The default number of scenarios that are typically presented by various organizations using scenario planning is four. This stems from the application of the so called deductive approach, which implies taking the two largest contextual uncertainties, establishing two book-end possible outcomes and creating a matrix of four combinations. A classic example is high and low economic growth coupled to a large and small degree of government intervention. A bank may choose high and low economic growth and high and low inflation. There you go!
This is a rather mechanistic perspective of the scenario method, not necessarily conducive for the central objective of scenario planning: understanding the key driving forces and their interrelationships. In the energy industry, with a long history in scenario planning, the practices that have evolved differ from this principle but they are also different from company to company. If we take a look at the scenario work that is available in the public ￼domain, then we note that Statoil uses a set of three scenarios, Shell since long has had the practice of publishing sets of two scenarios and BP always uses just one.
To the credit of BP it must be said that its analysis also involves discussion of a set of key uncertainties, whilst the few other majors that publish outlooks, notably ExxonMobil and CNNX, just present plain, single line forecasts, which we will hence ignore in this article (and of course many other companies publish nothing at all).
The annual BP publication is linked to the famous and widely used BP Statistical Review of World Energy. The BP scenario approach, if it can be called that, is an example of the incremental method: there is a base scenario being the ‘most likely’ outlook, but in addition there are some possible off-ramps depending on some identified, critical issues. Every year that the outlook is published, the key uncertainties are different. In 2017 they are: developments in mobility, the path to a lower carbon world and risks to gas. In 2016 they were, for example: economic growth, (also) the lower carbon world and the potential of shale oil and gas. In this way, over time, the major uncertainties get attention, and of course no one will conclude that a key uncertainty disappears from one year to the next. The BP outlook is very focused on the energy system, making reference to the key direct ￼drivers such as economic growth and demographics, but does not include a discussion of the underlying political, cultural and social dimensions.
As we all know, Shell has a long history in scenario planning, going back to the early seventies. It was then that Pierre Wack, the founding father of the Shell scenario practice, pioneered scenarios that included the possibility of a drastic shift of power to OPEC and a tightening of crude oil supply. The actual developments in that decade, including two oil price peaks, hit home and since then the value of scenario work was hardly ever disputed in Shell. The main thrust has been to use the scenarios as a way to examine the driving forces behind global developments that in turn will drive the energy system. For each decade, since the 1970s, one may discern a few key themes that dominate the era concerned. In the 1970s this was clearly the rise of OPEC and implications for the oil market, in the 1980s the possibility of the fall of the iron curtain, in the 1990s the focus was on the liberalization and globalization, in the first decade of this century the topic of climate change came to the fore and in the current decade the energy transition has become top of mind. Whereas BP and Statoil publish updates to their outlooks every year, Shell only brings out a fresh set of scenarios every three to five years. Of course, in between such releases, analysis work continues, targeting specific developments, sometimes resulting in focused publications, for example about urbanisation.
Shell’s latest (published) scenario exercise dates back to 2013, contrasting a Mountains world involving a shift of power (back to) national governments and elites with an Oceans scenario in which power is distributed and national borders fade.
Since the 1980s, Shell has settled on the principle of developing and publishing two contrasting scenarios. The rationale would seem to be that a third scenario could be interpreted as the middle, most likely option. Managers then have their beloved ‘base case’ and as a result a thorough discussion of the uncertainties would go nowhere. This is at variance with the philosophy of founding father Pierre Wack, who claimed that one of the scenarios would need to describe a surprise-free world, resonating with the audience, whereas two additional scenarios should explore the key uncertainties. Apparently Wack himself was less concerned with the possibility of gravitation towards the surprise-free world, no doubt eloquently ridiculing it to the extent that managers would not dare to take it seriously any longer.
This three scenario approach is exactly what Norwegian Statoil has adopted. Since 2015 the company has been publishing scenarios, whereas before that the annual report contained a single, broad discussion: ‘Energy Perspectives’. The Statoil scenarios carry triple R names: Reform, Renewal and Rivalry. It would appear that the practice is becoming that they are refreshed every year but that they keep their names. Reform could be interpreted as Wack’s surprise-free scenario, although it is not business as usual and does include a substantial transformation of the energy system. Renewal involves a globally coordinated, radical change in policies towards much greener societies, resulting in significant reduction in emissions. Rivalry has elements of both Shell’s Mountains and Oceans and may be summarized as nationalistic chaos. The scenario is, like Oceans, bad news for climate change. The Statoil scenarios replicate, to some degree, the Shell practice of attempting to understand the driving forces behind the changes in the energy system. They do consider geopolitical, macroeconomic and social issues. It will be of interest to see if Statoil manages to keep this very methodical approach evergreen in the next years.
Three companies, three ways of developing and presenting scenarios of the future. If the objective is to understand and explain the driving forces and their interrelationships behind the evolving (energy) business environment, then the question is whether BP’s single-scenario-with-some-sensitivities is adequate. Nevertheless, one may assume that from the perspective of the three companies their scenario work, each in its own way, serves the primary objective of scenario planning: to provide a platform for discussion within the company and with the outside world (that is why they are published).
But all three abstain from using the classic two by two framework.