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Oil scenarios for long-term business planning: Royal Dutch Shell and generative explanation, 1960-2010
Abstract
Most executives know that overarching paints of plausible futures will profoundly affect the competitiveness and survival of their organisation. Initially from the perspective of Shell, this article discuses oil scenarios and their relevance for upstream investments. Scenarios are then incorporated into generative explanation and its principal instrument, namely agent-based computational laboratories, as the new standard of explanation of the past and the present and the new way to structure the uncertainties of the future. The key concept is that the future should not be regarded as ‘complicated’ but as ‘complex’, in that there are uncertainties about the driving forces that generate unanticipated futures, which cannot be explored analytically.
... As discussed by Jefferson and Voudouris (2011), the ACEGES model supports the development of scenarios with computational experiments to portray plausible futures. The key advantage of the ACEGES model is the explicit modeling of 216 countries and a high degree of complexity that can be introduced to explore the uncertainties of global oil market outlooks. ...
... When a large number of simulations are implemented, the results are summarized by country using the quantile sheets (Schnabel and Paul 2013). By using the ACEGES model with quantiles, we suggest a move from the multi-pathway scenarios, a key innovation from 1971 when ShellÕs Group Planning shifted away from single-line forecasting (Jefferson 2012;Jefferson and Voudouris 2011), to continuous scenarios as a way of emphasizing the key features of oil production over time. ...
The role of unconventional oil is increasing in global energy markets. Although conventional oil is being depleted, unconventional oil might manage or eliminate supply constraints in meeting the demand for oil without large positive step changes in the prices. In this study, we use the ACEGES model, which is agent-based, to explore the potential impact of uncon- ventional oil on the evolution of the oil markets, focusing on four important oil-producing countries. We also use quantile sheets to summarize the simulation results. Given the esti- mated potential of conventional and unconventional resources, the results suggest that the production profiles will change tremendously. Although countries rich in conventional oil, such as Saudi Arabia and Iran, will still occupy the global oil markets for approximately the first half of this century, oil production in countries with rich unconventional resources, such as Canada and Venezuela, will be higher in production than Saudi Arabia and Iran from 2050 to 2060. This change in production means that the market power in the global oil markets will shift from Middle Eastern countries to Canada and Venezuela in this century.
... As discussed by Jefferson and Voudouris (2011), the ACEGES model supports development of scenarios by means of computational experiments to portray plausible futures. The key advantage of the ACEGES model is the explicit modelling of 216 countries and a high degree of complexity that can be introduced to explore the uncertainties of the global oil market outlooks. ...
The role of unconventional resources (e.g., oil sands and extra-heavy oil) is anticipated to increase in the global oil market. Although we are facing a scarcity of conventional (low cost) oil resources, unconventional oil resources might manage (for a period of time) supply constraints in terms of meeting expected increases in oil demand. Here, we use the ACEGES (Agent-based Computational Economics of the Global Energy System) model to investigate the potential impact of unconventional oil resources on the future evolution of the oil market on a global scale. An important observation from the ACEGES-based simulations is the significant shift of the peak production of oil (both conventional and unconventional) if and only if technological progress will allow upstream extraction rates for unconventional resources, similar to the historic extraction rates of conventional oil. Given the estimated potential of total oil resources, the ACEGES-based scenario suggests that the unconventional oil production may shift the peak year of total oil by 60 years or more, assuming favourable upstream investment plans and a continuous increase in the demand for crude oil products at a reasonable price. However, increased total oil production might not meet the unconstrained (high) growth rates of oil demand.
... It is important to note that by using ACEGES model with Expectiles Smoothing and GAMLSS we suggest a move from the multi pathway scenarios, a key innovation in the 1967 when Shell's Group Planning shifted away from single-line forecasting (Jefferson and Voudouris, 2011;Jefferson, 2012), to continuous scenarios as a way of emphasising the uncertainty around the outlooks of natural gas. Furthermore, the use of continuous scenarios avoid suggesting a degree of precision that would be spurious and are appropriate when exactitude is elusive while being approximately right is helpful for policy making and long-term strategy. ...
Due to the increasing importance of natural gas to modern economic activity, and gas’s non-renewable nature, it is extremely important to try to estimate possible trajectories of future natural gas production while accounting for uncertainties in resource estimates, demand growth, production growth and other factors that might limit production. In this study, we develop future scenarios for natural gas supply using the ACEGES computational laboratory. Given the estimated EUR, the ’Collective View’ and ’Golden Age’ scenarios suggest that the peaks of median global production of natural gas may happen in the broad vicinity between 2045 and 2052 while the asymmetrically weighted upper frontier might peak between 2050 and 2065.
... For example, the ACEGES laboratory, as a scenario development tool for exploratory energy policy, uses the Model panel to set the parameters of the simulated scenario using two complementary ways, namely a user-centred approach and a mathematically centred approach as discussed by Jefferson and Voudouris (2011). Note that the Model panel allows the policy-makers to modify the parameters affecting the entire simulation and/or the parameters affecting a country. ...
La question énergétique est au cœur du triptyque du développement durable, d’un côté, il s’agit d’assurer la sécurité énergétique nationale en tenant compte de l’état des ressources et des perspectives géostratégiques de dépendance, de l’autre, il convient de maintenir une compétitivité induisant une croissance pourvoyeuse d’emplois, et ce malgré une énergie plus rare et donc plus chère. Enfin, il est nécessaire de tenir compte de la contrainte environnementale (émissions de gaz à effet de serre, changement climatique) qui impose des choix drastiques et immédiats pour réduire les risques encourus. La démarche prospective et la formulation de scénarios constituent à ce jour une réponse des institutions internationales, des gouvernements et des différents acteurs de la sphère privée aux incertitudes qui touchent le secteur énergétique mondial. Penser les transitions énergétiques revient ainsi à admettre que le système énergétique est complexe, que les changements technologiques doivent être compatibles avec les mutations économiques, sociales et géopolitiques. Le passage aux énergies renouvelables n’est pas un simple mécanisme de substitution, il constitue une transformation majeure du système énergétique mondial dans un contexte de hausse des prix de l’énergie.
Purpose
The chapter presents a new approach to address energy policy and security based upon the ACEGES (Agent-based Computational Economics of the Global Energy System) model and the SPT (stochastic portfolio theory).
Design/Methodology/Approach
The ACEGES model is an agent-based model for exploratory energy policy by means of controlled computational experiments. The ACEGES model is designed to be the foundation for large custom-purpose simulations of the global energy system by modeling explicitly 216 countries.
Findings
By using the ACEGES model, we can better explore the energy markets at the country level and provide assessments on export capacity (for energy producers) and import needs (for energy consumers) within a single umbrella. Based upon these country-specific assessments, the SPT framework provides a flexible framework for analyzing the energy market structure from a theoretical and practical perspective. As a theoretical methodology, the SPT framework provides insight into questions of market behavior and arbitrage and can be used to construct hedging energy portfolios with controlled behaviors. As a practical tool, the SPT framework can be applied to the analysis and optimization of energy portfolios for physical trade for energy export-oriented and import-oriented countries.
Practical Implications
The integration of the ACEGES model and the SPT framework provides a way of analyzing the dynamics of the energy markets (for energy policy) and constructing energy portfolios for physical trade that can affect bilateral and multilateral energy trade agreements.
Originality/Value
The paper provides a conceptual and a practical framework to address issues of energy policy and security by integrating for the first time the ACEGES model and the SPT framework to develop import and export portfolios for physical trade between countries.
Much of the discussion of past scenario development in business has centred on Shell's pioneering work in the 1970s. This paper examines more closely what was done and published, drawing on the direct experience of some of those most closely involved in the detailed work and upon hitherto unpublished and uncited material, to present a rather different narrative than what is to be found in the existing literature. The result nevertheless retains the reputation of Shell's scenario methodology as useful for understanding and gaining advantage from an uncertain future, while shedding light on how current uncertainties may be better handled in corporate strategy appraisal.
Scenario Planning has been around for more than 30 years and during this period a multitude of techniques and methodologies have developed, resulting in what has been described as a ‘methodological chaos’ which is unlikely to disappear in the near future (A. Martelli, Scenario building and scenario planning: state of the art and prospects of evolution, Futures Research Quarterly Summer (2001)). This is reflected in the fact that literature reveals an abundance of different and at times contradictory definitions, characteristics, principles and methodological ideas about scenarios. It has been suggested that a pressing need for the future of scenarios is amongst other things, to resolve the confusion over ‘the definitions and methods of scenarios’. This paper makes a beginning at this need by tracing the origins and growth of scenarios and the subsequent evolution of the various methodologies; a classification of the methodologies into three main schools of techniques is given and the salient features of these schools are compared and contrasted.