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Advanced Management Program for Oil & Gas Industry Executives

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Lessons from Groningen: Mitigating Risk Is Extra Hard when You’re Creating an Entirely New Market

October 30, 2017

Lessons from GroningenIn 2009, at a celebration of the 50th anniversary of the Groningen field – Europe’s largest natural gas field and one of the greatest energy discoveries in history – Rex Tillerson, then chairman and chief executive officer of ExxonMobil Corporation, called Groningen “an extraordinary proving ground.” The field, which lies under about 350 acres of farmland, cow pastures, and villages in the northeastern part of the Netherlands, is a joint venture between ExxonMobil, Royal Dutch Shell, and the Dutch government.

Tillerson’s long list of business lessons from Groningen included the need for public-private cooperation, long-term thinking, and technology innovation to meet increasing energy demand while reducing emissions. “Every sector of society needs to be part of meeting the world’s energy challenges – from consumers and businesses to governments around the world,” said Tillerson, who is now the U.S. Secretary of State.

Success in business means taking and managing risk. In the oil and gas industry there is every conceivable risk.” – Click to tweet

Every conceivable risk

What Tillerson didn’t mention was the environmental and political challenges to the Groningen field. For one, there have been earthquakes so powerful that the government has had to put a cap on production at the gas field.

Thunderbird professors Andrew Inkpen, Michael Moffett, and Kannan Ramaswamy discuss the challenges, risks, and successes of the Groningen field in a new book, The Global Oil & Gas Industry: Stories from the Field. Through a series of case studies, the professors identified four themes that characterize the current state of the industry. The story of Groningen fits into the theme of risk.

“Success in business means taking and managing risk. In the oil and gas industry there is every conceivable risk: environmental, political, safety, geologic, financial, and commercial,” the professors write. “Despite these risks the industry has built business models that ensure the risks are properly managed and mitigated. These experiences can be valuable to other firms both within and beyond the domain of extraction businesses as they battle similar issues.”

All four themes – risk, innovation, national companies, and megaprojects – will be addressed in depth in the upcoming Thunderbird executive education course, Advanced Management Program for Oil & Gas Industry Executives. Held December 4-15 in Glendale, Arizona and taught by Inkpen, Moffettt, and Ramaswamy, the course is designed for upper-middle to senior-level leaders facing industry-related globalization challenges.

Advanced Management Program for Oil & Gas Industry Executives

December 4-15, 2017 | Thunderbird Campus

Learn More

Establishing a new market

Inkpen, Moffett, and Ramaswamy use Groningen as a case study to illustrate the complexity of major gas projects involving multiple countries and markets. With a specific focus on natural gas, the case explores the importance of integration across project development, gas production, market development, and government relations.

The professors tell the story of Groningen as a good example of long-term thinking, long-term discipline, and long-term commitment. It was the three-way partnership between ExxonMobil, Royal Dutch Shell, and the Dutch government that propelled the Groningen field into the largest gas field in Europe and the 10th largest in the world, the professors say. But the project also posed particular challenges, including:

  • Building a market for natural gas and finding an optimal balance between supply and demand
  • Oversight and regulation and the role of the government vis-à-vis the corporate partners
  • Forging into new territory and negotiating with new (and initially resistant) energy markets
  • Evolving relationships and staying flexible as the industry changes

“What do you do if you find natural gas while looking for oil? Convince people they need natural gas.” – Click to tweet

Geologists had set out to find oil when they discovered natural gas at Groningen in 1952. At first that was a disappointment. Coal was the primary fuel for domestic and industrial use and oil was seen as a second choice. If natural gas was going to be marketable, consumers had to be convinced to use it, appliances need to be replaced or converted, and a grid needed to be created to supply the gas to homes, businesses, and industry.

When large quantities of natural gas were found in what appeared to be a super-giant field in 1959, a whole new market opened up. Natural gas was sold to consumers at a rebate. Oil-fired industrial installations were converted to gas and new systems came on board ready to use gas. Production at Groningen began in 1963 and, until recent concerns about seismic damage, production was expected to last until 2080.

Uncertain future and universal lessons

Oil and GasAlthough quakes had been felt around Groningen since 1991, it was a 3.6-magnitude temblor in 2012 that increased fears of the nearly 150,000 residents in the area and triggered a response from the government. Since 2014, the Dutch government has been capping Groningen production in an attempt to minimize risk of further earthquakes. The government has since acknowledged it underestimated the environmental impact and problems that gas production could cause. 

But just as it was impossible in 1959 to foresee the future value of a European natural gas market based in the Netherlands, there was no way the companies or the government could have foreseen today’s circumstances when they discovered the giant gas field.

Traditional risk management rules about what to do and what not to do may be of little help when confronted with a situation of this magnitude. But, say Inkpen, Moffett, and Ramaswamy, the business characteristics that have made the Groningen gas field so successful will most likely also help it overcome the current challenges.

Traditional risk management rules may be of little help with the external risks found in Oil & Gas.” – Click to tweet

Even though Shell, ExxonMobil, and the Dutch government all have different strategic objectives, the professors say Groningen is a good example of how “public-private partnerships can work effectively with the right governance structure and financial incentives.”

As Tillerson said at that 50th anniversary celebration for Groningen in 2009: “Such long-term commitment from government will be critical to the future to encourage investment in enormous, long-term, capital-intensive and complex projects to bring new energy supplies to market. With sound and sensible policies, we can expand and diversify the world’s energy supplies, unlock promising new technologies and meet the challenges of providing more energy while protecting the environment.”

Advanced Management Program for Oil & Gas Industry Executives

December 4-15, 2017 | Thunderbird Campus

Learn More