Facing the energy future - PwC · 2016-06-20 · Facing the energy future All three sectors are facing a wide range of threats. CEOs in energy, mining and utilities are all more likely

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Facing the energy future

18th Annual Global CEO SurveyKey findings in the energy, utilities and mining sectors

170Energy, utilities and mining CEOs in 54 countries were interviewed for PwC’s 18th Annual Global CEO Survey: A marketplace without boundaries? Responding to disruption (www.pwc.com/ceosurvey)

84%Energy, utilities and mining CEOs see over-regulation as a threat to their growth prospects over the next 12 months

Utilities CEOs anticipate more disruption to their business than their colleagues in energy and mining, but all three sectors are deeply concerned about the impact of regulation and are looking to technology, partnering, and diversity for ways to cope.

Contents About our industry-wide survey 3

Cautious optimism 4

Disruption on the horizon as energy transformation takes hold 8

New competitors from across the value chain and beyond 9

Active restructuring and keeping a handle on costs 10

Taxing times 11

Creating value with new technologies 12

Dynamic alliances with new partners 14

Using diversity to enhance 16

your priorities, our professionalism…

318th Annual Global CEO Survey

Rapid, technology-led change presents many risks – but also many opportunities. It’s reshaping the relationship between customers and companies and breaking down the walls between industry sectors. It’s making forward-thinking CEOs question the very businesses they’re in as they reassess how their organisation’s differentiating capabilities can better solve customer problems.

In ‘A marketplace without boundaries? Responding to disruption’, we explore three implications of this changing competitive landscape. CEOs need to understand how to create new value in new ways through digital transformation, develop diverse and dynamic partnerships, and find different ways of thinking and working. And to succeed, business leaders will have to show vision, flexible thinking and carefully listen to and learn from stakeholders to make clear, informed decisions.

This report is a summary of the key findings in the energy, utilities and mining industry, based on interviews with 170 energy, utilities and mining CEOs in 54 countries.

We also were fortunate to have an in-depth interviews with the following CEOs who are quoted in this report:

Dr. Javier Genaro Gutiérrez Pemberthy Abdulrazaq Isa Ecopetrol CEO, Waltersmith Group

Andrew Mackenzie H.E. Sim Sitha Chief Executive Officer, BHP Billiton Director General, Phnom Penh Water Supply Authority (PPWSA)

About our industry-wide surveyCEOs are displaying a sense of optimism about their respective companies’ growth potential despite having real concerns about an increasingly disrupted business environment. In PwC’s 18th Annual Global CEO Survey, we look at how business leaders are finding new ways to compete in an era of unprecedented technological change. We surveyed 1,322 CEOs in 77 countries and a range of industries in the last quarter of 2014, and conducted face-to-face interviews with 33 CEOs.

Cautious optimism

Energy, utilities & mining (EU&M) CEOs tend to be gloomier about the immediate economic outlook compared to colleagues in other industries. That’s translating into fairly conservative expectations about short-term revenue growth for all three sectors. Fewer EU&M CEOs are very confident of revenue growth over the next 12 months (see Figure 1). It’s worth noting, that the majority of executives are at least somewhat confident of growth.

Looking ahead three years, though, energy and mining CEOs are more optimistic than their counterparts in utilities companies (see Figure 2). More than half of mining CEOs are very confident of growth over the next three years, while 43% of energy CEOs are very confident. That compares to just 33% of utilities CEOs. Why the discrepancy?

For energy and mining CEOs, the focus this year remains firmly on operational efficiency, with both industries facing tough market conditions. CEOs in utilities, though, are looking ahead to radical disruption of their businesses. They recognise that an energy transformation is underway.

In all three cases, CEOs are learning how to create value in new ways through digital transformation, develop diverse and dynamic partnerships, and find different ways of thinking and working.

These areas will help energy, utilities and mining companies shape the future, not just react to it.

“There is quite a bit of volatility in the market. Because energy plays a significant role in the global economy and at this point in time, there is a significant shift in the oil price, the capacity of different economies in the world to absorb this price movement may cause some major economic upheavals for some countries.”

Dr. Javier Genaro Gutiérrez Pemberthy Ecopetrol



Base: All respondents (Energy, 72; Utilities, 73; Mining, 25)

Source: PwC, 18th Annual Global CEO Survey

Figure 2 Diverging mid term growth expectations

Q: How confident are you about your company’s prospects for revenue growth over the next 12 months? Over the next 3 years? Respondents stating “very confident”

Base: All respondents (Energy, 72; Utilities, 73; Mining, 25) Source: PwC, 18th Annual Global CEO Survey

Figure 1 Conservative short term growth expectations

Q: How confident are you about your company’s prospects for revenue growth over the next 12 months?

12 months 3 years

Energy

Utilities

Mining

43%

33%

52%

29%

32%

24%

0 10 20 30 40 50 60

Very confident Somewhat confident

Energy

Utilities

Mining

47%

37%

56%

29%

32%

24%

0 10 20 30 40 50 60


All three sectors are facing a wide range of threats. CEOs in energy, mining and utilities are all more likely to think that threats to growth have increased in their sector over the past three years. They are particularly concerned about higher taxes, geopolitical turmoil, over-regulation and how indebted governments will handle their deficits (see Figure 3).

For utilities companies, like their colleagues across industries, availability of key skills and cyber threats also stand out. All three sectors have an aging workforce, and are facing skills gaps, particularly in the areas of management, maintenance, and special trades. Mining CEOs see social instability as a bigger concern, while oil and gas executives worry more about protectionism.



Figure 3 The energy, utilities and mining threat matrix

Q: How concerned are you about the following potential business, economic, policy and social threats to your organisation’s growth prospects? % of respondents who stated ‘extremely’ or ‘somewhat’ concerned

Energy Utilities Mining

Over-regulation 81 89 80

Availability of key skills 64 70 56

Government response to fiscal deficit and debt burden 74 66 80

Geopolitical uncertainty 76 74 84

Increasing tax burden 83 73 88

Cyber threats including lack of data security 46 66 44

Social instability 57 40 76

Shift in consumer spending and behaviours 50 48 24

High or volatile energy costs 67 63 72

Protectionist tendencies of national governments 68 58 60

Speed of technological change 53 52 8

New market entrants 46 48 32

Inadequate basic infrastructure 50 48 64

Lack of trust in business 53 71 60

Bribery and corruption 50 37 68

High unemployment/underemployment 50 36 52

Supply chain disruption 44 40 56

Access to affordable capital 46 44 48

Pandemics 31 26 48

80-89%

70-79%

50-69%

30-49%

below 30%


It’s no secret that the mining and oil and gas sectors are highly cyclical. Both sectors tend to be harder hit by any economic downturn. But when times get better, they benefit more too. So more optimism around the three-year outlook may be one part of the answer.

But we think there are deeper issues underlying the difference in optimism around the mid-term. Many of them can be summarised in one word: disruption. Utilities CEOs see disruption on the horizon in far more areas than their peers in energy or mining. Their greater levels of concern

about skills and technological change reflects uncertainty about the capabilities their companies will need to cope.

The wide array of transformative forces confronting the industry – what we term “energy transformation” – is causing significant upheaval. If companies don’t stay ahead of change, they may find profits eroding. But many CEOs recognize that these shifts are already presenting opportunities – 53% of power and utilities CEOs say opportunities for growth have increased over the past three years.


Disruption on the horizon as energy transformation takes hold

Compared to energy and mining executives, utilities CEOs are far more likely to believe that global megatrends will disrupt the entire business landscape, with profound implications for their industry. Nearly two-thirds (62%) anticipate disruption from shifts in the way customers behave. That echoes the findings we present in “The road ahead: gaining momentum from energy transformation”, where we show that utility companies need to align their ambitions with those of their customers in a new energy future, ensuring their services are relevant to and cost-effective for as many customer situations as possible.

More than half also expect both changes in their core technologies of production or service provision and in distribution channels to have a major impact. These changes include an increased emphasis on renewable generation and the necessary transmission technologies to support it, as well as increased uptake of “smart grids” and a shift towards more distributed generation.

More than half of utilities CEOs also expect competition from new entrants as well as traditional rivals to have a significant impact.

That’s already happening; for example, Google is making significant forays into both renewable energy production and the ‘smart home’ space.

Indeed, more than half of all utilities CEOs expect greater competition from other industries – mainly technology and financial services – in the next three years. Again, that’s higher than energy or mining. That makes sense, given that while energy or mining remain primarily capital intensive industries, in the utilities sector energy transformation is shifting opportunities for good margins into new parts of the value chain with far lower barriers to entry – and requiring new types of capabilities.

But it’s the prospect of regulatory upheavals that worries utilities CEOs most: 89% are nervous on this score, compared to just 66% of CEOs overall. Most mining (84%) and energy (74%) CEOs also expect regulation to have a major disruptive impact on their businesses. But they’re less inclined to think that other forces like customer behaviours or competition from new entrants will have a major impact (see Figure 4).

These disruptive forces don’t operate in isolation. Often it is the combination or collision of forces that has the most dramatic impact.


New competitors from across the value chain and beyond

More than half of all utilities CEOs expect that companies will enter new industries in the next three years. Here, too, that’s more than peers in energy or mining companies. Utilities executives are most worried about new entrants from technology, other parts of the energy, utilities and mining value chain, or financial services companies. Yet the biggest threats may actually lie elsewhere: 30% of engineering & construction CEOs, and 28% of forest, paper and packaging CEOs, expressed interest in entering the industry. The latter are moving into energy production as a way of utilising wood residues.

New sources of competition from movements along the value chain within the sector are a concern for energy and mining CEOs too. Abdulrazaq Isa, CEO, Waltersmith Group sees downstream companies moving into the upstream space as the greatest new competitive threat.

Of course, attack is often the best form of defence – and 48% of utilities CEOs have already entered a new industry or considered doing so. They’re mainly targeting the professional and business services and technology sectors. Some energy and mining companies are starting to look across industries too, albeit at lower levels.

“The main competition we are facing so far is from the players that migrated from the downstream to the upstream sector. The downstream sector makes much higher margins within the same oil & gas sector. So they are now raiding our territory and buying up assets. This has been ... the biggest threat that we’ve seen so far.”

Abdulrazaq Isa CEO, Waltersmith Group


Figure 4 Utilities CEOs are expecting more disruption than peers in energy or mining

Q: How disruptive do you think the following trends will be for your industry over the next five years? Respondents who stated ‘very disruptive’ or ‘somewhat disruptive’

Changes in industry regulation

Changes in customer behaviours

Increase in number of significant direct and indirect competitors –traditional and new

Changes in distribution channels

Changes in core technologies of production or service provision

Energy

Utilities

Mining

46%

62%

48%

24%

42%

20%

74%

89%

84%

42%

56%

40%

33%

56%

32%

0 20 40 60 80


Utilities are actively restructuring operations too. The percentages planning to in-source previously outsourced processes or functions and to exit major businesses or markets this year is noticeably higher than it is the total sample – a clear sign that they are preparing for turbulence.

CEOs in all three sectors share a continued emphasis on cost-cutting; as in previous years, it tops the list of restructuring activities by a wide margin.

“I would expect that whilst we are going to see some production growth, our most important lever to grow net income is going to be through reducing our costs.”

Andrew Mackenzie Chief Executive Officer, BHP Billiton

Active restructuring and keeping a handle on costs

Energy and mining companies are also looking at restructuring in some key areas (see Figure 5). One-fifth of mining CEOs say they will sell a majority interest or exit a significant market, for example, and 28% are planning to complete a cross-border merger or acquisition. That reflects their risk appetite, particularly in less stable commodities and difficult geographic locations.



Figure 5 Cost reduction continues to lead the list of planned restructuring activities

Q: Which, if any, of the following restructuring activities do you plan to initiate in the coming 12 months?

Implement a cost-reduction initiative

Enter into a new strategic alliance or jointventure

Complete a domestic M&A

Outsource a business process or function

Sell majority interest in a business or exited asignificant market

“Insource” a previously outsourced business process or function

Complete a cross-border M&A

End an existing strategic alliance or jointventure

73%

52%

40%

37%

25%

22%

14%

10%

63%

49%

25%

25%

8%

14%

15%

11%

72%

44%

20%

12%

20%

12%

28%

4%

0 10 20 30 40 50 60 70 80

Energy

Utilities

Mining


Taxing times

Energy and mining are concerned with making the best use of a country’s natural resources. So it’s not surprising that taxation stands out as a particular issue for both. More than four-fifths believe that an internationally competitive and efficient tax system should be a top priority for government where they are based. But less than a fifth feel that governments have actually been effective at achieving this outcome. (see Figure 6)

More than half of mining companies are doing something about the issue; 56% of mining CEOs say their organisation is focusing on collaborating with government around tax issues over the next three years. And there are some signs that better times may be on the horizon. More than half of energy, utilities and mining CEOs see governments implementing more competitive tax policies. And significant numbers also see progress around better coordination across nations, and changing tax systems to reflect how multinational companies operate (see Figure 7).


Figure 6 Energy, utitilies and mining CEOs think governments have a ways to go on achieving a competitive and efficient tax system

Q: Which three areas should be government priorities, in the country in which you are based? How effective has government been in achieving these outcomes in the country in which you are based?

Energy

Utilities

Mining

13%

18%

16%

82%

66%

84%

0 10 20 30 40 50 60 70 80 90

Internationally competitive and efficient tax systems should be a top government priority

My government is effective or greatly effective at achieving an internationallycompetitive and efficient tax system


Figure 7 Energy, utitilies and mining systems think governments have a ways to go on achieving a competitive and efficient tax system

Q: Are you seeing changes in international policies and regulations in the following areas? Respondents who said yes.

Governments are increasingly implementing more competitive tax policies, which are influencing

organisations’ decision on where to operate

Governments are changing tax systems toreflect how multinational corporationsoperate today

Better coordination among nations is leadingto increasing convergence of tax policies andrates

48%

37%

41%

56%

36%

49%

56%

48%

40%

0 10 20 30 40 50 60

Energy

Utilities

Mining

Creating value with new technologies

Energy, utilities and mining CEOs all believe that investing in digital technologies can pay significant dividends. EUM CEOs agree on the three technologies that hold the most strategic importance for their companies: battery and power technologies, cybersecurity and data analytics (see Figure 8).

“I think that technology is a tool which we can use to operate more efficiently.”

H.E. Sim Sitha Director General, Phnom Penh Water Supply Authority (PPWSA)




Figure 8 Battery and power technology, cybersecurity, data mining and analysis are most strategic

technologies

Q: How strategically important are the following categories of digital technologies for your organisation? Respondents who stated ‘somewhat’ or ‘very‘ important


Cybersecurity Battery and power technologies Data mining and analysis

Data mining and analysis Cybersecurity Battery and power technologies

Battery and power technologies Data mining and analysis Cybersecurity

Mobile technologies for customer

engagement

Mobile technologies for customer

engagementInternet of things

Cloud computing Internet of things Cloud computing


These are all areas where energy, utilities & mining companies are investing, despite tight budgets, to better manage risk and improve operations. The large majority of energy, utilities & mining CEOs who have invested in new digital technologies report that the benefits are considerable. They have achieved significant operational improvements, make much better use of the data they collect and have enhanced their company’s ability to innovate (see Figure 9).

For example, nearly four-fifths of oil and gas CEOs agree that digital technologies are creating value for their organisations when it comes to data analysis and operational efficiency. Abdulrazaq Isa, CEO, Waltersmith Group, explains that “From our business we see that new technology is impacting how quickly and efficiently we are able to drill and complete wells. It also impacts on cost at the end of the day.”

One area they’re less concerned with is mobile technologies for customer engagement. Just 40% of mining and 57% of energy CEOs view this type of technology as strategically

important. Utilities CEOs are more likely to rate it highly, but they still lag slightly behind the level of interest from CEOs overall (73% vs. 81% overall). This reflects the difference in the customer bases for each sector; whereas energy and mining have industrial customers, the power & utilities sector have both industrial and residential customers.

More than half of utilities and energy CEOs are anxious about the pace at which technology is advancing – up from less than a third last year. In contrast, just 8% of mining CEOs worry about the speed at which technology is advancing, far less than the 57% of CEOs in our total sample who expressed alarm on this score.

Interestingly, while for energy and utilities CEOs, a clear vision of the competitive advantages to be gained and a well-thought-out plan are the most important factors to getting the most out of digital investments, mining CEOs rate specific hiring and training strategies to integrate digital technologies throughout the enterprise most highly.


Figure 9 Improving operations is the greatest benefit of digital technologies say EUM CEOs

Q: To what extent are digital technologies creating value for your organisation in the following areas? Respondents who stated ‘quite high value’ or ‘very high value’; top five choices only listed


Data and data analytics Operational efficiency Data and data analytics

Operational efficency Data and data analytics Operational efficiency

Digital trust including cyber security Internal/external collaboration Internal/external collaboration

Strategic decision making Digital trust including cyber security Risk-taking decisions

Internal/external collaboration Brand and reputation Sourcing and supply chain management

Dynamic alliances with new partners

The percentage of utilities CEOs planning to form new alliances has leapt from 39% to 52% this year. Nearly as many energy and mining CEOs are also looking to joint ventures, strategic alliances and informal collaborations to drive cost-efficient ways of operating.

Energy, utilities and mining CEOs are partnering across the entire value chain and wider ecosystem, partnering with everyone

from government and suppliers to customers, business networks, NGOs and academia (see Figure 10). Some are even working with competitors or firms from other industries

They most often use such partnerships to access new customers, geographic markets and new/emerging technologies. Partnerships are also sometimes seen as a way to de-risk projects, spreading out capital expenditure risk. Strengthening innovation capabilities can be a key reason as well.



Figure 10 EUM companies are partnering across broad ecoystems

Q: Are you currently engaged with or considering engaging with any of the following types of partners through joint ventures, strategic alliances or informal collaborations? Respondents who stated ‘currently engaged with’


05

10152025303540Start-ups

Firms from other industries

Academia

Non-governmentalorganisations

CompetitorsBusiness networks, clustersor trade organisations

Customers

Suppliers

Government





Figure 11 Technology access, risk sharing and innovation top reasons for partnering

Q: What are your reasons for collaborating in joint ventures, strategic alliances or informal collaborations? % ranked 1, 2 or 3

Sharing of risks

Access to new/emerging technologies

Ability to strengthen our innovation capabilities

Access to new geographic markets

Access to new customers

51%

51%

42%

34%

29%

40%

46%

22%

46%

50%

28%

28%

24%

32%

36%

0 10 20 30 40 50 60

Energy

Utilities

Mining

Using diversity to enhance

The percentage of power & utilities CEOs planning to hire more people has remained flat this year, at 36%. That’s nearly identical with expectations from the energy sector, but fewer than in the mining, industry, where just over half of CEOs expect to add headcount. Nonetheless, more power & utilities CEOs are concerned about the availability of key skills than their mining counterparts (70% vs. 64% of energy and 56% of mining CEOs). And while fewer executives in power / utilities and energy say their companies actively search for talent in different countries, industries or demographic segments, compared to the overall sample, mining CEOs are actually more likely to do so. That may stem in part from the remote locations of some mining operations.

The majority of CEOs in energy, utilities and mining say their company now has a diversity and inclusiveness strategy. That’s yielding concrete benefits. Of those with such a programme, around 90% say it has enhanced business performance, and nearly as many credit it with attracting talent and strengthening their company’s brand and reputation. Such strategies may also help develop the youth of tomorrow, a key priority for industry leaders, as our in-depth interviews revealed.

“Whether we are talking about geopolitical harmony or whether we’re talking about how we work together as diverse teams, we say we should come together with diverse ideas.”

Andrew Mackenzie Chief Executive Officer, BHP Billiton


Global contactsNorbert SchwietersGlobal Energy, Utilities & Mining LeaderGlobal Power & Utilities Leader +49 211 981 [email protected]

Ross HunterGlobal Oil & Gas Leader+44 20 780 [email protected]

Jock O’CallaghanGlobal Mining Leader+61 3 8603 [email protected]

www.pwc.com/energy

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Facing the energy future - PwC · 2016-06-20 · Facing the energy future All three sectors are facing a wide range of threats. CEOs in energy, mining and utilities are all more likely