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January 2017 Issue 33

ENHANCING THE BUSINESS OF LOGISTICS

A CHANGING LANDSCAPE

Adjusting strategies Oman Air Cargo

Anticipating continued growth Dubai Airports

Global Supply Chain honoured By Dubai Trade


Best Solution in Petrochemical Logistics

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The changing energy landscape SIGNATURE MEDIA FZ LLE P. O. Box 49784, Dubai, UAE Tel: 04 3978847/3795678 Email: info@signaturemediame.com Exclusive Sales Agent Signature Media LLC P.O. Box 49784, Dubai, UAE Publisher: Jason Verhoven jason@signaturemediame.com Director: Peter Dass peter@signaturemediame.com Managing Editor: Munawar Shariff munawar@signaturemediame.com Art Director: B Raveendran ravi@signaturemediame.com Production Manager: Roy Varghese roy@signaturemediame.com

Printed by United Printing Press (UPP) – Abu Dhabi Distributed by Tawseel Distribution & Logistics – Dubai

We are not running out of oil just yet, but the industry is definitely going through one of the biggest hiccups of our times. Which way the industry will go isn’t quite clear yet. What is definitely very clear, however, is this hiccup is demanding a change in the traditional route of operations. Oil and gas leaders need to step up and come up with clever tactics to deal with the cost and investment issues in the near term and prepare themselves for tackling the environmental concerns which are inevitable going forward. The oil price drop since the end of 2015 is a huge indicator of supply exceeding demand add to this the weak global economic growth. And with oil producing countries continuing to pump at full capacity for fear of losing out on market share, this imbalance is only going to get worse. To add insult to injury, Iranian exports of oil increased significantly in the second half of last year. All of these factors only mean that oil prices are going to remain low for the foreseeable future. All of this and many other relevant topics are inside this issue. Do let us know your thoughts.

Munawar Shariff Managing Editor munawar@signaturemediame.com

Contributor’s opinions do not necessarily reflect those of the publisher or editor and while every precaution has been taken to ensure that the information contained in this handbook is accurate and timely, no liability is accepted by them for errors or omissions, however caused. Articles and information contained in this publication are the copyright of Signature Media FZ LLE & SIGNATURE MEDIA LLC and cannot be reproduced in any form without written permission.

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January 2017 Issue 33

ENHANCING THE BUSINESS OF LOGISTICS

60 06 News 16 Country report – Europe, Americas and major economies An interesting way ahead Global economy suffers another lacklustre year in 2016

24 Cover Oil and gas – a changing landscape Tumbling oil prices are bad enough, but are we prepared for a future that limits fossil fuels?

30 New energy trends Booz Allen Hamilton forecasts energy trends in 2017, and explains the direction the industry will take in the coming years

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36 Talent – key priority in 2017 Talent acquisition will continue to be a key priority for MENA companies in 2017

38 Creating a secure barrier GSC looks at Cyber Security threats and solutions in 2017, as we learn from the experiences in the past year

44 Adjusting strategies – Oman Air Cargo Mohammed Al Musafir, Senior Vice-President, Commercial Cargo at Oman Air SAOC, talks to GSC about where the operator is heading in 2017

48 Anticipating continued growth In this Oxford Business Group’s interview with Sheikh Ahmed bin Saeed Al Maktoum, Chairman, Dubai Airports; President, Dubai Civil Aviation Authority; and Chairman and CEO, Emirates Group we get to know more about traffic patterns and the aviation business

51 A sea change: emerging from a downturn Insights into surviving the oil and gas downturn

60 Unwind Global Supply Chain magazine honoured by Dubai Trade Dubai Trade recently recognised its strategic and logistics’ partners in an awards ceremony and Global Supply Chain was one of the proud honorees


dnata wins Taqdeer award for excellence in labour relations dnata’s UAE cargo operations have been recognised for their commitment to employee welfare by winning the Taqdeer Award – the world’s first points-based award programme that promotes and celebrates excellence in labour relations. dnata has been awarded a five-star rating in the DAFZA (Dubai Airport Free Zone Authority) and DSOA (Dubai Silicon Oasis Authority) category of the

His Highness Sheikh Ahmed bin Mohammed bin Rashid Al Maktoum, Chairman of the Mohammed bin Rashid Al Maktoum Foundation presents the Taqdeer Award to Bernd Struck SVP UAE Cargo, dnata

Taqdeer Awards, and has been particularly recognised for its work in the areas of Labour Policy, and Culture and Work Environment. Launched by the Government of Dubai under the patronage of His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, Crown Prince of Dubai, the Taqdeer Awards have been created to showcase and strengthen Dubai’s position as

home to the most progressive employers in the Middle East. Participating companies are judged based on provided examples of their employment practices and comprehensive use of global benchmarks, and are awarded a rating ranging from one to five stars, based on the number of points they receive in a rigorous evaluation of their entry by an independent judging committee.

Al Tayer: Dubai Government continues upgrading infrastructure to cement its leading model HE Mattar Al Tayer, DirectorGeneral and Chairman of the Board of Executive Directors of Roads and Transport Authority (RTA) said that the General Budget of the Dubai Government endorsed by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President, Prime Minister of the UAE and Ruler of Dubai, had confirmed

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that Dubai is well on track in undertaking infrastructure development projects; the key development driver of any city worldwide. About 17 per cent of the total government budget has been allocated to infrastructure projects. About 50 per cent of RTA’s budget has been allocated to the construction of road and mass transit system projects,

Mattar Al Tayer

in a bid to provide a first-class infrastructure that contributes to realising RTA’s vision of Safe and Smooth Transport for All.

“There is also a portfolio of new projects highlighted by Route 2020 project covering the extension of the Red Line of Dubai Metro up to 15 kilometres, comprising seven stations. A strategic project is also set for construction to connect Dubai with Hatta through Lehbab in coordination with the Infrastructure Development Ministry, in addition to internal road projects several residential communities, especially in Hatta among other projects to be announced early 2017,”he added.


Dubai’s non-oil foreign trade at AED 952 billion in first nine months of 2016 Dubai saw a 11 per cent surge in the total volume of traded goods in the first nine months of 2016, rising as high as 70.82 million tons of commodities. Imports had the lion’s share at AED 594 billion – 46.81 million tonnes and 12 per cent increase – while exports and reexports accounted for AED 109 billion – 11.84 million tonnes and eight per cent increase – and AED 249 billion – 12.17 million tonnes and 10.5 per cent increase – respectively. This pushes the total value of Dubai’s trade up to AED 952 billion. “To offset the impact of the general slowdown in world economy, lower commodity prices and the slump in oil prices, Dubai has wisely Sultan bin Sulayem restructured and broadened its sources of revenue, while taking considerable measures to stimulate growth in the affected sectors,”said DP World Group Chairman and CEO and Chairman of Ports, Customs and Free Zone Corporation, Sultan Ahmed Bin Sulayem. To maintain Dubai’s business appeal, an advanced trade infrastructure, Ahmed Mahboub Musabih convenient government services at seaports and airports, a wellestablished legislative structure and a unique public-private partnership were all in place. Mobile phones topped the list of highvalue commodities in Dubai’s foreign trade in the first nine months of this year with AED 124 billion worth of trade, and computers at AED 30 billion. This supports Dubai’s transformation into the world’s smartest city and its growth as one of the region’s and the world’s major trading hub for smart ICT products.

Qatar Airways Cargo announces four new freighter destinations Qatar Airways Cargo announced that it will launch freighter operations to four new destinations in the Americas, starting February 2nd, 2017. The Boeing 777 freighter will fly twice a week to the South American cities of Buenos Aires, Sao Paulo, Quito (subject to Government approval), and the North American city of Miami. The twice weekly freighters will depart from Doha via Luxembourg, the cargo carrier’s European hub, with stops at Sao Paulo in Brazil, Buenos Aires in Argentina and Quito in Ecuador. On the return leg, the freighter will stop in Miami, Florida and Luxembourg before arriving in Doha. These new freighter services aim to meet the growing demand for import and export trade in the region and will supplement the belly-hold cargo capacity on Qatar Airways daily flights to Sao Paulo, Buenos Aires and Miami. The launch of this new freighter route entails great business and network growth for Qatar Airways Cargo as it brings the cargo carrier’s total freighter destinations in the Americas to 12, while offering belly-hold services to 13 cities on the continent.

Alibaba Group partners with SEKO Logistics in Hong Kong and Taiwan for cross-border e-commerce SEKO Logistics is one of four international logistics companies chosen to be an Alibaba ‘OneTouch’ launch partner in Hong Kong and Taiwan. OneTouch supports traders with one-stop, end-to-end export services, and comprises customs clearing, tax refunds, financial transactions, foreign exchanges, and international B2B logistics. SEKO will offer services to any Alibaba customer or company registered in Hong Kong or Taiwan shipping products to China or to any of the world’s major eCommerce markets. OneTouch is a wholly-owned subsidiary

of Alibaba Group, and serves as the leading online platform providing professional import and export BPO (business process outsourcing) services to China’s small and medium-sized crossborder trade enterprises. This new collaboration with Alibaba comes just weeks after SEKO Logistics announced its investment in a further 100,000 square feet of warehousing and fulfilment capacity in Hong Kong as it continues to build an ‘ecommerce gateway’ for retail and high-tech customers targeting China’s online consumer market. Source: www.supplychain247.com

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Abu Dhabi Terminals oversee underwater clean-up at Khalifa Port Abu Dhabi Terminals (ADT), in cooperation with Al Mahara Diving Centre and Tadweer Waste Treatment LLC, has completed an underwater clean-up operation at Khalifa Port. Organised to ensure the protection and sustainability of the marine ecosystem, the operation took place in November last year, and saw ADT volunteer divers, members of Al Mahara Diving Centre, and Tadweer plunge to the depths of the port’s waters to search for any garbage that may have collected in the berths. The event was instigated by ADT, when it called out to experienced divers to take part

in the clean-up and attracted participation from both the public and private sectors. Similar clean-ups have been held in the past, and as a result, the divers commented that the port was already quite clear of garbage and that any debris gathered was small. The event highlighted ADT’s unwavering commitment to the protection of the marine environment and ecological system, particularly at a time when this environment is facing threats and potential challenges from pollution, waste, and urban development.

RAK Airport takes off in 2016 numerous milestones passed Ras Al Khaimah International Airport has enjoyed a highly successful 2016, according to Chairman, Engr HE Sheikh Salem bin Sultan Al Qasimi. Sheikh Salem believes that this shall be the airport’s most positive year, with a host of landmarks passed, and records broken during its course. In terms of passenger numbers, Ras Al Khaimah’s rocketing tourism industry has also contributed to figures that show 68 per cent growth over 2015 on a like-for-like basis. That marker alone makes 2016 one of the most successful years for the airport in its recent history, but cargo tonnage climbed an even more impressive 98 per cent and aircraft movements increased by a handsome 37 per cent. For 2017, RAK Airport will continue to build on what has been established during 2016. They have technological innovations planned for the first quarter that will ease the check-in process, and may even take it outside the airport itself. They also plan to open the new seasonal terminal in the early part of 2017.

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Quercus Investment opens Dubai office London-based Quercus Investment Partners Ltd has launched its Middle East office in Dubai, as investment in renewables gathers momentum across the GCC. Quercus is positioned to become one of the largest European investors in renewable energy within the next five years. The firm now operates from offices in London, Milan and Dubai, with an international senior management team. The International Energy Agency has said that the world’s capacity to generate electricity from renewable sources has now overtaken coal, which indicates a clear market shift in favour of renewables. European governments are planning to power 20 per cent of production from renewables by 2020, while Dubai’s DEWA has made a solid investment in solar power with its Mohammed Bin Rashid Al Maktoum Solar Park development, the largest single-site solar project in the world. The global installed capacity for renewables is set to increase by 69 per cent over the next 15 years. Renewable energy sources show resilience against market conditions, and, in particular, the recently volatile price of oil.


DC Aviation Al-Futtaim awarded Middle East Ground Handler of the Year by UAS Dubai-based DC Aviation Al-Futtaim (DCAF) has been awarded by UAS International Trip Support as the best Ground Handler in 2016 for the Middle East region. Co-Owner/Founder and Executive President of UAS, Mohammed Husary presented the award to Susan Bujtas, Operations Manager at DCAF. Commenting on the award, Holger Ostheimer, Managing Director, DC Aviation Al-Futtaim said: “We have consistently been improving our services year-onyear and this award is a testament to that fact. This award will motivate us to further improve our services as we look forward to welcoming, even more, customers through our facility.”

Tejari signs MoU with Dubai SME to streamline procurement services Tejari has announced the signing of a MoU with Dubai SME, the agency of the Department of Economic Development (DED) in Dubai, mandated to develop the small and medium enterprise

(SME) sector, to deploy a dedicated eProcurement platform for SME members. The collaboration aims to automate member requests, enable supplier categorisation and reporting capabilities through the BravoAdvantage Supplier Value Management capability. The platform will fully integrate with the eSupply and will act as a gateway for membership payment. The announcement follows the successful automation of Dubai SME’s registration, pre-qualification, and approval processes to their Government Procurement Programme. The programme, founded in 2011, was designed to enable SMEs to access contracting opportunities with government departments in the UAE. With the deployment of the new application all transactions among Dubai Government Departments will be consolidated on one unique platform ensuring all departments assign the agreed five per cent of their purchasing spend to SME members. Tejari will play a key role in the implementation of the application, from complete re-designing of user experiences on all smart services, to providing enduser training and support to Dubai SME to ensure the successful adoption of the platform.

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Gulf Air drives future business growth with Dell EMC Dell EMC announced that Gulf Air has selected Dell EMC’s market-leading Data Domain and Data Protection Suite solutions to create a highly scalable protection and availability foundation for supporting rapid data growth. Gulf Air aims to leverage the backup and recovery capabilities offered by this solution to help meet its data accessibility requirements. Gulf Air is driven by huge volumes of user-generated data – further expected to grow by 12 per cent in the next 18 months. With the modern passenger in mind,

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Gulf Air optimises the data to develop an array of products and services. To meet this end, efficient backup and recovery with resilient protection storage is key to fuelling the national carrier’s business ambitions. Gulf Air opted to deploy a highly scalable and sophisticated Dell EMC data protection solution to power the IT transformation of its existing storage infrastructure, reduce related costs, future-proof it with advanced efficiencies and safeguard critical data and processes. This will also facilitate business continuity and growth.

Emirates SkyCargo expands network to Fort Lauderdale Emirates SkyCargo has expanded its network of cargo destinations in the United States with the launch of a new daily service to Fort Lauderdale, Florida from December 15th, 2016. Fort Lauderdale is Emirates SkyCargo’s 13th destination in the United States, and its second in Florida. The daily Dubai- Fort Lauderdale route is operated by a Boeing 777-200LR and offers up to 15 tonnes of belly-hold cargo capacity per flight. Emirates SkyCargo also offers belly hold cargo capacity on its daily service to Orlando, Florida, bringing the total cargo capacity offered to the state to over 330 tonnes per week. The inclusion of Fort Lauderdale to its US network will allow Emirates SkyCargo to open up trade opportunities and provide additional connectivity to its cargo customers in South Florida and the broader region. The top exports from Fort Lauderdale are expected to include healthcare equipment including surgical and laboratory equipment, pharmaceuticals, electronics, aerospace components, aviation and shipping spares, perishables including cheese, seasonal fruits and vegetables and mail. Top imports into the region are likely to include pharmaceuticals, aerospace components, electronic and electrical goods.


UAE’s KEF Holdings launches KEF Infra One KEF Infra, the infrastructure subsidiary of KEF Holdings, the UAE-based multinational diversified group that specialises in innovative offsite manufacturing technology, officially launched the KEF Infra One Industrial Park, the world’s largest and first-of-its-kind fully integrated offsite manufacturing park in Krishnagiri, Tamil Nadu in India. The launch event was headlined by Narayana Murthy, Founder of Infosys, in the presence of Faizal E Kottikollon, Founder and Chairman, KEF Holdings, Shabana Faizal, Vice Chairperson, KEF Holdings, Sumesh Sachar, CEO, KEF Infra, and over 750 guests - including KEF Infra partners and industry leaders from India and across the world. Valued at US$ 100 million (AED 367 million), KEF Infra One spans one million square feet and features a diverse range of cutting-edge technology that can revolutionize manufacturing and delivery processes in the construction industry. With a vision to fast forward India into one of the world’s leading hubs for sustainable construction, KEF Infra is at the forefront of Industry 4.0, and leverages world-class design and state-of-the-art manufacturing technology – providing high quality, meticulously engineered infrastructure solutions in a timely and cost-effective manner. With a strong pipeline of projects within India through 2017, KEF Infra also aims to export its global vision of innovation and technologyled development to various GCC markets, starting with the UAE, to specifically address the sustainable infrastructure demands in the region.

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Logistics Parks essential to strengthen Vietnam’s trade potential Logistics parks are a strategic solution for global companies seeking to consolidate their operations, according to DP World Group Chairman and CEO Sultan Ahmed Bin Sulayem, who met with Vietnamese Prime Minister Nguyen Xuan Phuc in Hanoi last month. Seamless cargo movement to and from these parks is vital, Bin Sulayem explained, connecting land, air and sea using easy-to-use and ‘smart’ electronic portals, much like the one-stop Dubai Trade Portal offered at the global trade enabler’s flagship Jebel Ali Port and Free Zone in Dubai. During their meeting, Bin Sulayem also expressed his interest in developing logistics zones in Vietnam, while participating in other long-term projects to improve infrastructure in the country. This follows a meeting with the President of Vietnam Tran Dai

DP World Group Chairman and CEO Sultan Ahmed Bin Sulayem with Vietnamese Prime Minister Nguyen Xuan Phuc during their meeting in Hanoi.

Quang on Tuesday where Bin Sulayem welcomed the government’s efforts in upgrading roads and bridges connecting to the 40-hectare Hiep Phuoc Industrial Park, where DP World operates its Saigon Premier Container Terminal (SPCT), a project that is an 80:20 joint venture between DP World and Vietnamese state-owned Tan Thuan Industrial Promotion Company (IPC).

dnata completes 10 successful years of cruise logistics and management in Dubai dnata Airport Operations marks 10 years of working with the Department of Tourism and Commerce Marketing (Dubai Tourism) to establish Dubai as a global cruise hub. From handling 55 cruise ship calls with 106,000 cruise tourists in the 2006/07 season, the market has since grown to 133 cruise ship calls attracting over 541,000 cruise

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tourists to Dubai in the 2015/16 season. Over 23 of the world’s leading cruise lines now have Dubai as a port of call for their passenger turnaround and six worldclass cruise lines homeporting, speaking to Dubai’s growth in prominence as a cruise hub of the region. For the winter cruise season, dnata welcomes

Thomson Cruises to Dubai, and the Emirate has been named as the new home port for the Thomson Celebration Cruise Ship. Major cruise companies such as Norwegian Cruise Lines (NCL), Celebrity Cruises and Crystal Cruises have added Dubai to their itineraries, and MSC Cruises, TUI Cruises have

deployed superior passenger capacity ships and are among the 10 maiden ship calls to Dubai this season 2016/17. Modern facilities and fast processing times of passengers in terms of visa clearances, smooth baggage handling and transportation services from the aircraft to the port and vice versa are the key aspects.


Dubai Supreme Council of Energy promotes 3rd Emirates Energy Award (EEA) 2017 in Oman As part of its efforts to maximise participation in the 3rd Emirates Energy Award (EEA) 2017, to be held under the patronage of HH Sheikh Mohammed bin Rashid Al Maktoum, UAE Vice President and Prime Minister and Ruler of Dubai, under the theme

‘Innovative Solutions for Clean Energy’, Dubai Supreme Council of Energy (DSCE) has highlighted the key elements of the event at a press conference attended by Omar Al Qurashi, Vice Chairman of EEA Marketing and Events, Naser Al Shaiba, Director of Environment, Health, Safety and Climate Change, DSCE, along representatives from the Omani energy sector. Representatives of the Council underlined the role of Emirates Energy Award (EEA) in rewarding best energysaving practices that are applicable and innovative at the same time. The press conference aimed to attract public and private institutions and research centres working in the energy sector due to the efforts and major projects undertaken by the Sultanate in order to shift to a green economy. The conference is in line with Oman’s Vision 2020, which aims to meet 10 per cent of electricity requirements from renewable energy sources by 2020.

Solutions for a healthy world Tranzone operates a state-of-the-art 3PL warehouse in Jebel Ali Free Zone. We have partnerships with the leading pharmaceutical, medical device and animal health companies around the world.

Healthcare Logistic Services: Air Freight Sea Freight Land Transportation Value Added Services Warehousing & Distribution Return logistics Documentation Tranzone FZCO (Member of Banaja Holdings)

Jebel Ali Free Zone (South) Plot No: S20129 P.O Box : 262955, Dubai, United Arab Emirates, Tel : +971 4 811 0000

Web: www.tranzone.ae JANUARY 2017 13


Dubai South celebrates 10 years of pioneering ambition Marking a significant milestone, Dubai South celebrated its 10th Anniversary in the presence of His Highness Sheikh Ahmed bin Saeed Al Maktoum, President Dubai Civil Aviation Authority and Chief Executive of Emirates Airline and Group. The ceremonies, held at the Palazzo Versace, also saw Dubai South award the contribution of its key stakeholders and partners. Said His Highness Sheikh Ahmed bin Saeed Al Maktoum, “The foundation of Dubai South is testimony to the visionary leadership of our ruler His

Highness Sheikh Mohammed Bin Rashid Al Maktoum, without whose guidance, support and direction none of this would have been possible. In 2006, guided by our ruler’s foresight and vision to see Dubai take centre stage as the aviation capital of the world, we set out to build the first master-planned aerotropolis, creating an innovative global gateway that would offer new standards of seamless connectivity. The future economic platform of Dubai, and an integrated urban destination, Dubai South is proudly etching a new blueprint

for cities of tomorrow as it rightfully takes its place as the City of You.” This year, Dubai South witnessed an unprecedented 43 per cent growth in the number of companies operating there, largely due to its unparalleled infrastructure and strategic location, providing companies with the perfect platform to extend their reach and participate more effectively in the global value chain. It also successfully launched its real estate project, The Pulse, and saw work commence on Emaar South, a joint venture between Dubai South and Emaar.

Tristar Shipping wins Safety Award Tristar Group’s Shipping Division won a Safety Award at the Lloyd’s List Middle East and Indian Subcontinent Awards held last month at the Palazzo Versace Hotel in Dubai. The recognition is testament to Tristar’s commitment of promoting a culture of safety within all of its divisions. Coincidentally, three days prior to receiving this award, the company conducted its annual Shipping Safety Day at the Port of Fujairah. The company has a Goal Zero policy which translates to

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zero harm to people and the environment companywide. Goal Zero has helped the organisation to develop a sound awareness amongst its employees as well as promoting a robust safety and quality culture across the board over the past years. Before receiving the Safety Award, Tristar Group’s acquisition of Abu Dhabi-based Emirates Ship Investment Company (Eships) for US$ 90 million, which was facilitated by Abu Dhabi Islamic Bank (ADIB), won as ‘Deal of the Year’ at the

Seatrade Maritime Awards held in October. Tristar Group CEO Eugene Mayne (centre) received the award with ADIB

Head of Specialised Finance Chris Phillips (2nd right). The group now owns and operates a fleet of over 20 vessels.


New Chief Innovation Officer appointed at DP World As part of its focus on innovation, DP World has appointed Sara Falaknaz as Chief Innovation Officer with immediate effect. Falaknaz is currently the Vice President of Innovation for DP World, and her new duties will expand the role in other directions. The company is building a group-wide global innovation structure across its operations, and has already created an online portal called ‘innoGate’ to collect ideas from its 37,000-strong workforce across 40 countries. She will also lead exploration of investment in breakthrough and disruptive ideas that could change the face of the industry, and how operations are conducted in the future through new technologies and working practices.

From left: Simon Stephens, Frazer Jones Middle East, Seema GuptaManager – Talent Development and Administration, and Abhishek Ajay ShahCo-Founder and Managing Director

RSA Logistics awarded ‘Employer of the year’ at the Middle East HR Excellence Awards RSA Logistics was awarded ‘Employer of the Year’ at the 2016 Middle East HR Excellence Awards, the most distinguished platform in the region for recognising HR and talent development professionals, held at the InterContinental Hotel. The Middle East HR Excellence Awards honour the exceptional accomplishments of individuals, teams and organisations that have made a significant contribution to the development of the Middle East HR Industry. The awards come under the

HR Summit and Expo, the biggest HR event in the region. RSA Logistics was conferred the title by a panel of judges for showing outstanding people development strategies that fostered an environment of engagement and motivation, leading to higher productivity, thereby proving itself as an employer of choice. The company was also recognised as a Best Employer by GCC Best Employer Brand Awards 2016, held in October last year.

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COUNTRY REPORT - EUROPE, AMERICAS AND MAJOR ECONOMIES

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An interesting way

ahead Global economy suffers another lacklustre year in 2016, finds FocusEconomics, as they make predictions for the year to come

G

lobal economic growth remained soft in 2016 for numerous reasons, which vary by region. Generally, the culprits include structural adjustments in many countries, efforts to reduce overcapacity, recurring natural disasters, geopolitical events - such as Brexit, a coup d’Êtat in Turkey, and the ongoing civil war in Syria, among others - and heightened uncertainty related to the US presidential election, as well as potential policy changes in the US, and a number of other major economies. Comprehensive data showed that the global economy grew 2.6 per cent year-on-year in Q3 (at current exchange

JANUARY 2017 17


COUNTRY REPORT - EUROPE, AMERICAS AND MAJOR ECONOMIES

rates), and remains on track to have grown 2.5 per cent overall in 2016, in line with FocusEconomics’ Consensus Forecast. Against this backdrop, many central banks in the developed world have maintained exceptionally loose monetary policy, in an effort to support household consumption and business investment. Eight years after the acute phase of the global financial crisis, the developed world is still using its central banks as a crutch. Throughout developed economies, interest rates are at, or close to, record lows, and several are experimenting with avant-garde policies in the hope of stimulating domestic demand. Although it is reasonably clear that such policies are actually supporting economic

18 JANUARY 2017

growth - while introducing distortions in many asset markets - it is still hard to see how these economies will wean themselves off such support in the coming years. In the US, the scenario of higher interest rates continues to gain strength. At its last monetary policy meeting of 2016, the Fed announced its decision to raise interest rates, while the accompanying projection materials included an increase in the median estimate for rate hikes for 2017. Of the world’s richest countries, the US economy is undoubtedly in the best position, even though growth has fallen to a new normal of about 1.5 per cent. President-elect Donald Trump has signalled a large“selffinanced”fiscal stimulus, while ultimately

backtracking on major disruptive policies related to trade or immigration. In Europe, although the latest economic indicators have been resilient, confidence in the Eurozone has continued to be undermined by political risks, the rise of national opt-outs from region-wide policy, and the EU’s struggle to deal with Brexit. Such are the threats that Europe faces, that questions such as the future of Greece, the region’s immigration crisi,s and difficulties in its banking sector are likely to be pushed to the margins for now. In the common currency area, economic growth has been plodding at around 1.5 per cent in 2016. The fate of Japan is what European economies are keen to avoid.


COUNTRY REPORT - EUROPE, AMERICAS AND MAJOR ECONOMIES

Shanghai, China

GDP growth in Japan remained lacklustre in 2016, at around 0.5 per cent. The economy continues to be constricted by a shrinking workforce, a rising old-age dependency ratio, and tight immigration controls. 2016 proved to be a less uncertain year for most emerging economies than had seemed likely. Expectations of a US tightening cycle in 2016 dissipated as the year progressed - the first rate hike was ultimately postponed until the end of the year - and the greenback rally stalled. This prompted many emerging market central banks to cut interest rates, boosting disposable income. Moreover, investors went back on the hunt for higher-yielding assets, capital flowed back into emerging markets, and bond issuance likely reached a record

high in 2016. Nonetheless, market participants’ bigger appetite for emerging-market debt was partly due to the absence of returns in developed economies, rather than a vote of confidence for riskier assets. In terms of commodity prices, on November 30th, crude oil prices jumped above US$ 50 (AED 183.65) per barrel for the first time since October, after OPEC sealed a deal to reduce production by 1.2 million barrels per day (mbpd) to about 32.5 mbpd for six months, from the start of January. The markets reacted positively to the agreement, which includes an option to extend it until the end of 2017. In the first two weeks of December, crude oil prices surged to over USD 57 (AED 209.36) per barrel as the oil cartel also

Throughout developed economies, interest rates are at, or close to, record lows, and several are experimenting with avantgarde policies in the hope of stimulating domestic demand. clinched a deal with non-OPEC countries, mainly Russia and other big crude exporters, to reduce their supply by 558,000 barrels a day. The deals amount to the first global supply pact since 2001, with producers battling to reverse a price crash that began in mid-2014, and caused oil prices to remain at record lows for two years.

2017 spotlight on China, Brexit and the EU, and Trump’s administration Geopolitical factors, elections in various European countries, and the inauguration of Donald Trump as President of the United States will all contribute to a highly uncertain global context in 2017. Following an expected

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COUNTRY REPORT - EUROPE, AMERICAS AND MAJOR ECONOMIES

City of New York

2.5 per cent increase in 2016, analysts surveyed by FocusEconomics expect that global economic growth will nevertheless experience a moderate improvement in 2017, to 2.9 per cent, and continue at around this rate in the following two years. The improvement projected in 2017 rests mainly on analysts’ assumptions that the global economy will continue to be bolstered by a continued recovery in developed economies – supported by still accommodative monetary policy in some economies, and a renewed fiscal boost in others - and by stronger economic activity in most of the emerging world. The 2017 global growth forecast was left unchanged in December, which reflects balanced risks to the outlook. However, certain threats persist. Among these threats are potential stumbling blocks in the Brexit negotiations, the resurfacing of another China-meltdown episode, like that seen in early 2016 – with a consequent deceleration of its economy – and uncertainty related to the economic policies of the new Trump administration, which have the potential to stir things up drastically in the global economy. In terms of political risks, the wave of change seen in 2016 in a number of countries, including the UK, the US, and Italy, will continue unrelentingly in 2017,

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and uncertainly related to recent geopolitical events will persist. Looking at individual countries, the global outlook for 2017 showed an upward revision to growth prospects for major economies such as the Euro area, Japan, and the US. The GDP growth forecast for the UK also improved from the previous month, as concerns over negative spill-overs from the Brexit vote continued to reduce. Among major emerging economies, the economic outlook for Brazil, Russia, and India deteriorated from the previous month’s assessment, while China’s GDP growth projection remained stable. At a regional level, only growth prospects for Latin America and Sub-Saharan Africa deteriorated from the previous month’s Consensus.

USA – Signs of economic strength precede new administration As the dust settles following the presidential election, economic data from the past month have been broadly positive. Steady gains in the labour market, including a post-recession drop in the unemployment rate in November, have made the headlines. Personal disposable income and household spending have remained fairly solid throughout 2016, boosted by buoyant consumer confidence, which jumped to a nine-year high in November.

In terms of economic growth, after an extended soft growth patch characterised by five quarters of inventory correction, GDP growth in Q3, at 3.2 per cent, was the fastest in two years. Meanwhile, positive prospects for oil prices, and somewhat improving global conditions, are supporting US manufacturing activity, with the ISM index rising for a third consecutive month in November. The signs of strength in the US economy, as Trump prepares to assume office, provide a strong contrast to the difficult context inherited by his predecessor, Barack Obama, who took office at the depths of the financial crisis. Trump has vowed to further boost US growth to about 3.5 per cent a year on average. However, FocusEconomics analysts expect the boost that Trump can add to US growth in 2017 and 2018 to be modest. They see GDP growth at 2.2 per cent in 2017– up 0.1 percentage points from last month’s estimate–and inching up further to 2.3 per cent in 2018.

Euro Area – Region shows resilience overall in Q4 The Eurozone’s growth story continued unfazed in the third quarter, as a solid performance in the domestic economy drove a steady expansion. Households benefited from low inflation, and an improving labour market, while the external sector and


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investment were the economy’s weak spots. Data for the final quarter point to a modest pick-up in momentum. The unemployment rate inched down in October, and economic sentiment rose in November. In addition, the euro fell to the lowest level seen in years following the US Federal Reserve’s decision to hike interest rates. The depreciated currency should bode well for the region’s exports, which have been hurt by subdued volumes of global trade. The common-currency region’s growth outlook improved by 0.1 percentage points this month, and the FocusEconomics panel sees GDP expanding 1.5 per cent in 2017. A solid domestic economy should support the economy’s momentum, however, political risks are elevated in the face of a jam-packed election schedule next year. In 2018, the panel sees growth remaining stable at 1.5 per cent.

Japan – Recovery remains in question Economic activity has performed relatively well in Q4 as the weakening of the yen following Donald Trump’s victory in the November US presidential election, and a modest pick-up in global growth supported business confidence. On the downside, poor gains in wage growth continue to constrain private consumption. Although GDP expanded for the third consecutive quarter in Q3, the reading was revised down due to a worse-than-expected performance in private investment, and a sharp destocking process. Moreover, a change in accounting standards and the base year for GDP contributed to the lower figure. The government unveiled the FY 2017 budget on December 8th, 2016, which was approved by the Cabinet on December 22nd. The budget intends to rein in social security costs, boost the country’s workforce, and encourage salary increases. Moreover, the government is set to approve a third supplementary budget for this year, amounting to USD 1.7 billion, and focusing on earthquake reconstruction and military spending. An accommodative monetary policy and a weaker yen are expected to boost growth next year. That said, ambitious economic and social reforms are needed to ensure a healthier and more sustainable growth trajectory. The main downside risk to growth next year will be increased protectionism under Trump’s administration. Analysts see the economy

22 JANUARY 2017

Westminster at sunset, London, United Kingdom

growing 0.9 per cent next year, which is up 0.1 percentage points from last month’s projection. For 2018, they see growth at 0.8 per cent.

United Kingdom – The calm before the storm in 2017 The United Kingdom’s economy continues to hold up well. A complete set of data confirmed that GDP growth had decelerated marginally in the third quarter, but that growth remains robust compared to historical levels. The economy was supported by a rebound in exports, while domestic demand disappointed. Economic activity is performing well, as the smooth political transition following the

resignation of former Prime Minister David Cameron, and the accommodative stimulus of the Central Bank, are keeping consumer and business confidence at reasonable levels. However, the depreciation of the pound, rising inflation and insufficient wage hikes risk eroding household consumption. Last month, Finance Minister Philip Hammond delivered the first budget statement after the referendum. In the next five years, the government projects higher borrowing and a slower fiscal consolidation compared to the previous budget. Political uncertainty stemming from the referendum will continue to deter investment. Growth is expected to decelerate in 2017 amid


COUNTRY REPORT - EUROPE, AMERICAS AND MAJOR ECONOMIES

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a nomics is sis on the FocusEco and analy s st a tors c re fo mic indica economic acroecono m , t st n a a E rt o le e Midd most imp e ntries in th u th o c d n y a e k a for 127 aran Afric h a -S b require u s S pe, companie g in Asia, Euro k in h help Forward-t rmation to Americas. timely info d s. n n a io le is b c such relia siness de ork e right bu tw th e n e l k a a b m them ensive glo xt e as s’ n ic o m no its positi FocusEco pled with u o c e , th ts f is o s of econom indication urce leader, are reliable so a s a n o an industry ti ta u p ’s re d rl o lid s so ng the w company’ ence amo l ss intellig e n si ultinationa u m b r fo stitutions, in l ia s. c ie n c a n e major fin rnment ag s and gove companie

a slowdown in real household income growth. However, accommodative policy action taken by the BoE will soften the impact. The 2017 GDP forecast was recently upgraded by 0.2 percentage points, and now the economy is expected to expand 1.1 per cent. For 2018, GDP growth is projected to accelerate to 1.3 per cent.

Inflation – Global inflation maintains upward trend Global inflation continued to rise in November, edging up from 3.4 per cent in October to 3.5 per cent. November’s print marked the highest inflation rate in more than two years. Although the increase

stemmed mainly from higher commodities prices, the cost of global raw materials remains low, given that most commodities markets remain oversupplied. Disinflationary pressures are still strong in a number of advanced economies. Against this backdrop, most central banks are implementing largely accommodative monetary policies, which include, in some cases, ultra-low interest rates - even below zero - and quantitative easing programmes. The use of such unconventional measures in the developed world is expected to continue next year, and still loose monetary policies continue to be priced in by analysts,

MICS O N O C E S FOCU apart from for the US economy. The US Fed hiked interest rates for a second time since the financial crisis in December 2016. The Fed’s previous interest rate increase was in December 2015. The FocusEconomics panel projects that global inflation will rise to 4.1 per cent in 2017 - which was revised up by 0.1 percentage points from last month’s Consensus - from an expected 3.5 per cent in 2016, mainly due to higher energy prices in the wake of a recovery in crude oil prices. In 2018, analysts see global inflation moderating to 3.7 per cent, as inflationary pressures in most of the emerging world will abate.

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COVER STORY

a changing landscape

24 JANUARY 2017


COVER STORY

Tumbling oil prices are bad enough, but are we prepared for a future that limits fossil fuels? In this PWC report authors Andrew Clark and Adrian Del Maestro talk about the changing O&G landscape led by the fear of climate change, and a powerful, concerted effort to reduce CO2 emissions and minimise fossil fuels

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he Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.”- Said Sheikh Ahmed Zaki Yamani, former Saudi oil minister, in an interview in 2000. Sixteen years later, Yamani’s words neatly sum up the troubled state of the oil and gas (O&G) industry. Although the demise of oil is still some time away, it’s clear that the sector is going through one of the most transformative periods in its history, which will ultimately redefine the energy business as we know it. Navigating change of this scale will require smart, strategic judgment on the part of O&G company leaders. They must tackle cost and investment concerns in the short term, while readying themselves to respond to the future impact of inevitable external environmental pressures.

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The sensational drop in oil prices – below US$ 40 (AED 146.92) per barrel at the end of 2015, down more than 60 per cent from their high in the summer of 2014 – reflects rampant supply and weak global demand, amid concerns over slowing economic growth around the world, especially in China. This imbalance is only going to worsen. Saudi Arabia continues to pump at full tilt, less concerned about propping up oil prices, and more intent on securing market share, hoping to drive out marginal producers, particularly the United States. As early as the second quarter of 2016, the flow of Iranian oil increased, adding to the glut. Facing Even Middle East turbulence and instability, such as the tension that complexity, erupted between Russia and Turkey energy in Syria toward the executives end of 2015, has not budged crude prices. need a plan Consequently, it is that takes expected that expect oil prices will remain advantage low for the near of current future, although it would not surprise if conditions volatility returns. and bets on The impact of this situation on O&G options for a producers has been new normal rapid and dramatic. In the third quarter of 2014, when oil prices were still above US$ This reaction is not enough - or perhaps it 100 (AED 367) per barrel, the supermajors is too much. Massive cost cutting may offer posted aggregate net income of US$ 22.9 billion some short-term breathing space, but it is a (AED 84 billion), according to Bloomberg. myopic, panicky response that could leave Twelve months later, upstream profits had been businesses unequipped for the next turn of wiped out. In response, companies are slashing the business cycle. outlays. They are expected to cut capital What, then, will forward-thinking expenditures by 30 per cent in 2016. Already, O&G executives do? If you are one of some US$ 200 billion (AED 735 billion) worth those executives, you are probably already of projects have been cancelled or postponed. beginning to think and act differently than Both international and national oil companies you have in the past. It is time to reassess are negotiating aggressively for 10 to 30 per the purpose and strategic direction of your cent discounts from oil-field service providers. company, and to find a profitable role to play Head counts are affected as well. More than in the new O&G landscape. O&G executives 200,000 employees have been, or will be, let must address a vital existential issue: how to go in the O&G industry, according to recent successfully do business in an increasingly company announcements. carbon-constrained world.

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Competition, slumping oil prices, and glutted energy demand are not the only giant-scale factors affecting the business. The O&G landscape is being significantly reshaped by a potent emerging trend: the fear of climate change, and a powerful, concerted effort to reduce CO2 emissions and minimise fossil fuels. If you are a business leader in this industry, your most important task this year is to address, or at least face up, to a vital existential issue: how to successfully do business as an O&G company in an increasingly carbon-constrained world.

The heat is on Actions taken by industrialised nations to lessen global warming by curtailing the use of


COVER STORY

fossil fuels gained momentum in June 2015. The leaders of the G7 industrialised nations issued a communiqué, calling for the phasing out of petroleum-based energy by the end of the century. Six months later, nearly 200 nations at the COP21 summit in Paris agreed to a goal of limiting global temperature increases to less than two degrees Celsius above preindustrial levels, and to reach net-zero greenhouse gas emissions in the second half of the century. This deal appears to represent a collective commitment by nations large and small, to move away from fossil fuel production and consumption. This anticipated outcome of the meeting did not deter the CEOs of 10 of the world’s largest O&G companies (BG Group, BP, Eni, Pemex, Reliance Industries, Repsol, Saudi Aramco, Shell, Statoil, and Total) from declaring their support for what became the COP21 targets a month before the Paris meeting. Given the reality of diminished fossil fuel use in the future – and the gradual acceptance of that reality in the energy industry – a slew of questions immediately arise. Will upstream oil companies end up with stockpiles of ‘unburnable’ petroleum reserves? If so, should they abandon all exploration activity? Will downstream refiners need to rejigger their configurations to accommodate more biofuels and emission-abatement technologies? Will natural gas–focused companies be better positioned to manage the transition to a lowcarbon economy? Should large integrated O&G companies double down on lowcarbon technologies in their portfolio? These queries demonstrate the turbulence and complexity that energy company executives face – and they are only the beginning. As with any other transformation, managing the uncertainties requires a plan that takes advantage of current conditions, and simultaneously prepares the organisation to bet on options for a potential ‘new normal’: a stable business within the maelstrom of change.

For O&G companies, the right plan can be set in motion in three steps: First, review the business strategy to refocus your organisation on what you do best, and where you can best outpace competitors. As the emphasis on fossil fuels wanes, it is critical to avoid becoming overextended in

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COVER STORY

legacy areas. Look for growth areas where you already have massive strength that you can draw on, but where you are agile enough to adapt to changing market conditions. For example, exploration and production demand two very different business models. Production has significant funding requirements, whereas exploration involves substantially higher risks. All too many exploration firms have delved into production, only to discover that the complexities of these operations, and the capital and skills needed to support them, drain the business of resources, and make it hard to do either activity well. Downstreamfocused companies have had similarly unsatisfactory experiences when dabbling in

site in the North Sea, and intends to extend its productive life by 20 years. Second, no matter how difficult things get, avoid arbitrary cost cutting, which can leave your organisation ill-prepared for an uncertain future. Instead, channel funding into the areas of growth that best promote your differentiating capabilities. In addition, O&G companies must link their investment programs to options that are suitable for a more carbon-constrained operating environment. This is not to suggest that you radically change your portfolio and begin deploying wind farms on decommissioned oil platforms. Nor is it forecasted that pure exploration and production oil companies

upstream activities during the past decade. Those types of missteps and overreaching are potentially disastrous in today’s handicapped O&G market. Instead of broadening your business to pursue every opportunity you see, develop a more targeted approach to strategy. For example, Occidental Petroleum spun off its Californian asset into a separately listed company. Now Occidental is focusing on enhanced oil recovery, a sophisticated drilling method that can extend the life of producing fields. Similarly, Apache is emphasising developing an expertise in managing late-life assets abandoned by the majors; for example, it has acquired the 50-year-old Forties drilling

will be out of business in 20 years. But in the much shorter term, it is believed that every O&G company will have to figure out how to produce oil competitively, while reducing its carbon footprint as much as possible. Part of the solution is demonstrating a greater focus on energy efficiency. Statoil has taken steps in that direction by launching an ambitious internal project to review every turbine and compressor it operates on the Norwegian continental shelf. It intends to upgrade or replace equipment as needed to reduce its carbon footprint. Even integrated O&G companies should seriously consider incremental diversification, moving gradually into low-carbon technologies

28 JANUARY 2017

to manage the evolution of products as fossil fuels are phased out. For example, figure out whether you have the capabilities to invest in natural gas as a transition fuel. In November 2015, Royal Dutch Shell’s purchase of BG Group made it the world’s largest liquefied natural gas trader. This deal, and others, reflect the fact that natural gas is a preferred fuel for power generation in the US, and many other parts of the world, especially as its price has dropped, and made it more desirable than coal for cost and environmental reasons. If your company’s strengths are not suited to natural gas, consider acquiring and managing renewable energy sources such as wind, solar, and biofuels. Third, O&G companies need to exploit new technology to innovate, minimise costs, and help contribute to achieving a lower-emissions environment. For example, as oil prices plunge, demand for digital oil-field applications will grow. Opportunities to link multiple platforms operated remotely from a single onshore centre, or to deploy remote monitoring for onshore and offshore operations, can obviate the need for physical on-site inspections. One supermajor, BP, is already adopting drone technology to inspect pipelines at its remote Prudhoe Bay field in Alaska. Look into technology that can retrofit existing equipment for refining and producing renewable energy. Some large O&G companies, including ConocoPhillips, Eni, and Neste, are investing in refining processes to replace diesel with fuel from soybean, palm, and canola oils, as well as fats and animal tallow, in airplanes and commercial transportation. In short, as we enter the second year of low prices, every company in the O&G industry will be challenged in a different way. You will have to rise to the occasion, repositioning yourself based on what you do well today as well as on the opportunities you see going forward. Your skill at managing new business is part of this; the industry will hardly disappear, but it will certainly look very different 10 years from now. Some strategies for success are evident; others will be surprising – even to the companies that make them work, for the innovations that make them possible are not yet even on the drawing board. -www.strategyand.pwc.com/perspectives


TRENDS

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TRENDS

New energy

trends Booz Allen Hamilton forecasts energy trends in 2017, and explains the direction the industry will take in the coming years

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hange continues to be the defining feature of the global energy sector in 2017. In the oil and gas industry, as well as in electric power, major internal and external forces are driving change, requiring industry leaders to revisit strategies. In oil and gas, 2016 was a year of continued overproduction. The resulting oil inventory overhang finally had an effect in reducing US shale production, but did little to spur demand that’s needed to bring the global market into balance. In the Middle East, a prolonged period of low oil price has impacted government spending, but the move toward economic diversification and reduced reliance on oil is prompting greater investment in high-potential sectors, including real

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TRENDS

estate, construction, hospitality, tourism, and education. There is also a greater national focus on achieving operational efficiency across sectors – and one notable area that stands to benefit immensely from embracing digitally-enabled solutions is utilities. The utilities sector has historically underinvested in information technology (IT), but an increasing number of utilities in the Middle East and North Africa (MENA) region are waking up to the benefits of smart technology. In utilities and electric power, the traditional supply chain is undergoing change driven primarily by regulation, public policy, plentiful inexpensive natural gas, and dramatic cost declines in renewable energy and storage. Dr Walid Fayad, executive vice president at Booz Allen Hamilton MENA said,“Energy and technology form the backbone of global economies and play a crucial role in driving the operational success of all other sectors. As innovation and technological disruption become the norm across the MENA region, we are increasingly seeing regulators and policy makers embracing game-changing trends in the energy sector – from support of

renewable energy, advanced metering, and grid modernisation, to big data and cloud. We expect that wider adoption of these technologies will increase overall operational efficiencies, especially in the wake of a period of prolonged low oil prices.” Dr Adham Sleiman, vice president, Booz Allen Hamilton MENA, adds,“Data analytics has emerged as one of the key trends that will shape the future of the energy sector in 2017. Big data is rapidly changing the way the energy sector operates globally – by reducing costs, optimising investments, and reducing overall risk. In order to achieve these objectives, and create additional value from untapped areas, organisations in the Middle East must establish holistic digital strategies that include upgrading their required digital capabilities.” Booz Allen Hamilton identified the following five trends that will impact the energy industry in 2017:

In oil and gas, the global“lower for longer” cycle of oil prices has executives and boards of Integrated Oil Companies, National Oil Companies, and oilfield service providers placing high scrutiny on exploration and production activities. Industry leaders are pursuing everything, from technology and information innovation, to greater personnel and asset tracking in oilfield development in an effort to drive greater labour and material productivity. In the electric power industry, inexpensive natural gas has already caused a collapse in the construction of new coal plants, and nuclear power is now in danger of a similar decline. Across the entire energy spectrum, companies are taking steps to develop the capability to conduct deep continuous analysis of their capital projects during execution, and leaders are finding ways to put the insights they gain into management action.

Focusing on capital expenditure productivity

Creating enterprise value from data

Market shifts are putting capital program execution under major pressure in both the oil and gas and electric power industries.

Like many industries, the energy sector has seen the amount of data from its operations skyrocket as advanced instrumentation

JANUARY 2017 33


TRENDS

and metering has been implemented. Only the most accessible benefits from this data have been realised so far, mainly focused on identifying opportunities for cost savings through labour elimination and incremental improvements to existing processes. While analytics in the industry is nothing new, companies are only starting to scratch the surface of how data can create new value within existing businesses. For example, vertically integrated oil majors have weathered the“lower for longer”market environment in recent years better than non-integrated competitors, because of their refining and petrochemical businesses.Yet, most of these companies have very limited insight into the markets into which they sell their products. Data science is changing this, creating dramatically better ability to decipher and understand trends, draw insights, and capture new opportunities. A similar change is underway in safety and reliability, where use of data is changing what engineers know about the optimal safe operating envelope for industrial processes. Organisationally, companies across the energy spectrum are growing centralised data science teams, often blending legacy employees with new, more data science-oriented hires. The hard work of building business cases for data science is just beginning.

Using markets to shape the future grid Public sector support of renewable energy, advanced metering, and grid modernisation over the past five years – in the form of mandatory deployment standards, and direct and indirect subsidies – have been very effective at driving down the costs of these advanced energy technologies, spurring their broader deployment. As regulators and policy makers consider what comes next, they are increasingly moving from a standards-and-subsidy approach to one that is more market-driven. As a foundation for future markets, regulators are requiring a greater understanding of the value that distributed energy resources (DERs) bring to the grid, so owners of DERs can be fairly compensated. For utilities, particularly in retail markets, this means understanding how the grid works in greater detail, and being able to dynamically model how it changes over time with the further expansion of DERs. Ultimately, it also

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means operating markets where customers have greater choice than ever before.

Following security to the operational edge Across the energy sector, security has been focused primarily on protecting company and customer data on corporate systems. With the increase in instrumentation, automation,

and virtualisation of operational assets – the rise of the Internet of Things – the security frontier is moving to the operational edge, and is growing in importance. We have already seen the growing threat to Industrial Control Systems (ICS) because they represent an increasingly diverse and extensively connected set of technologies. ICS are already automating power


TRENDS

movement through the electrical grid, oil flow through pipelines, and control of manufacturing systems. Unfortunately, as cyber attackers are more emboldened, they are recognising the operational, economic, and safety impacts that attacks on ICS infrastructure can cause. As a result, companies will increase focus on security beyond their traditional lens.

Innovation is the tipping point for cloud In most industries, the decision to migrate IT infrastructure from fixed, on-premises servers to cloud-enabled as-a-service models has been heavily based on cost. This was true for many corporate systems at the oil supermajors, but it’s innovation that’s driving the current wave of cloud migration

in the operational business units at these companies. The rise of analytics within operational business units in order to create maximum business value is enabled by a digital strategy, centred on the flexibility that the cloud provides. In the utility industry, movement to the cloud has been delayed by ambiguity over how the costs of new service models are categorised.

JANUARY 2017 35


HUMAN RESOURCE

Talent

key priority in 2017

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he MENA Recruiting Trends 2017 report, released by LinkedIn, has brought some interesting facts to light. One is that talent acquisition will continue to be a key focus for MENA companies in 2017, and recruiters will be even busier this year, focusing on quality of hiring. Jobs pertaining to operations, sales and engineering will be the highest priority roles to fill in 2017. According to the report, which took into account survey responses of over 170 corporate talent acquisition leaders across MENA, over 81 per cent of talent leaders feel that talent is the number one priority in their organisation, and in 2017, this will gain even more prominence. Majority of recruiting leaders indicate they will be very busy in the coming year, with the report revealing that over 60 per cent of teams are preparing for an increase in hiring volume, while 29 per cent feel it will decrease, and 11 per cent feel budgets and recruiting team headcounts will stay flat. “The recruiting organisation is not the flashiest department. It doesn’t directly bring in revenue or create gamechanging products. Yet, it is the quiet enabler behind company successes, and this has not gone unnoticed. In recent years, talent and HR leaders in MENA have gained a prominent spot on the C-suite table, driving decisions about the future of the company. Talent leaders feel confident that their department is

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Talent acquisition will continue to be a key priority for MENA companies in 2017, according to the MENA Recruiting Trends 2017 report, released by LinkedIn helping define the future of their company,” said Ali Matar, Head of LinkedIn Talent Solutions for Growth Markets, Southern Europe, Middle East and North Africa. The report also reveals that operations, sales and engineering will be the highest priority roles to fill in 2017.“The demand for operations, sales and engineering talent is so prevalent that recruiting teams in MENA have to start thinking more strategically about how to find and recruit these talent pools. Relying on data to pinpoint locations where the supply of talent is higher than the demand is a crucial first step. Another successful tactic is targeting each of these functions with highly customized employer branding content,”added Matar.

Some of the other trends that will define recruiting in MENA in 2017 include: Social professional networks will continue to remain the top source of quality talent

According to LinkedIn’s research, MENA business will continue to use social professional networks such as LinkedIn to identify and hire new talent, further

strengthening the reign of social media. Since referred employees are faster to hire, perform better, and stay longer in the company, employee referrals as well as third-party website/online job boards will continue to be used to facilitate better hiring. The bulk of the talent acquisition budget will go to traditional tactics

Despite talent leaders sharing that employee referrals are one of the top sources of quality hires, most of them barely invest in building out a strong referral programme. Same with employer branding - publicised as one of the most important trends, it is about the last places where teams invest. The bulk of the team’s budget goes to more traditional tactics like posting jobs. About 22 per cent of hiring teams will continue to invest their budgets in job postings and recruitment agencies in 2017. If money weren’t a constraint, talent leaders would invest in employer branding and training for recruiters

2017 will see leaders being interested other tactics to facilitate better and qualitative hiring. If budgets weren’t an issue for teams, most MENA leaders, almost 52 per cent would prioritise investing in long-term strategic plays like employer branding. Around 51 per cent would invest in upskilling their team, and 37 per cent would look at new technologies instead of some of the shortterm needs that they currently resource.


HUMAN RESOURCE

Automation, customer relationship management tools for recruiting and soft skills assessments will define the future of recruiting

Automation, customer relationship management tools for recruiting and soft skills assessments that predict job success are the top trends that will shape the recruiting

industry in the next few years. Given that recruiters report limited headcount and budget, while hiring demands are growing, automation is top of mind for the industry with 38 per cent of companies considering innovative interviewing tools

for hiring, followed by customer relationship management tools at 36 per cent. Automation would both allow for speed, and also remove human bias. It would also allow for better ways to screen candidates for soft-skills, which over 60 per cent of hiring managers agree is a big challenge, and it is also the third most popular trend in MENA. This report is based on the survey responses of over 170 corporate talent acquisition leaders across MENA. All respondents are at the manager level or higher.

JANUARY 2017 37


TECHNOLOGY

Creating a secure

barrier GSC looks at Cyber Security threats and solutions in 2017, as we learn from the experiences in the past year

38 JANUARY 2017


TECHNOLOGY

2016

saw a huge number and variety of cyberattacks, ranging from a high-profile DDoS using hijacked Internet-facing security cameras, to the alleged hacking of party officials during the US election. We also saw a rising tide of data breaches, from organisations big and small, and significant losses of people’s personal information. With the year almost over, we’re pondering how some of those trends might play out in 2017.

attacks seek to coax users into compromising themselves. For example, it’s common to see an email that addresses the recipient by name, and claims they have an outstanding debt the sender has been authorised to collect. Shock, awe, or borrowing authority by pretending to be law enforcement are common and effective tactics. The email directs them to a malicious link that users are panicked into clicking on, opening them up to attack. Such phishing attacks can no longer be recognised by obvious mistakes.

Current and emerging attack trends

Financial infrastructure at greater risk of attack

Destructive DDoS IOT (Internet of Things) attacks will rise. In 2016, Mirai showed the massive destructive potential of DDoS attacks, as a result of insecure consumer IoT devices. Mirai’s attacks exploited only a small number of devices and vulnerabilities, and used basic password guessing techniques. However, cybercriminals will find it easy to extend their reach because there are so many IoT devices containing outdated code, based on poorly-maintained operating systems, and applications with wellknown vulnerabilities. Expect IoT exploits, better password guessing, and more compromised IoT devices being used for DDoS, or perhaps to target other devices in your network.

Shift from exploitation to targeted social attacks Cybercriminals are getting better at exploiting the ultimate vulnerability - humans. Ever more sophisticated and convincing targeted

The use of targeted phishing and ‘whaling’ continues to grow. These attacks use detailed information about company executives to trick employees into paying fraudsters or compromising accounts. We also expect more attacks on critical financial infrastructure, such as the attack involving Swift-connected institutions, which cost the Bangladesh Central Bank US$ 81 million in February. Swift recently admitted that there have been other such attacks, and it expects to see more, stating in a leaked letter to client banks: “The threat is very persistent, adaptive and sophisticated – and it is here to stay”.

Exploitation of the Internet’s inherently insecure infrastructure All Internet users rely on ancient foundational protocols, and their ubiquity makes them nearly impossible to revamp or replace. These archaic protocols, that have long been the backbone

JANUARY 2017 39


TECHNOLOGY

of the Internet and business networks, are sometimes surprisingly flaky. For example, attacks against BGP (Border Gateway Protocol) could potentially disrupt, hijack, or disable much of the Internet. And the DDoS attack on Dynin October (launched by a myriad of IoT devices), took down the DNS provider and, along with it, access to part of the internet. It was one of the largest assaults seen, and those claiming responsibility said that it was just a dry run. Large-scale ISPs and enterprises can take some steps to respond, but these may well fail to prevent serious damage if individuals or states choose to exploit the Internet’s deepest We security flaws.

Increased attack complexity Attacks increasingly bring together multiple technical and social elements, and reflect careful, lengthy probing of the victim organisation’s network. Attackers compromise multiple servers and workstations long before they start to steal data or act aggressively. Closely managed by experts, these attacks are strategic, not tactical, and can cause far more damage. This is a very different world to the pre-programmed and automated malware payloads we used to see – patient and evading detection.

More attacks using built-in admin languages and tools

also see more attacks using penetration testing, and other administrative tools that may already exist on the network, need not be infiltrated, and may not be suspected

We see more exploits based on PowerShell, Microsoft’s language for automating administrative tasks. As a scripting language, PowerShell evades countermeasures focused on executables. We also see more attacks using penetration testing, and other administrative tools that may already exist on the network, need not be infiltrated, and may not be suspected. These powerful tools require equally strong controls.

Ransomware evolves As more users recognise the risks of ransomware attack via email, criminals are exploring other vectors. Some are experimenting with malware that re-infects

40 JANUARY 2017


TECHNOLOGY

JANUARY 2017 41


later, long after a ransom is paid, and some are starting to use built-in tools and no executable malware at all to avoid detection by endpoint protection code that focuses on executable files. Recent examples have offered to decrypt files after the victim shared the ransomware with two friends, and those friends paid to decrypt their files. Ransomware authors are also starting to use techniques other than encryption, for example, deleting or corrupting file headers. And finally, with ‘old’ ransomware still floating around the web, users may fall victim to attacks that can’t be ‘cured’ because payment locations no longer work.

Emergence of personal IoT attacks Users of home IoT devices may not notice or even care if their baby monitors are

42 JANUARY 2017

hijacked to attack someone else’s website. But once attackers ‘own’ a device on a home network, they can compromise other devices, such as laptops containing important personal data. We expect to see more of this as well, as more attacks that use cameras and microphones to spy on households. Cyber criminals always find a way to profit.

Growth of malvertising and corruption of online advertising ecosystems Malvertising, which spreads malware through online ad networks and web pages, has been around for years. But in 2016, we saw much more of it. These attacks highlight larger problems throughout

the advertising ecosystem, such as click fraud, which generates paying clicks that don’t correspond to real customer interest. Malvertising has actually generated click fraud, compromising users, and stealing from advertisers at the same time.

The downside of encryption As encryption becomes ubiquitous, it has become much harder for security products to inspect traffic, making it easier for criminals to sneak through undetected. Unsurprisingly, cybercriminals are using encryption in creative new ways. Security products will need to tightly integrate network and client capabilities, to rapidly recognise security events after code is decrypted on the endpoint.


TECHNOLOGY

Rising focus on exploits against virtualised and cloud systems

Deploying next-generation endpoint protection - As ransomware becomes ubiquitous and endpoints grow more diverse, Attacks against physical hardware (eg, organisations must refocus on endpoint Rowhammer) raise the possibility of protection. But signature-based solutions dangerous new exploits against virtualised are no longer enough on their own, and can cloud systems. Attackers might abuse the miss zero-day attacks. Choose solutions that host or other guests running on a shared host, attack privilege models, and conceivably recognise and prevent the techniques and behaviours used in nearly all exploits. access others ‘data’. And, as Docker and Prioritising risk-based security - No the entire container (or ‘serverless’) ecoorganisation possesses the resources to system become more popular, attackers will systematically protect everything, and 100 increasingly seek to discover and exploit per cent prevention is no longer realistic. vulnerabilities in this relatively new trend Clarify the risks associated with each system, in computing. We expect active attempts to and focus your efforts accordingly. Risks operationalise such attacks. change fast - look for tools that track them dynamically, and respond Technical attacks against accordingly. But make sure states and societies those tools are easy and Technology-based attacks have practical enough to use. become increasingly political. the basics Societies face growing risks from Risks change YouAutomating can’t afford to waste both disinformation (eg,‘fake news’) time running the same and voting system compromise. fast – look reports and performing the For instance, researchers have for tools that same security tasks you demonstrated attacks that might always have. Automate allow a local voter to fraudulently track them vote repeatedly without detection. dynamically, Even if states never engage in attacks against their adversaries’ and respond elections, the perception that accordingly these attacks are possible is itself a powerful weapon.

wherever it can be done simply and easily, so you can focus scarce resources on serious risks and high-value tasks. Building staff and process to deter and mitigate social attacks - Since social attacks now predominate, educating users and involving them in prevention is now even more important. Focus education on the threats each group is likeliest to encounter. Make sure it’s up-to-date: outdated guidance on topics such as phishing can be counterproductive, offering a false sense of security. Improving defender coordination Cybercrime is organised crime: defence must be organised, too. That means choosing tools and processes that eliminate barriers within your organisation, so everyone can respond quickly to the same attack. It may also mean looking for legal and practical opportunities to collaborate with other companies and the government, so you can mitigate widespread attacks and learn from others’ post-mortems. -www.sophos.com

What can organisations do to protect against new threats? Unfortunately, many organisations still don’t have their security basics right. Consider these six measures organisations should put in place to help keep more complex threats at bay. Moving from layered to integrated security - Many organisations now possess multiple solutions that were once best-in-breed, but are now too costly and difficult to manage. Moving towards integrated solutions, where all components communicate and work together will help to solve this. For example, if malware knocks an endpoint’s security software offline, network security should automatically quarantine that device, reducing the risk to your entire environment.

JANUARY 2017 43


CARGO NEWS

C

Adjusting strategies

argo volumes of GCC carriers has been adversely disturbed in 2016 due to an increased airline capacity that is surpassing demand during the current economic downturn. Says Mohammed Al Musafir, Senior Vice-President, Commercial Cargo at Oman Air SAOC,“Due to a surplus of global air freight capacity, along with slower global trade, GCC cargo volume growth this year slowed down in comparison with the performances seen last year, and although to date, GCC carriers have seen less of a slowdown in cargo than many other airlines, naturally, the overall low growth has had an impact on operations. This impact is expected to have a bigger effect on the smaller regional operators.” is constantly analysing global market trends, and adjusting their

Oman Air Cargo Mohammed Al Musafir, Senior Vice-President, Commercial Cargo at Oman Air SAOC, talks to GSC about where the operator is heading in 2017

44 JANUARY 2017

strategies accordingly. Challenges remain, however. With all the planning and hard work that is put into this business every day, Oman Air cargo does not, of course, operate in isolation, and global economic changes can have a significant impact on them. “Significant among the changes witnessed in the past two years was the major drop in oil prices. And although this may have adversely affected international trade and commerce, we continue to endeavour on our growth plans, taking into account these global economic changes and continuously adapting our strategies to keep these influences to a minimum,”explains Al Musafir. The Oman Air cargo business is an international one. They have adopted an ambitious growth strategy - ‘To


With all the planning and hard work that is put into this business every day, Oman Air cargo does not, of course, operate in isolation, and global economic changes can have a significant impact on them

JANUARY 2017 45


CARGO NEWS

Become The Best’.“It will see us expand our existing international network even further, increase the strength of our fleet, delivering even more consignments to more destinations than ever before,”he adds. The operator has recently added destinations like Mashhad, Najaf, and started their first China operation to Guangzhou, along with upcoming scheduled routes to more African destinations. With this, their focus for 2017 will be on Africa and Asia, as well as expanding their partnership service agreements as they strategically expand their network. “Our focus is three fold,” explains Al Musafir,“First, we are working on expanding our product and service offerings, introducing more specialised services, and better tailored solutions to our growing client base. In 2017, we will be launching a 100 per cent cloud-based cargo management system to confidently manage our rapid expansion plans. The system will provide reliable, transparent, and real-time data throughout our logistics chain, from drop-off to delivery. Second, our new, state-of-the-art cargo facility at our hub in Muscat, is on schedule to begin operations

46 JANUARY 2017

in the second half of 2017. With an initial annual capacity of 350,000 metric tons, the 38,000-square-metre cargo facility provides loading and unloading functions, export and import handling activities, air-to-sea and air-to-road services, and screening and customs inspection procedures. The new complex is capable of build-up, break-down, transfer, staging, storage, and tracking of all inbound and outbound cargo in the form of pallets, unit load devices, in-house pallets, and bulk cargo. The facility accommodates frozen and chilled storage, secure and dangerous goods storage, bonded storage and quarantine facilities, as well as a live animal centre.” The third aspect, he adds, is their customer service department.“We constantly strive to offer best-in-class professional services to institute strong, lasting relationships with every client, partner, and stakeholder. We understand that professional customer service is at the core of a successful business. Which is why our Customer Service teams are at the foundation of our future success. Through a thorough combination of quality, speed, accuracy, and commitment, we

relentlessly work to remain ahead of our customer’s expectations,”he states. Oman Air is also upping their game by stepping into the e-services arena, as this is rapidly becoming integral to the development and evolution of the industry. “We at Oman Air Cargo look at technology as an advantage to constantly improve our operations and services. Our new cloud-based system will offer end-to-end transparency and control, meaning our clients will be able to track their shipments around the clock. Oman Air Cargo’s upcoming mobile application (available on IOS and Android), will give our clients access to real-time information wherever they may be,” explains Al Musafir. From flight schedules, booking capability, and local agent support, to tracking the status of shipment throughout the logistic chain, all will be available at the tip of a finger. A dedicated mobile application will also be available for their global agents, giving them the platform to offer better customer service, greater efficiency, and instant information for better decision-making, all with client satisfaction being the ultimate goal.


INTERVIEW

In this Oxford Business Group’s interview with Sheikh Ahmed bin Saeed Al Maktoum, Chairman, Dubai Airports; President, Dubai Civil Aviation Authority; and Chairman and CEO, Emirates Group we get to know more about traffic patterns and the aviation business

How has the recent shift in global air traffic patterns, mainly from the West to the East, affected the aviation industry in Dubai? SHEIKH AHMED BIN SAEED AL MAKTOUM: Urbanisation, the shift of economic power eastward and the resulting emergence of a new middle class will continue to have an impact on traffic flows. Asia in particular will see tremendous growth, largely driven by its growing economies and middle-class populations in China and India, while African and Middle Eastern traffic will also continue to increase. Although European and North American growth is slower, both markets began with a larger starting base. Dubai is well positioned to benefit from its geocentric location and from its well-established and fast-growing networks at its two airports. Currently Dubai International (DXB) serves over 100 airlines that connect 260 destinations. What will be the impact of the transfer from DXB to Dubai World Central (DWC) on Dubai’s business environment? SHEIKH AHMED: Business will continue to benefit from the

development of two quality hubs, and both will provide options for UAE residents as well as for the millions of travellers from overseas

Anticipating continued growth

44 JANUARY 2017


INTERVIEW

who fly to or through Dubai every year. In the long term, and following the completion of the next phase of expansion, DWC is likely to evolve into Dubai’s intercontinental hub while DXB will serve regional airlines and markets. This is a strategy that will allow our two hubs to complement each other. Looking at growth in terms of the shift in airports, from DXB to DWC, we at Dubai Airports can anticipate the relocation of the Emirates Airlines hub once the next phase of development of DWC is completed. That phase, which would provide capacity for 120m passengers, is projected to be completed around the mid-point of the next decade. How can DWC compete for international travellers, and how will its location impact cargo? SHEIKH AHMED: The proximity of hubs is not a significant factor

when you consider that we are all attracting traffic from a massive and growing global marketplace. Due to our geocentric location, the development of top-flight infrastructure along with the rapid expansion of our home airlines, we have seen growth across both airports. This is expected to continue. In Dubai we project that 126m passengers will pass through our airports by 2020, and that the total will approach 200m by 2030. Similarly we can anticipate

the continued growth of cargo volumes. DWC is already among the top 20 airports for international cargo volumes, after opening in 2010, while DXB is number three. With passenger and cargo numbers increasing each year, what can Dubai do to maintain its capacity in the long term? SHEIKH AHMED: In the long term, we will be investing in the

expansion of DWC to achieve capacity of 120m passengers in the next phase of its development with an ultimate capacity of up to 240m passengers and 16m tonnes of cargo DWC will thus serve as Dubai’s intercontinental hub well into the future. With the rapid growth we are experiencing in all sectors, our ongoing challenge is to provide capacity to match the growing demand. In 2016 we will complete the final element of a $7.8bn expansion programme at DXB with the opening of Concourse D, which will boost that airport’s capacity to 90m. With additional improvements to procedures and technology designed to improve flow, we anticipate an ultimate capacity of 100m passengers per year at DXB. In parallel, we are planning to expand the existing passenger terminal building at DWC from the current 5m-7m passenger capacity to 26m passenger capacity by 2018. -www.oxfordbusinessgroup.com

JANUARY 2017 45


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COVER

A sea change:

emerging from a downturn Operators are scaling back dramatically on upstream capex spend and deferring major projects, oilfield services (OFS) companies have responded by pulling the traditional cost reduction levers in a downturn: cutting capex and headcount massively, while minimising operating expenditure. This report written by Craig Stevens Senior Manager, Oil & Gas and Adrian Del Maestro Director of Research, Price Waterhouse Coopers provides insights into surviving this downturn

O

scar Wilde once said,“We are all in the gutter, but some of us are looking at the stars.” And to some extent, that sentiment must resonate with many oilfield service (OFS) companies. The past two years has been a torrid time for the sector. With operators across the global oil patch scaling back dramatically on upstream capex spend and deferring major projects, OFS has responded by pulling the traditional cost reduction levers in a downturn: cutting capex and headcount massively, while minimising operating expenditure. Margins have been eroded, and many OFS companies are still in financial distress. The outlook was grim. Now there appears to be light at the end of the tunnel though. With supply and demand seeking a gradual equilibrium, the oil price has recovered a little. Among some companies there is a growing confidence that, perhaps, we have reached the trough. Schlumberger CEO, Paal Kibsgaard, displayed this optimism when discussing third quarter earnings, saying,“After seven quarters of unprecedented activity decline, the business environment stabilised as expected in the third quarter, confirming that we have indeed reached the bottom of the cycle.” That said, if we are poised for a potential recovery, it is likely to be uneven. So, as some OFS companies dare to gaze at the stars, what do they need to do to prepare for a potential upturn? As they emerge

JANUARY 2017 51


COVER

from the turmoil, in many ways the operating landscape has radically transformed since the oil price decline in the summer of 2014. What will they need to focus on to succeed in this new world?

A brave new world beckons Much has been written on the level of financial distress in the sector. But it is worth mentioning a few facts to put this distress into context. A major driver has been the dramatic decline in global upstream capital expenditure, with some commentators suggesting a 40 per cent decline in spend in 2016, versus the high in 2014 (as illustrated in Exhibit 1). This capex reduction, combined with a broader decrease in drilling activity and opex minimisation strategies, is having a significantly adverse impact on the OFS sector. This is evident in the drilling segment. For example, since the summer of 2014, we have seen day rates for drill ships decline by some 30 per cent, and monthly utilisation rates for drill ships plummet from 90 per cent to just over 30 per cent in recent months. More broadly, strong negotiating tactics by operators (anecdotal evidence suggests discounts of between 30 – 40 per cent) have adversely impacted OFS rates, with some service providers suggesting this level of price reduction is not sustainable longer term. In terms of financial performance this degree of distress across the sector translates into major margin erosion if we look at the earnings results of the large OFS companies (see Exhibit 2). Clearly, there will be great sense of relief among market participants if we have really touched the bottom. But to be fair, if we have touched the trough of the cycle, the recovery is likely to be uneven, with some companies emerging from the turmoil sooner than others. One may argue that the big global integrated players will be the first to benefit from the green shoots of recovery, given their financial and operational scale. Then again, some of the smaller, specialist, niche players may be the early beneficiaries of an upturn. That said, many of the other players are likely to experience the downturn for another year or so. However, should that be the case, as companies emerge from this period of distress, the world they operate in has changed dramatically.

52 JANUARY 2017

Exhibit 1: Global Upstream Capex 2010 – 2017 in US$m

Source: Rystad Energy; Strategy and research


COVER

Exhibit 2: Earnings Margins of Leading OFS Companies Q1 2006 – Q2 2016

Source: Bloomberg; Strategy& research

In a paper written in 2014, ‘Surviving the worst: It’s time for oil services to address shortcomings and find strategic solutions’, the challenges facing the sector as it entered the downturn were highlighted. But in many ways, the landscape has evolved so much since June 2014, as illustrated in Exhibit 3. Oil prices no longer have a mythical ‘structural floor’ of US$ 100/bbl (AED 367), with Brent hitting a low of US$ 28/bbl (AED 103) in January 2016; operators are less ‘bullish’, and we see some retreating from those challenging technical frontier plays and large scale capital projects (such as Shell shelving its Arctic aspirations and Chevron publicly stating it wants to move away from major projects), as well as reduced exploration activity; Saudi Arabia’s role as the traditional swing producer is being

JANUARY 2017 53


challenged by US tight oil, a segment that has proved to be extraordinarily resilient; the lifting of sanctions in January 2016 paved the way for the return of Iran, as it grew production, seeking to become a major OPEC producer; there is the renewed momentum for a lower carbon world and a greater sense of urgency post COP21 for the need to decarbonise our energy system; and finally, we see a relentless focus on cost reduction across the whole oil and gas sector.

Prepare yourself for a recovery While OFS companies may still feel that their feet are firmly planted in the ‘gutter’, what should they do to prepare for the ‘stars’? Here are just a few thoughts to consider: 1. Double down on innovation

Innovation and R&D are at the core of the OFS business. It is worth reminding ourselves that oil operators outsourced this capability in the 1980s, and since then it has become a differentiating factor between operators and services when bidding for work. That said, the pain of the downturn has forced some OFS companies to cut back on R&D spend. This is significant. The larger OFS companies spend as much as the majors in absolute terms, but noticeably more in terms of spend as a percentage of sales (see Exhibit 4). Due to financial distress triggered by the oil price decline some of the major OFS companies are scaling back R&D spend. Compared to 2014 all the big four OFS companies saw R&D spend shrink, as illustrated in Exhibit 5. Given the importance of innovation, it is essential OFS companies protect investment levels in this core area. Moreover, the technology demands of players in this environment will also influence the type of technology being sought. It is unlikely advances in seismic technology will have the scale of impact in the market, given the drop in exploration spend, and reduced activity, compared to growing demand for improving production technology. More broadly, innovation in technology will be key to reviving the competitiveness of some basins. The UK North Sea is a good example. This mature and high cost region has seen its production economics challenged by low oil prices, with the threat of some fields being prematurely decommissioned. The application of new

54 JANUARY 2017

Exhibit 3: Evolution of Global Oil Market – Selected Drivers

Source: Strategy& research


COVER

technologies will be critical, not only in lowering the cost to operate, but may also underpin innovation exports to other basins (such as decommissioning skills). As oil prices hit a low of US$ 28/bbl (AED 103) in early 2016, the UK government announced a number of initiatives to support the North Sea oil and gas sector, including the creation of the UK Oil and Gas Technology Centre (OGTC). The aim of OGTC is to pioneer technologies of specific benefit to this mature basin to extend longevity of production, as well as prepare for decommissioning.

2. Explore partnerships to aggressively push ‘big data’ analytics

The innovation theme is broader than R&D spend. The sector has an opportunity to really push on data analytics and the Internet of Things, in order to dramatically improve the efficiency of operations. If we look at the digital oil field, for example, there are some pioneers in the industry, but digital oilfields have yet to take off. This is partly because the sector has been slow to adopt and deploy these new technologies at scale. One industry player described the sector’s conservative approach

Exhibit 4: R&D Absolute Spend – IOCs vs. OFS 2015

Source: Bloomberg; Annual Reports; Strategy& research

Exhibit 4: R&D Spend as % of Sales – IOCs vs. OFS 2015

Source: Bloomberg; Annual Reports; Strategy& research

to technology as ‘glacial’. This is in stark contrast to other extractive industries, such as mining, where driverless trucks are well utilised, and driverless trains are being piloted to promote productivity enhancements in remote regions. More recently, the Kazakh government formed a partnership with Google and McKinsey to analyse big data from sensors placed in mining operations across the country to monitor productivity levels. To be fair to the oil and gas sector, the risk of catastrophic failure is also a major reason why companies are wary of rapid adoption. Nevertheless, with the industry’s relentless focus on cost reduction, and the impact of headcount attrition and loss of capability, technology has the opportunity to succeed. It can help drive efficiencies, and go some way to bridging that capability loss. There are now new entrants in the sector not traditionally seen as oilfield services companies, such as Siemens and GE Oil and Gas, who are competing with the likes of Halliburton and Schlumberger. These technology companies use their experience in other industries and versatility to leverage digital technologies to address remote operations and collaboration, analytics, optimisation, and the Internet of Things. Some OFS companies may do well to consider strategic partnerships with these new entrants to deliver a whole new set of capabilities to operators. 3. How will OFS bridge the capability gap?

The human cost of this downturn cannot be over-estimated. According to some industry estimates, between 230,000 and 350,000 jobs have been lost in the oil and gas sector globally since mid-2014. The OFS segment has been particularly aggressive in this area, shedding significant numbers of employees over the past two years. The scale of this attrition will exacerbate the capability issues already plaguing the sector. Moreover, the ability to retain and recruit new talent to the sector will be rendered much more difficult. How can you ‘sell’ a sector to new joiners that is notorious for harsh headcount reduction during each cyclical downturn? More importantly, perhaps, when the upturn comes, what will be the consequences of this capability loss?

JANUARY 2017 55


COVER

In conversations with the sector, some respondents noted their biggest concern was the lack of people and capabilities available to OFS once the upturn materialises. Moreover, when this upturn comes, it is likely to be quick, and due to the lack of people, the industry will be building the next cost escalation cycle. Facing this significant capability gap, what should OFS do? Clearly, there is no single silver bullet, but companies will need to consider a range of strategies, ranging from the application of technology, to pursuing partnerships with selected providers to outsourcing services and operations. Again, the mining sector may serve as a helpful reference point regarding workforce diversity. BHP Billiton recently announced an aspirational target of ensuring 50 per cent of its workforce is made up of women by 2025, citing not only it was the right thing to do, but it would also improve performance. 4. Reduce complexity of operations

Companies should review their business structure and operations to reduce complexity and eliminate inefficiencies that have become ingrained over time. The value of digitisation has long been heralded, but little real progress has been made in this area. Baker Hughes is one exception, where they are exploring the application of artificial intelligence to manage back office invoicing. As the pressure on cost reduction remains, companies will need to explore new avenues to achieve this, and digitisation might be one option. Given the aversion of the sector to catastrophic risk, piloting digitisation in several non-core business units is a good way to deploy this technology with lower levels of risk impact. Reducing complexity does not mean diluting integration. Operators will continue to seek service providers that provide them with scale, technology and solutions that are a one-stop-shop, rather than seeking a solution from multiple vendors. So as the momentum for integration mounts, key OFS companies will need to develop integrated capabilities without adding to the complexity of their operations. Moreover, OFS companies might consider business models where they more effectively share pools of resources. In the same way Premier floated the concept of pooling

56 JANUARY 2017

back office functions across some operators in the UK North Sea, OFS might be able to replicate a similar approach. Equally, there are other existing business models that may gain more traction in this current environment. Schlumberger and Halliburton already pioneer services and solutions that manage assets on behalf of operators (respectively called Production Management and Integrated Asset Management). Through these services OFS companies share the risk and reward with operators. This enables service companies to optimise

operations and innovate, while creating flexibility for the operator to release its own talent and capital to redeploy to newer and more prolific basins. These kind of models are increasingly appealing in a world where operators are looking at different ways to lower costs and allocate resources efficiently. 5. Be mindful of M&A deals and know your future client portfolio

Despite predictions from some industry commentators that a wave of M&A in the sector is imminent, this has yet to materialise.

Exhibit 5: Decline in R&D Spend for Selected Players 2015 vs. 2014

Source: Bloomberg; Strategy& research


COVER

In fact, according to our analysis, the value of global M&A deals in OFS is down by some 70 per cent from 2014 levels, and the number of deals equally down by some 60 per cent (as of mid-2016). That said, there has been some noticeable activity in this area. Technip and FMC announced their US$ 4.7 billion merger, Schlumberger acquired Cameron for US$ 14.8 billion, while Halliburton’s US$ 37.5 billion bid for Baker Hughes failed on antitrust grounds. To be successful in this area, M&A transactions need to address specific

objectives, ranging from transformational plays to building particular capabilities. The risk of any major M&A transaction is they distract management focus, and are costly to execute, and may add complexity to the business. However, the upside from well thought through and planned M&A can be significant. For larger players, a major M&A transaction can be the means by which they can differentiate themselves, and an ideal opportunity to re-shape the business quickly. Alternatively, companies can explore limited ‘bolt on’

Exhibit 6: Potential Factors Influencing OFS Recovery by Category

Source: PwC

acquisitions that deliver value-added services and capabilities in a region or technology. But, given the complexity of executing an M&A deal successfully, there are other options. Pursuing partnerships and alliances with other companies that complement and enhance capabilities is a cost-effective way to deliver added services, and perhaps may serve as precursor to a targeted M&A deal. This is what happened when Technip and FMC established a joint venture called Forsys Subsea, which subsequently resulted in their recent merger. It is worth noting that GE was also in talks with Baker Hughes about a potential partnership. This focus on portfolio optimisation should not only be viewed through the M&A lens. OFS companies will also need to decide their optimal portfolio through the lens of their client base. As oil and gas activity picks up, OFS companies will need to have a view on the plays they will focus their efforts on going forward. This may have a number of dimensions, ranging from geography, offshore versus onshore, asset type from gas to oil, and conventional versus unconventional, to potentially the type of corporate client from NOCs to Independents. The service providers will need to identify where they see growth opportunities across the oil and gas landscape, and given the uneven picture, different players will experience a very different recovery (as illustrated in Exhibit 6).

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For example, if the medium-term view is one of lower oil prices, OFS may shy away from more expensive production technologies such as oil sands and heavy oil. In the North Sea, some service providers may take the view a lower oil price for longer will accelerate decommissioning and that is the play to focus on. Similarly, the opening of Iran, with its needs for foreign investment to boost oil production beyond four million bbls/d presents a completely different type of opportunity. 6. Working smarter

As we head towards a future, particularly

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in mature basins, dominated more by late life and decommissioning, rather than exploration and development, it’s clear that innovative solutions will play a greater role as upstream companies seek to minimise their decommissioning spend. Consortia of service companies providing packaged solutions through aggregation of skillsets could be the way forward – providing the upstream companies with almost a one-stop-shop to meet their decommissioning needs. And those solutions need only be ‘good enough’ to ensure that, first, the job gets done, and second, the

inherent risk transfer from operator to service company is minimised through intelligent ‘demolition’, which protects both the asset and the people involved. By fulfilling those needs, the consortia can ensure that the solutions are cost effective, and repeatable on future projects. A further consideration in relation to risk transfer is getting the terms and conditions right at the onset of the project. The risk profile related to late life and decommissioning is different to business as usual production, where an operator is ‘happy’ to take the operational risk. The risk


COVER

involved in dismantling something is more likely to rest with dismantler rather than the operator. Innovation in building those Ts and Cs will be vital in ensuring all parties are comfortable with the risk transfer profile, as well as giving the service company, or consortia of service providers, the competitive advantage in a market place that is only likely to heat up.

Conclusion There is a sense that a balancing of industry fundamentals is approaching, which should support a limited oil price recovery. And while

we are unlikely to see US$ 100/bbl (AED 367) prices returning in the near to medium term at least, a more robust price in the US$ 60-70/bbl (AED 220.38 - 257.11) should be realised in the next few years. This will trigger an increase in upstream capex spending and broader activity levels, which in turn will improve the fortunes of the OFS sector. But this recovery will be uneven. Moreover, we are unlikely to witness a return to the boom period as prices recover. Operators are in cost reduction mode, and are embedding a culture that ensures the business model is more resilient at lower prices.

This will mean the OFS sector has to adapt its own business to this new reality. It is essential, therefore, that OFS companies maintain their focus on cost reduction, but with one eye on the future. Those players that can operate efficiently and profitably in the current environment, while investing in core business areas for future growth, will be the fittest to emerge from the turmoil and most likely to reach for the stars. -Craig Stevens Senior Manager, Oil & Gas craig.w.stevens@uk.pwc.com & Adrian Del Maestro Director of Research adrian. delmaestro@strategyand.uk.pwc.com

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UNWIND

Group photo of the appreciated organisations

Jason Verhoven, Director, Signature Media LLC, (centre) publisher of Global Supply Chain magazine receiving the award from H.E. Ahmed Mahboob Musabih, Director of Dubai Customs (left) and Eng. Mahmood Al Bastaki, CEO of Dubai Trade (right)

Global Supply Chain magazine honoured by Dubai Trade Dubai Trade recently recognised its strategic and logistics’ partners in an awards ceremony and Global Supply Chain was one of the proud honorees

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D

ubai Trade, a DP World company, recently recognised strategic and media partners during its first appreciation ceremony this week. The ceremony was part of Dubai Trade’s strategy to support partnerships between the public and private sectors and to encourage trade relations in Dubai. It was attended by H.E. Ahmed Mahboob Musabih, Director of Dubai Customs, Mohammed Hamdan Al Zaabi, Director of Trade Promotion and Investment

at the Ministry of Economy, Eng. Mahmood Al Bastaki, CEO of Dubai Trade, along with organisations that have contributed to Dubai Trade’s success, including government and financial organisations, private sector companies and the media. Dubai Trade honored organisations that provide smart services to their customers and those who have integrated their services with its smart electronic systems, such as the secured electronic payment gateway “Rosoom”. Other attendees included cargo insurers, storage businesses, shipping companies, and others providing information on ship and port traffic. The ceremony, was inaugurated by H.E. Ahmed Mahboob, Director of Dubai Customs who said: “We are working hard to ensure our leaders’ vision for Dubai to become the smartest city globally becomes reality. Dubai Trade today provides 820 services through its electronic portal, used by more than 113,000 users leading to 50,000 daily transactions. This is down to those who maintain the portal and the support of our partners who chose to use the services.” Mahboob pointed out that Dubai Trade is continually improving its support services, such as the introduction of the newly launched Land Transportation Management and Warehouse Booking Systems. Dubai Trade provides its services exclusively through its online portal that covers the trade and logistics industry. All services are also available via smart applications, allowing customers easy access to their full range of services, anytime and anywhere.


Global Supply Chain January 2017 Issue  

Supply Chain, Supply chain management , logistics and supply chain segmentation, warehousing, RFID, healthcare logistics, 3PL, 4PL, six sigm...

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