The global economy had just started a green recovery from the COVID-19 pandemic when the market experienced unprecedented levels of volatility again. This upset an already complex situation of tight oil markets and heightened price volatility. Energy companies are now forced to refocus their ESG efforts on supply security and energy independence. As the gas sector continues its strategic diversification efforts, there’s new momentum for transitioning to renewables.
The crisis has become an acute motivator to go green now, rather than in 30 years. Accelerating this transition means developing energy storage that’s fit for the future and expanding interconnections so countries can share energy. This highlights how crucial it is to invest in solar, heat pumps and energy efficiency. It’s also vital to speed up approval processes for renewables infrastructure.
Until recently, the need to decarbonise was largely viewed in the context of ESG. But we have now received a wakeup call: Transitioning to clean energy is critical for ensuring energy security.
The historically volatile oil and gas sector will only see increasing uncertainty in coming years. Among the forces driving that will be growing pressure for digital transformation, evolving regulations on carbon emissions reduction and reporting, new infrastructure investment demands and changing workforce needs.
To manage the many challenges facing the oil and gas sector, companies will need to reassess their business strategies and decide what their role and identity will be in an evolving energy landscape. They have three choices: focus squarely on developing fossil fuel-based resources, diversify through strategic acquisitions or by embracing other energy capabilities, or go all-in on renewable energy resource development.
By embracing digital transformation and updating their existing technologies, companies can improve efficiency both upstream and downstream, which will save both time and money. In the upstream sector alone, we estimate the use of digital technologies could save hundreds of billions of dollars in capital expenditures and operating expenditures by 2025. Digital technologies will also provide a competitive business edge and pave the way for ongoing innovation and growth.
Around the world, businesses and governments alike are setting goals to achieve net-zero greenhouse gas emissions by 2050 or earlier. For companies in the oil and gas sector, this trend raises many questions. Is the best response to transition away from traditional fossil fuels? How could innovative technologies help to reduce current emissions? What business strategies need to change as net-zero initiatives accelerate?
Emissions reporting requirements are continually evolving, and oil and gas companies will be expected to meet increasingly strict standards for consistency, assurance and sustainability. They must also be prepared to eventually meet new global standards that are currently being discussed.
A talent shortage is one of the biggest challenges facing the industry. As pressure grows for digital transformation, companies will find it increasingly important to attract data scientists, software engineers and other employees with advanced analytics and IT skills. Companies will also need to attract talent in new business areas such as power retail and offshore wind for example. Retaining those workers will also require changing the workplace culture to be more flexible, innovative and competitive.
Transforming the global energy system will entail huge costs – $13tn, according to an estimate by the International Renewable Energy Agency. Ensuring reliability will also pose challenges as a wider variety of energy resources, including intermittent sources like wind and solar, are integrated into an increasingly complex global system.
As the energy landscape transforms in coming years, mergers and acquisitions (M&A) will require ever higher levels of caution and due diligence. M&As are always risky and expensive, but accelerating trends – ESG, net zero, digital transformation and climate change – will raise the stakes even further. As a result, expect more companies to instead choose to grow their talent, assets and markets through partnerships and alliances.
Carbon markets are evolving rapidly. Governments around the world are testing many different tax and pricing strategies as a way to reduce fossil fuel consumption, increase use of renewables and improve energy efficiency and carbon capture/storage. The success of these strategies remains to be seen, and their impacts on energy costs, supply, demand and emissions have yet to be determined.
As the world progresses on the path to net zero, the oil and gas industry will see increasingly less reason to invest in new fossil fuel supplies. Spending has already declined in recent years, driven in part by lower demand during the COVID-19 pandemic. Another factor has been the expectations of investors and other stakeholders, who are leading the call for more investment in renewable energy resources instead. However, given the current situation, there’s now renewed interest in also securing energy supplies through domestic hydrocarbon production.
Faced with changing models for business growth, the sector is seeking to build value through other strategies. As pressure builds to improve ESG performance, an increasing number of companies will consider such efforts to help to reduce business risks, improve resilience, enhance corporate reputations, grow revenues and create long-term value.
In recent years, companies have steadily increased their investments in renewable energy and ‘green molecule’ resources like hydrogen fuel produced using renewables rather than natural gas. Those investments are expected to keep growing as more businesses and governments commit to net-zero goals. However, more progress is needed: Oil, coal and natural gas still account for 80% of today’s energy supply.
Moving to new and greener sources of energy will do more than transform the global energy system – it will drive change across supply chains of all kinds. In addition to expanding demand for solar panels, wind turbines, batteries and hydrogen fuel cells, it will create new demands for lower-carbon raw materials, parts, products and means of transport. Businesses that embrace these changes and find new ways to create new value from decarbonising their value chains will gain lasting strategic and competitive advantages.
With investors increasingly directing their money towards renewables and green energy technologies, oil and gas companies are likely to face a capital-constrained future. This will drive more self-funded growth. Without proper planning for this new business environment, there’s also a risk of energy supply shortages. Companies can avert such risk and discover new opportunities by reassessing their current business strategies and planning for a future market that will be very different from today’s.
Oil and gas demand and prices rebounded after the availability of COVID-19 vaccines paved the way for economic recovery. That’s generated positive free cash flow for many companies, raising questions about how they should use that money. Businesses have several options to choose from: debt repayment, dividend payouts, new asset developments, infrastructure upgrades and mergers or acquisitions.
With company debt declining, the oil and gas sector is seeing increased activity in strategic M&A. This will drive consolidation, reshape the industry and create new market alignments. Industry deals with complementary sectors will also help to steadily blur the boundaries between oil and gas, power and utilities, chemicals and other businesses closely tied to energy.
ESG requirements are continuing to evolve, and global sustainability standards have yet to be established. As a result, companies in the emissions-intensive oil and gas industry can expect ongoing challenges in setting targets, tracking performance and reporting on progress. Building momentum towards sustainability will also require cultural change and buy-in from across the workforce. These changes are likely to become easier as ESG requirements become standardised and more government and financial incentives for sustainability are put in place.
The oil and gas industry could risk its social licence to operate if it doesn’t take clear actions to reduce greenhouse gas emissions through renewables, carbon capture or other strategies. Governments, investors, consumers and other stakeholders increasingly expect companies to set net-zero targets and achieve sustainability. Businesses that act sooner rather than later will be able to demonstrate their commitment to these goals, improve resilience and build long-term value in a fast-changing economy.
Commodity traders continue to show a strong interest in short-term oil and gas investments. However, they increasingly recognise the longer-term risks created by the industry’s carbon-heavy footprint. Like other investors, they can be expected to demonstrate a growing preference for companies that are acting to improve ESG performance and achieve net-zero goals.
Digital transformation can help the industry improve efficiency and reduce emissions. But it also creates new opportunities for bad actors to launch cyber attacks against oil and gas infrastructure. Such threats could severely disrupt business, cause millions in damage and even lead to loss of life. Enhancing cyber security will be a challenge as the world’s energy system grows ever more complex, but it’s also imperative. Companies that can take a cyber security lead will have an edge over competitors.
The global energy transition is underway. Oil and gas companies need to prepare for a future that’s less carbon-intensive, more digital and far more complex. To succeed, businesses will need to embrace change, evolve their workplace culture and adopt new strategies for growing and creating value.
Learn what’s currently driving deals in the industry, and what the outlook is for future activity. We discuss our predictions across sub-sectors: upstream, oilfield services, midstream and downstream.
More than ever, organisations are under pressure to operate sustainably and improve their ESG performance. Achieving these goals requires companies to redefine what capital efficiency means and to align their strategies with the emerging expectations of stakeholder capitalism. This report looks at the changes this is bringing for oil and gas businesses in the US.