical expertise, international diplomacy, and the tension between commercial and environmental imperatives. In this year’s report, the calculus is even more complex.
The year began soon after over 140 countries adopted the Paris Agreement creating a blueprint for addressing climate change, and the Obama administration had rejected both the Keystone and the Dakota Access pipelines to move oil from Canada to ports on the Gulf of Mexico. The year ended with the unexpected election of Donald Trump as US president.
The new president threatened US withdrawal from the Paris Agreement, signed executive orders to permit construction of the two pipelines and ease coal mining rules, considered a border adjustment tax that would help exports, appointed a climate-change skeptic to head the Environmental Protection Agency, and named ExxonMobil CEO Rex Tillerson secretary of state.
The Tillerson appointment coincided with early speculation that the US would ease sanctions against Russia, potentially making it easier for Western oil and gas companies to partner with their Russian counterparts. Meanwhile, Saudi Arabia, the world’s largest oil producer, planned an IPO for 5 percent of Aramco, the national oil company as well as the world’s largest commercial enterprise.
The oil and gas brands moderated their public reaction to the year’s geopolitical developments and focused instead on streamlining their businesses to meet immediate needs and develop long-term strategies, which included investment in natural gas. The historically low crude prices forced companies, particularly ExxonMobil, to remove uneconomical oil reserves from their balance sheets.
By adding efficiencies, cutting costs, and digitizing operations, many of the major oil and gas brands operated profitably at a lower oil price threshold. Stock prices rose, and even the Russian brands, limited by sanctions, found ways to develop their businesses. Except for the two Chinese brands, every brand in the BrandZ™ Oil and Gas Top 10 rose in value, and the value of the Top 10 increased 5 percent compared with a 20 percent decline a year ago.
Shifting to gas
With the growing volume of oil produced by hydraulic fracturing in the US, the congress removed export restrictions imposed in the 1970s, when America was oil dependent and faced shortages. These changed circumstances, along with the lower price of crude oil, contributed to decisions by ExxonMobil and Chevron to invest significantly in refineries and petrochemical facilities located along the Gulf coast.
In a letter to President Trump, ExxonMobil urged the US to stay in the Paris Accord to help ensure open market competition. Fracking makes the US well positioned as a supplier of natural gas, which emits less carbon than oil. Having built its reputation on complicated and risky deepwater drilling with long-term returns, ExxonMobil announced plans to invest significantly in US fracking operations that can potentially produce profits faster and at a lower price threshold. Shell, Chevron, and Total also adjusted their businesses to move more nimbly and accelerate profitability.
And companies shifted attention to liquid natural gas (LNG), which, because it can be shipped long distances, changes gas from a local to a global market. Shell’s assimilation of BG Group, acquired early in 2016, strengthened its position in LNG. Reflecting the company’s shift to LNG and deepwater exploration, the company also raised its stake in Brazilian offshore operations and sold its interest in Canadian tar sands,
Seven years after the Deepwater Horizon disaster in the Gulf of Mexico, BP collaborated with GE to develop a diagnostic system of sensors that monitor offshore platform performance and safety, making all the data instantly available on a dashboard, and signaling any need for replacement or repair. This technology, a fitness tracker for offshore rigs, enables preventative maintenance to improve safety, reduce downtime, and avoid disasters.
Reframing the conversation
Oil and gas brands remained cautious, despite the initial Trump administration signals about relaxing environmental controls and Russian sanctions. Although such changes might drive business and lift stock prices, at least for the short term, they also could animate NGOs and consumers concerned with climate change. Brands balanced pressure to produce strong quarterly results for stockholders with the need for longer-term strategies to sustain brand equity and shift away from fossil fuels.
Because of these concerns, and the rising influence of the public, in part because of social media, brands reexamined communications strategies to reach a wider audience beyond academics, analysts, journalists, legislators, and other influencers and decision-makers. Brands attempted to reach millennials, who are inclined to select brands aligned with their values.
The brands reframed the climate-change conversation and centered the disagreement on timing, asserting that the move to new energy sources is inevitable but will take decades. An ExxonMobil ad explained that the company’s investment in Gulf coast natural gas facilities will help both produce jobs and reduce emissions.
Public opinion could accelerate the introduction of new metrics, other than annual production and reserves, for valuing oil and gas companies. Such metrics might include a company’s investments in low- or zero-carbon fuels or other activities that advance the transition to new energy sources.
Even Saudi Arabia acknowledged the need to shift away from oil. The planned Aramco IPO, which could create the world’s largest publicly traded oil and gas company, will provide access to capital markets and funding as the country attempts to transition its economy and society away from oil dependence.
Despite sanctions imposed by the West on Russia after its invasion of Ukraine in 2014, the Russian state-owned brands Rosneft and Gazprom increased in value, and another Russian brand, Lukoil, joined the BrandZ™ Oil and Gas Top 10. Rosneft sold just under 20 percent of the company to Glencore, a Swiss commodities trader, and expanded its presence in the Middle East, signing agreements with Iraq, Libya, and other countries.
In addition, Russia and Turkey agreed to cooperate on construction of pipelines under the Black Sea. Operated by Gazprom, the pipelines would supply gas to Turkey and parts of Europe while circumventing existing routes through Ukraine. Lukoil profits improved and its stock price increased with the rise in oil prices and a weak ruble that favored exports.
Primarily because of China’s slower economic growth, and the low global price for crude oil, the valuations of Sinopec and PetroChina declined. Because of China’s slowing economy, the state oil companies pursued overseas growth opportunities, including Sinopec’s purchase of Chevron’s South African refinery and retail businesses.
Brand-Building Action Points
1. Stay the course
For the major brands that have shifted their long-term strategies to lower carbon impact, it would be a mistake to read the potential rollback of regulations in the US as a free pass to pollute, although it may result in some relief from the level of paperwork required for compliance. Being responsible will deliver greater shareholder value.
2. Speak up
It became obvious that a wide gap separates elite opinion shapers and decision makers from less well-connected people who nevertheless have strong opinions and can effect change. Oil and gas brands historically have directed their messages mostly to the legislators, lobbyists, journalists, and others who influence regulations and contracts and help shape corporate reputation. Today, it is important to reach a wider audience.
3. Shape the story
Double down on communications about the progress in new technologies and innovations that are good for the environment. The relaxation of regulations by the Trump administration may animate the segment of environmental activists that wants to portray the industry as inherently bad for the health of people and the planet. Brands need to advance the counter narrative, that people cannot live without the products of this industry.