Over the past several years, many experts have concluded that the current business model of investor-owned or international oil companies (IOCs) is unsustainable. These observers believe that the IOCs’ star will fade as the technological superiority they currently deliver to national oil companies (NOCs) in control of reserves is supplanted by that of oilfield service companies (OSCs).

However, in a future of sustainable energy, we see a different end game. We believe that the IOCs, NOCs and OSCs have a strong, natural interdependency that provides the best path to a sustainable future, based on a “triple bottom line” of economic, social and environmental imperatives.

The oil industry began and flourished in the West, where private, investor-owned oil companies, driven by profits, focused on low-risk local resources. But as local reserves grew scarce and production declined, these companies expanded globally to pursue higher-risk, higher-reward opportunities.

Except for the Eastern Bloc, IOCs controlled the world’s oil supply, developed leading technologies and dominated markets for refined products.

Heads of the world’s oil-rich countries, frustrated that IOCs were reaping the lion’s share of profits and were oversupplying the market, nationalized their reserves. In 1960, some of these countries joined forces to form OPEC, the Organization of Petroleum Exporting Countries.

These petroleum-advantaged nations mandated social and development agendas for their NOCs. This initiative caused them to lag IOCs in technological capabilities and efficiency and, in some cases, to underinvest in future production. However, as NOCs took control of over three-quarters of the world’s oil supply (currently 85%), many observers began to question the relevance and future role of the IOCs.

Meanwhile, the IOCs focused on ways to offset reduced access to the world’s most prominent reserves. They improved efficiencies and pursued technological advances in exploration and production. This, coupled with stronger players consolidating the industry and focusing on core assets and competencies, led to growth for the IOCs; the development of strong, multinational OSCs; and profitable niches for smaller, independent producers and refiners.

Blurring roles

This separation between IOCs and NOCs is blurring. NOCs are pursuing a broader agenda and technological independence to become more self-sufficient and play a larger role in developing a diversified, sustainable local economy. For example, Brazil’s Petrobras is a leader in deepwater development technology, while Saudi Arabia is forward-integrating into refining and chemical assets in critical international markets.

At the same time, while IOCs are espousing environmental-social agendas—investing in renewable energy and conservation initiatives—to date they have not been able to use a “green” agenda to drive a discernable difference in financial or share performance.

In the current social and economic context, where the only given is rapid change, all the players face dilemmas. The IOCs must confront continued reserve challenges and environmental issues stemming from capital investments in “dirtier” oil-processing technology. The NOCs in developing economies with an advantaged reserve base (Spanish Latin America, Africa and the Middle East) are struggling with access to technology and human capital. The NOCs in developing countries with a disadvantaged reserve base, such as China and India, face supply security challenges.

Difficult choices

Each group in the energy sector faces difficult choices. Each must balance short-term profits and social obligations with longer-term sustainability and environmental imperatives.

For private companies (IOCs and OSCs), the balance between “exploit” and “invest” strategies will continue to be the key issue. Exploit strategies concentrate on the near term, focusing investments on proven plays and adjacent technologies; invest strategies place risk capital in unproven resource potential, major innovations and emerging technologies, including the development of cost-effective alternative energy supplies.

Sole pursuit of the exploit strategy can maximize short-term returns but will inevitably erode profitability as reserves decline and, ultimately, carbon-based taxation renders the strategy unprofitable. An invest strategy involves increased commitment to research and other longer-term initiatives aimed at developing a “supply-side solution” to support global sustainability.

Both IOCs and OSCs can have a key role in developing improved recovery technologies and cost-effective renewable energy. However, given the financial markets’ “now-now-now” expectations, sacrificing short-term results to fund longer-term initiatives may also threaten the viability of an enterprise.

The NOCs face similarly challenging questions. For producing NOCs, the exploit strategy, such as Venezuela’s channeling of energy profits to citizens, is not sustainable. The question, therefore, is how best to balance short-term social needs with longer-term investments to improve infrastructure and human capital and spur growth.

For consuming NOCs, the choices are not as clear. For countries with an energy deficiency, investment in energy efficiency and conservation has merit. The logic for the theoretical exploit alternatives, such as capital investments in return for reserves from producers, is more controversial. The potential for unstable oil-rich governments to obtain advanced weaponry as part of a “capital for energy-supply agreement,” or for oil-seeking governments to take military action to protect their NOCs’ capital investments, could cause significant political instability.

Worse yet, exploit strategies could aid the growth of rogue states with access to advanced weaponry, or undermine sustainability efforts in poor but resource-rich countries. In addition, there is little doubt that the asset ownership and policy links between consuming NOCs and their militarized governments can lead to faster military intervention.

Global cooperation

A sustainable energy future is one in which all parties invest and deliberately choose to forego some immediate short-term benefits to secure their long-term future.

IOCs and consuming NOCs are in the best position to develop supply-side and demand-side solutions that facilitate sustainable growth. They have the technology, population and economies to create alternatives and improve conservation.

For producing NOCs, investment is a means to improve living conditions and education for their people and ensure sustainable economies. Resource-rich countries that do not extend the life of their resource base, or develop alternate drivers for their economies, will hasten the potential for social, environmental and economic disaster.

Whether the oil and gas industry achieves sustainable growth will be determined largely by the ability of NOCs, IOCs and OSCs to collaborate on setting boundaries to drive the sector toward the triple bottom line that balances social, economic and environmental considerations.

This will require significant changes. The European Union may seem closest to having a balanced perspective today, yet all nations must compromise on their priorities. Developed and stable developing nations are rebalancing their energy priorities, but the poorer nations have not yet struck a balance between social programs and investment in an energy future.

Given the poor track record of attempts to bring together countries to drive enduring change (for example, the failure to reach a globally accepted climate-change accord), it is unrealistic to expect governments alone to set boundaries. Therefore, NOCs, IOCs and OSCs must work with the public sector to develop appropriate policies. These will likely cause some short-term pain, but will ensure a healthy, globally successful (and long-term profitable) energy industry.

Inevitably, the most-developed and richest countries and companies must set the example for the world—it is their choice which example to set.

Blueprint for sustainability

In our model of a sustainable energy industry, there is a role for all industry players. Sustainability depends on balance. Therefore, all players that base their strategy on the appropriate balance between current (exploit) and longer-term (invest) goals can be successful. In this balance, all traditional players must “give to get.” Everyone brings something to the table, and receives something in return.

What each party brings to the table. The IOCs and OSCs pass along supply-side technology and capital, the consuming NOCs bring demand-side technology and capital, and the producing NOCs offer sustainable, low-cost energy. Governments set policies that balance the triple bottom line of profit, social and environmental needs.

What each party receives. All players obtain returns on their investments.

The IOCs, OSCs and consuming NOCs obtain attractive opportunities for investment, reserves, business growth, stable supply and asset utilization—which lead to long-term profitability and growth. Producing NOCs gain access to consuming markets and migrate into sustainable technologies for future energy supply.

Developed nations and energy-consuming developing nations enjoy energy diversity and supply security. Energy-producing developing nations gain industrial diversity, home-grown human capital and a knowledge-based economy, without requiring onerous political or military commitments.

A good example of this model is the recent opening of oil fields in Russia’s Krasnoyarsk Territory. Estimates are that the area will provide more than 2 million barrels per day of oil and condensate once the fields are developed through a partnership between the Russian government and private oil companies. If successful, the partnership would create a common transport network, energy-supply system and social provisions much more effectively, quickly and cheaply than if each participant acted individually.

Another example is the partnership between the Canadian government, universities and IOCs to jointly fund R&D to make oil-sands development less environmentally intrusive.

The world has faced and met many tremendous challenges throughout history, and a sustainable world may be its biggest test yet. Yet considering the consequences, failure by the energy industry to meet this challenge could lead to hardship greater than the world has yet seen.

Vance Scott is a partner with A.T. Kearney (atkearney.com) and head of the firm’s energy and process industries practice for the Americas. He is based in Chicago. Neal Walters is a partner and leader of the energy and process industries practice for Canada and is based in Toronto. Brent Ross and Prakash Chandrasekar are consultants with the firm.