Long-Term Demand and Equipment Investments

How industry forecasts play into companies’ infrastructure investments and diversification plans

The energy industry continues to grapple with a key question: how long will demand for fossil fuel products remain strong enough to justify long-term investment? Putting aside the philosophical environmental element of it, this article focuses on the business impacts and investment challenges that leadership teams must consider.

For decision-makers serving the oil and energy space, this uncertainty creates a strategic dilemma. Capital equipment, infrastructure upgrades, and new product development require significant upfront investment – and confidence that demand will hold. But with shifting regulatory environments, evolving technologies, and geopolitical instability all in play, defining a clear path forward is more complex than ever.

Market Trends Shift Demand

There are numerous factors to consider in this debate, both globally and regionally. Recent key market shifts include:

• COVID pandemic shifting demand
• Geopolitical pressure on Russia reducing short-term gas supply and increasing prices
• Continued pressure to reduce carbon emissions by consumers as well as local and state governmental agencies
• Political leadership changes implementing new policies in the U.S. and internationally
• Technological innovation – such as biofuels - in the oil and gas industry

For many companies, particularly over the past 20 years, the safe path has been diversification—reducing dependency on fossil fuels to satisfy investors and future-proof operations. But what happens to the existing customers who have been with you for decades and rely on your products every day?

Short- and Long-Term Value are Equally Important

The answer lies in balance. Companies must invest in future diversification while maintaining and modernizing core product lines. Diversifying as a small business demands substantial time and effort, especially while managing day-to-day operations. Whether through the acquisition of a company, product line, or technology, successful diversification requires considerable resources, clear strategic direction, and strong leadership commitment. When executed effectively, it provides long-term risk mitigation and growth potential.

On the flip side, investing in the core product line has other benefits, notably a well-known market and an existing customer base being key. However, the company looking at future diversification and the company investing in its core product line are both in the same position, concerned about the length of the runway.

Investment Strategies

When assessing roadmaps and investment strategies based on where we are today, the perceived length of the runway has increased compared to previous decades. It’s hard to put a firm date when there will be a major drop out, but when making major capital equipment investment decisions or deciding whether we should invest in a new product for the oil and gas market, confidence is high that the demand will be there for the next couple decades.

Scully is no exception assessing this balancing act. Recently, to maintain and improve the capability of our in-house machine shop long term, we invested in a new Okuma horizontal CNC machining center and an Exomist twin spindle lathe. Not only do these capital investments help mitigate supply chain risks, but they enable us to offer customization benefiting the existing customer base.

Another example: after over 20 years using a die cast tool to make our Sculflow nozzles, its yield was getting too low. To continue to produce this flagship product, Scully invested in a new casting tool to be able to respond to our customers’ needs for decades. Could we have outsourced it overseas for much less? Yes. But we believe the market will be around for the next 20 years. Then there is the pride of manufacturing in the USA and better control of our own destiny.

The strategic investment examples mentioned above improved production capabilities. The moment you have confidence in the future market return, investments in technology and innovation open up. Improving efficiencies that lead to cost savings are critical to customers dealing with market headwinds and an aging workforce. Automating processes in a slow-adapting market using wireless communication, data analytics, digital applications are a few areas that can make a big impact in a short time.

The correct approach is a dual-armed strategy of investing in your core industry and customer base as well as in new, diversified industries. However, managing the challenge of how many resources to apply to each is the magic formula. The benefit we have is that there is a significant runway to work with as demand for fossil fuel energy is going to be around for the foreseeable future.

Dani Alkalay is the Product Marketing Director at Scully Signal, and can be reached at DAlkalay@scully.com.

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