In order to understand what the future may be like, it is imperative to understand the present. One of the most effective uses of scenarios is to take an envisioned future state and work backward to establish signposts that are indicative of that future state. If one of these signposts can be seen today, it means the imagined future is a possibility.
Here are seven geopolitical drivers of risk that can serve as signposts.
The risks associated with interstate and intrastate conflict remain high. A list of 10 conflicts to watch in 2019, published by Foreign Policy magazine, contains the usual suspects, but also some unexpected entries:
- U.S.-China tensions
- Saudi Arabia, U.S., Israel and Iran
- South Sudan
The list can be debated, but it is noteworthy from two perspectives:
- The geographical spread of conflict is not confined to one area but covers multiple continents
- Many of these countries are prime suppliers of oil and gas
2. Climate change
The physical risks associated with climate change are well documented, yet the geopolitical processes which underpin these risks are less understood. International agreements on emissions are not based just on science, but also on political and economic imperatives.
President Trump’s decision to withdraw the U.S. from the Paris Agreement reflected less a concern with the empirical data and more the perceived impact on the U.S. economy. The energy sector is not merely a passenger in these processes but can leverage its position as a technology leader to advise decision-makers.
As the world enters the fourth industrial revolution, there is an exponential growth in connected devices. Indeed, people now talk of an Industrial Internet of Things (IIoT) which creates greater efficiency and allows the implementation of automated processes driven by Artificial Intelligence (AI). At the same time, having more devices introduces new attack vectors on a larger scale. The inability of the industry to control these digital technologies generates an impetus for governments to introduce regulations and legislation.
The successes of populist political movements, exemplified by President Trump and Brexit, suggest that globalization is losing momentum. In its place are conservative trade relationships and protectionism, inviting scrutiny of the trade policies of some of the world’s biggest economies. Business opportunities will realign as some markets open up for participation while others become more restrictive. The recently mixed fortunes of South American politicians are likely to shape oil and gas trade policies on that continent over the coming years.
5. Regulatory landscape
The energy industry is susceptible to new regulation, largely driven by climate change imperatives. The public has woken up to the threat of climate change and is demanding action from policymakers.
Several countries have committed to restricting sales of new automobiles powered by internal combustion. There will be a full ban in Norway by 2025, the U.K. by 2040 and China at some point in the future, which will dampen the appetite for oil.
The shipping industry is likewise searching for alternative sources of propulsion and will be a declining user of oil-derived products. Aviation is also subject to increasing regulation to limit emissions.
Governmental action is increasingly likely to be committed to change that will fundamentally impact the energy industry.
6. Supply chains
A diversified international supply chain presents a significant risk. The cyber security shortcomings of many devices have left companies exposed. Even if a company has comprehensive oversight of their own systems, there are few frameworks to determine if suppliers maintain equivalent standards. Vulnerability in a suppliers’ device introduces the vulnerability to a company’s own systems.
Moreover, geopolitical tensions can affect supply chain capacity. Several Western countries invoked national security as grounds to ban Chinese networking equipment manufacturer Huawei from supplying products to critical national infrastructure. Such bans will affect the energy industry supply chain.
7. Workforce availability
The energy industry requires access to a highly skilled workforce. This is partly a problem of supply, with insufficient people being trained in the appropriate skills, but workforce availability is also affected by geopolitical exigencies. Security turmoil creates unsafe areas, the political will to embrace migration is decreasing, and we will soon see the first “climate refugees” displaced by environmental changes.
Understanding a problem is the first step towards solving it, and understanding the drivers of risk is the first step towards mitigating and managing them. The ways that you can do this, working within some of the areas identified above to more fully take control of your risk profile, will be explored in more detail in the next blog.
Previous in series: Geopolitical instability: Turning up the heat on the energy industry
Next in series: Managing geopolitical risk in the energy industry