Shifting towards a new global energy paradigm

15 Oct Shifting towards a new global energy paradigm

Zsolt Hernádi, Chairman and CEO, MOL Group, admits that the sector’s ‘Golden Age’ may be over, but continual success is still in their hands

Before we delve into MOL Group, I would like to get your insights on the global energy sector, the ongoing role of oil and gas, the latest forces shaping supply and demand as well as the future evolution as the world becomes more and more carbon-conscious and sustainability and climate focused. You have spent two decades at the helm of one of Europe’s most efficient energy company, as well as a member of the European Round Table for Industry. Could you provide your analysis of the global oil and gas industry at present; what is your outlook for the coming decade, considering the ongoing shift towards cleaner sources of energy?

Back in 2016, when we issued our new strategy, MOL 2030, we had forecasted a change in the future, seeing that this golden age of oil industry comes to an end, rather sooner than later. We predicted that the demand would eventually drop and that pressure on the industry would increase – not only in the oil and gas industry, but in the fossil industry as a whole. More and more pressure will come from regulators, investors and consumers, practically from the whole society for change towards a more environmental-friendly world. We knew this time was coming and we predicted a 30 to 35 percent demand drop by 2040. In line with that, we announced some important material changes in our group strategy. In this industry investment cycles are long and, therefore, you need to anticipate these changes 10 or 15 years ahead, starting with the planning, making investments, analysing scientific data, obtaining permissions, starting the real construction, etc. All these kinds of transition and transformations require time.

We knew this time was coming, but though it would be around 2035 to 2040. We could not imagine that it would already come in 2020. The oil industry has enjoyed its golden age: crude prices were relatively high a year ago, demand was continuously increasing everywhere. Nobody believed the industry would be so badly hit in 2020. Three things happened simultaneously: first, crude price dropped. That was just before the pandemic and caused by different things: because the US share of oil and gas and unconventional hydrocarbon production had continuously increased and benefitted from the high price environment. In parallel, the debate between the in-OPEC and the outside-of-OPEC countries went sour and Saudi Arabia lifted the production regulation. Then came the pandemic which created a huge drop on the demand side: we had a 20 percent drop in a couple of weeks, which never happened before in the history of oil and gas. Disappearing demand further exacerbated the already significant oversupply. The crude prices dropped dramatically, WTI price has even hit negative range on 20th of April 2020. Oil and gas companies were hit by the collapsing prices and demand in parallel. In April, the demand dropped by almost 40 percent in the core markets where we are present; that was a real life test of our strategy. A bit like we had a time machine, we could check how we can perform in a world with dramatically lower fossil fuel demand. The third thing that happened is that governments’ policies speeded up the transformation of the entire oil and gas industry. The EU Green Deal is a EUR 1,800 billion deal, stating that every EU Member State needs to spend at least 30 percent on green projects. Most likely the same changes will come to the US, once they re-join the international agreements for zero carbon emission target. China, Korea or Japan just confirmed that they want to achieve a net zero CO2 emission target and probably more and more countries will do so. That stakeholder pressure, coming ultimately from the polls, from the voters, the citizens, the consumers has become incredibly high.

These three things are determining the future of our industry for the long-term. The pandemic is just the tip of the iceberg: far deeper transformations will happen very soon, in the entire industry. These three reasons are the biggest change factor in this industry. While most experts predict recovery and the return to pre-crisis economic performance by 2022 or beyond for most countries, in our industry this golden age is not coming back. We need to speed up the green energy transition and that is valid for MOL as well. Luckily the transformation has been part of our strategy since 2016, when we said amongst the first ones that the golden age of oil & gas is over and decided that we have to start the transition, commencing the transformation of the industry. Many oil and gas companies have said the same since then, but we have taken real action in these past five years and now we can assure that this the right direction. We acknowledge though that in some cases and some areas, the speed of MOL’s transformation has to be even faster and deeper than we thought four years ago. The Hungarian government is also committed to meet the climate targets and MOL Group as a good corporate citizen will act in line with this.

In that regard, MOL has formulated its 2030 strategies aiming at refocusing the company’s priorities to seize the opportunities present in today’s fast changing environment where lower demand for fossil fuel prevails. Can you give us the broad spectrum of this strategy? What are some of the major investments that are currently made by the company to develop areas like chemical or consumer services? How much has changed from this 2030 strategy, since the time that you formulated it?

We are a fully integrated company with several pillars, including E&P, refineries and wholesale, retail and petrochemicals. Lately we have been focusing far more on the petrochemicals, looking at what kind of feedstock we can provide from the refineries for the petrochemicals, and what kind of investments we have to make in the petrochemical segment to meet the demand of the future. We have analysed the value chain to find the points where we have competitive advantages, and based on that, we made certain carefully selected investments. One of the biggest organic investments in the company is a Polyol plant which is now 70 percent ready. Once ready, our value chain will be further extended and our portfolio will be widened by a high value product, having stable and increasing demand outlook for decades.

In parallel to that, we are intensifying our work around plastic recycling, answering the recent call from the market. Everybody knows we need plastic, it is in our everyday life: we love plastic. What we do not love is plastic waste. That is the problem and that is why the pressure is on to re-use more and more waste material in the production. Plastic has to contain more waste. With that in mind, we have acquired a German compounding company, Aurora with strong R&D capabilities around plastic waste materials and their recycling. In addition, we have created another strategic partnership with another similar German company but with a different technology using the plastic waste as well. Based on our own license and our own R&D technology, we have invested into a rubber bitumen plant. This allows us to recycle about 500.000 used tires yearly and put them into the bitumen, and with doing so, we actually also improve the quality of the product. The next big thing is waste-management: how to make value from waste more efficiently.

MOL is also working to improve consumer services at its filling stations. We have almost 2,000 excellently located filling stations in the region. We are constantly looking how to improve and extend our product portfolio there, to increase the convenience of our customers. We use more and more digital solutions in the customer interactions and also in the background. We analysed with infrared technology how people are moving in a filling station and if they buy a cold drink or rather another thing – depending on that we can change immediately the supply to the stations, change the product portfolio over there or we can even change the layout of the interior.

All in all, we started the transformation but we realized that this is not enough, giving our group’s size and significance on the market. We are absolute market leader in four countries, where we are by far the biggest company. We started to look at further actions we could do, and we started to think about the circular economy, because this is part of our life, this is the wish of consumers, and this is our wish to all of us to live in a better environment; and for the better environment you need more and more recycled goods. We started to move in this direction and created collaborations with universities, to look at what kind of technologies we can develop, which are achievable on the market and how deep we can go into this circular economy.

Surely we will continue to produce fuels, because whatever we do, most of the cars in the next 20 to 30 years will still use classical fuels. It is unrealistic to replace the whole car and truck fleet from one day to the other, such a change requires decades. Yet we have to search for new kind of solutions we can use to be more efficient. Consumption will decrease, the demand will decrease, sooner or later some refineries will have to shut down and only the most efficient refineries can survive. So efficiency and productivity is a must. In parallel, we have to look at how we can decrease the footprint of our refineries and activities, and look at what kind of new technologies we can implement. That is the other part, the R&D part of our work, implementing new technologies. These are not cheap at all, but we have to do that because it is the future.

Innovation and sustainability are the two driving forces that are influencing decisions in the corporate boardrooms now but also in governments and the energy sector. Can you share with us a bit more about your R&D centre in Szazhalombatta?

Just recently, we have opened – virtually because of the pandemic situation – the Polyol Research Centre. In our R&D we need a close cooperation with the universities as much as possible. Luckily, the policy of the government is exactly the same and they are pushing universities to cooperate and collaborate with big industry players where there is a need for new technologies. The universities have the role to bring in the latest knowledge and the new trends and technologies. How to combine both worlds is the question: developing something that cannot deliver profits is not good and just making profit without thinking about sustainability is not good either. Sustainability and profitability do not exist alone anymore; they go together. You cannot be sustainable without profit and you cannot be profitable without sustainability; it goes hand in hand. And in the future, it will only be more intertwined. With that in mind, we created our cooperation with several universities and there are already certain things that we can use.

MOL Group has a strong foothold in the region, you are market leader in four countries, you are operating refineries, petrochemical plants and gas transmission, as well as owning and operating a network of nearly 2000 filling stations in Central and South Eastern Europe. How would you summarize the group’s international aspirations? Are there new markets in your segments where you are currently locking targets in terms of organic growth and/or new acquisitions? 

For us new acquisitions were always opportunistic. We are always analysing and we are always looking at what is on the market, with an opportunistic approach.

MOL Group has upstream operations in 14 countries, from Pakistan to Norway, from Russia to the UK. Normally there is a natural hedge between the upstream and the downstream, so if the crude price goes down, the margins in the downstream are increasing and vice versa. Unfortunately, this year was totally different, because both were collapsed: not only crude prices but margins as well. That is the situation when the deep integration of MOL Group shows its advantage. Even in such a situation, when both E&P and refining were hit really hard, our retail and petrochemicals activities were performing well, achieving growth of different magnitudes. Most probably we will still see some shorter or longer periods with high oil and gas prices, so we want to keep a leg in upstream as well, keeping this natural hedge.

On the other hand, we want to reinforce our presence in the downstream segment, in South & Central Europe. Downstream, the petrochemical and the retail have a future. We want to be present in this market, making this kind of changes, making the transformation, extending the value chain, increasing the profitability and the efficiency, going closer to the consumers and providing them more services. We have to do that, we want to continue this, in line with our strategy. Soon we are reviewing our strategy, looking at where we need a little more speed and where our presence is no longer necessary. This strategy is ongoing, and in the first quarter of next year most likely we will come out with a refreshed version of our long-term strategy.

In the middle of this tumultuous year, in Q3, MOL managed to present positive results. Can you comment on the group’s performance and resilience as well in the middle of this crisis environment?

The resilience is definitely thanks to our diverse portfolio. In a very good year, all the four elements of our portfolio would grow continuously and fast. These business portfolios are balancing the others, in normal times. The growth engine is definitely on because the portfolio is healthy; people are the growth engine here. Motivating people so that they are providing better performance and better efficiency is the essence of what we do. Our integrated model is also clearly behind this performance.

As we are closing, what has been a volatile and difficult year, and getting ready to open a brand new chapter made of hope with the vaccine in 2021, how would you summarize your plans, your priorities for this next year? What would you like to achieve at post crisis and beyond?

We have hopes with the vaccine definitely because in the pandemic crisis, we have realized that everything is about the people. In four countries we are market leaders, but in the other seven countries, we are one of the first three players. It is our responsibility to provide goods for the market and we have to continue, and not stop our services and production as our goods have a high importance for the citizens. On the other hand, we need people, so protecting the people we have is vital. We have spent more than USD 20 million in the group to protect our people and made more than 100,000 virus tests already.

In parallel to that, we are reviewing our strategy: we are looking where there is a need to speed up and then we speed up; where we have to drop, we drop. We want to become even deeper integrated, to become more efficient and accelerate our transformation. The demand in the oil industry is not coming back to its previous level in 2021, neither in 2022. There will be a pressure on the prices, there will be an oversupply, so we have to be more efficient than before. This is a priority for next year: being more efficient than ever, being more productive than ever.

In some cases we have to speed up our transformation and tackle our new challenges like entering into the circular economy even deeper than before. Making this partnership or acquisition with the German companies was a nice test to see if we can understand this part of the industry, but now we need to speed up and do it faster with far more power.

As a conclusion, what would be your final and direct message to our readers?

Historic times need sometimes historic decisions. This is without a doubt a historic time, because this economic collapse, what happened in 2020 and will probably continue at the beginning of next year, never happened before. We need to react very quickly. Sometimes you need to react just the opposite of what has been decided the day before, because we do not know too much about the situation – and neither do the economists, the engineers, the scientists; it is a totally new situation.

They are the only real valuable thing that the economy can have: talented people. We need education and using the talents far more than at any time. The second thing is that we have to understand differently what globalism means. Political, economic and business leaders have understood that globalism does not solve everything. You are truly responsible for the people you are responsible for: if you are a company leader, you are responsible for the colleagues working in your company, for the customers that are buying your products and using your services, for your investors and for all the communities affected by your activities in any way. Responsibility is not just as long as you encounter profit. This responsibility is even at the time when profit has a second rank; and in particular times, profit can have a second rank. So politicians, business leaders, leaders who are responsible for anybody else, have to take into account that the global economy and the global world can solve certain thing. If it is about your own responsibility, the market is not global at all. We have to review this kind of categorical way of thinking, and we have to see for what we have to be prepared in the next, post COVID-19 world. The next normal will be totally different than the previous one. Any decision maker has to take into account what is important and what is not.

Lastly, if people believe that you are doing the right things, they are following you. They want to be disciplined. They really understand the situation and they want to live in a normal and better world. For us, the pandemic situation can be solved with determined people, with professional attitude, and with some faith. Sometimes we need that as well.