An ideal context for disruptive new energy innovations?:

Clayton Christensen writes brilliantly about the concept and properties of disruptive innovations in his book “The Innovator’s Dilemma: When New Technologies Cause Great Firms To Fail”. Disruptive innovations have the characteristics of a shift in paradigm – the way we perceive the relevant products’ context is fundamentally changed. The term “disruptive” reflects the effect the innovations have on the competitive arena when being challenged by such innovations. Existing suppliers are taken by surprise by these innovations. They are not prepared, and this new competition, suddenly coming their way, is not identified early enough. I highly recommend having a look at Clayton Christensen’s books on innovation and strategic effects of such perspectives. Having just attended an oil & gas conference I came to think of the perspectives provided by Mr. Christensen. Despite being in the middle of a harsh financial crisis, the industry has firm belief in better times ahead. The oil and gas industry is severely reducing investment activity as a result of the last half year oil price developments – capex spend in 2008 being around 160 bUSD is reduced to 150 bUSD in 2009 - take into account that this is instead of continuously increasing capex. The majors, as Shell and Exxon, continue to invest. Smaller companies, being hit harder by the crisis, reduce their capex spend based on risk and cash availability. The most remarkable observation is the clear consensus on future oil price developments from expected increase in demand in developing countries. Developed countries are actually in the process of reducing dependency on oil and gas. The general consensus represents a risk for the industry as it becomes more difficult to identify competition coming from unexpected sources. So, why should we be more worried now than earlier? I think there are more than one item constituting a developing competitive arena, and a fortunate environment for disruptive innovations: 1) Financial crisis: A crisis situation provides opportunities for innovations. Investors are looking for “what is next” and for companies that can provide products that are fresh, capital efficient, and/or have the potential of becoming a major hit in the relevant post-crisis context 2) Political Environment: There is currently a political environment that will support any initiative taken to provide reduced carbon emissions and reduced dependency on non-renewables. US President Obama is taking a clear position in US and is communicating the message repeatedly. European nations are also continuously exploring new energy alternatives to replace oil and gas dependency. 3) Oil & Gas supply/demand: Oil price is currently around 50 USD per barrel. In the longer term, the oil industry expects the oil price to increase due to increased demand. Low oil prices reduces exploration and development investments, so the combination of lower supply from lower investments and increasing demand should indicate a higher oil price. However, as price increases, the relative commerciality of alternative energy sources improves – alternative energy sources becoming more competitive. To be honest, I think we could expect higher demand for oil & gas as the global energy infrastructure is designed for supply of oil and gas, and as we recover from this current break in economic development - the developing countries (China being in the lead here) representing the engine for appreciating oil prices. However, if we are to learn anything from Christensen, the industry needs to be aggressive in securing competitiveness regardless of energy context. And there is currently motivation to change perspectives on energy supply.