In a nutshell: Future-forward energy companies will need to embrace innovation and experimentation to provide renewable power and fuels. They will also need to boost operational budgets and investments in technology.
Energy companies live in a world where volatility is expected and managing calculated risk is an art form. Agility, innovation and ambition are critical to everything the industry tackles, including its current mission — the cleaner energy transition. From the source to the end-customer, and every step in between, there are opportunities to take a leading role in moving the industry forward. Leaders are embracing the challenge, while maintaining a focus on growth, purpose and decarbonisation.
Of course, this is taking place amid a variety of complex factors: geopolitical issues, supply chain uncertainties, inflationary pressures, workforce challenges and stakeholder demands. Industry players know they are under pressure to figure out many complicated questions. A top priority: figuring out how the industry can help deliver the energy needed to meet growing demand for net-zero sources when the bulk of energy still comes from hydrocarbons.
Despite the difficult questions and rapid pace of change, energy companies are optimistic about revenue growth. In fact, 82% of oil and gas respondents to PwC’s 2022 Global Risk Survey say they expect their organisation’s revenues to climb over the next year, making the sector among the most bullish of the industries surveyed on prospects for increased revenues. Many (38%) predict revenue increases between 6% and 10%, while 13% expect an even larger increase — between 11% and 15%.
There are abundant growth opportunities, from advances in hydrogen and other alternative fuels to breakthrough technologies that are expected to help with the energy transition. As with most opportunities, these come with risks. Energy sub-sectors and even individual companies — whether engaged in exploration and production; transportation of crude oil; refining and distribution; or alternative energy — are at different stages on the journey, and face varying challenges. Those who manage risks well today will be in a better position to manage the energy transition going forward.
External or compliance pressures, which consume resources of risk functions and owners, are increasingly significant for energy companies. They face a growing volume of regulations, as well as stepped-up sanctions and regulatory actions related to Russia. When asked about the negative impact of policy and regulatory developments, 41% of energy companies say they are extremely concerned about environmental protection regulation. Slightly fewer, 38%, cite other industry-specific regulations.
Worldwide, there’s a growing focus on reporting and governance of decarbonisation and climate-related efforts. In the US, proposed SEC climate disclosure rules could lead to an even greater need to understand and reliably report emissions, well beyond today’s extensive reporting and regulatory requirements. New technology and modernised risk management activities will have a major impact on accurate reporting and validation and can also help companies achieve their ESG goals, regardless of whether they are moving into alternative energy.
Leading integrated companies are proactively defining their role in the energy ecosystem of tomorrow, adhering to net zero goals and accelerating their environmental, social and governance (ESG) journey. With assets and interests distributed across multiple streams in the broader value chain, the largest integrated companies have a great opportunity to lead the way in decarbonisation efforts. Attaining these goals won’t be easy.
While there’s a long road ahead, the transition won’t necessarily be slow. It’s racing forward, and the full industry — not just integrated companies — is feeling the effects of the new initiatives.
Oil and gas survey respondents say that keeping up with the speed of digital and other transformations is the most significant challenge to managing risk. A majority (52%) tackle this challenge at the business unit level or in an ad hoc manner (19%).
Given the uncertainty and disruption caused by the war in Ukraine and sanctions against Russia, it’s not surprising that energy companies name geopolitical risks as their greatest concern, ranking it above cyber, market, talent and other top-of-mind risks. For upstream companies the situation has amplified the importance of existing priorities: responsible growth and resilient supply.
Despite the growing focus on lower-carbon assets, the majority of the world’s energy still comes from hydrocarbons. Increased demand as the pandemic began to wane and global supply constraints together have applied upward pressure to commodity prices — driving crude oil above $100 per barrel for the first time since 2014. The up-cycle offers the industry an opportunity to gain the capital needed to grow the business. But, as the industry is all too aware, everything is cyclical. Leading companies should continue to demonstrate the financial discipline needed to potentially weather more volatile or leaner days ahead.
Faced with weakening demand for new drilling, oilfield services (OFS) is looking for ways to broaden capabilities. As reported in our Deals 2022 Outlook, we expect to see continued expansion of OFS beyond the traditional oilfield business into new energy opportunities in digital, carbon capture, offshore wind and other capabilities. Already in play, and expected to continue, is the push to expand into processes such as wind farms and other renewable installations.
Oil and gas companies responding to our Global Risk Survey are reinforcing this reality. Industry-wide, the top factors expected to drive growth over the next 12 months include launching new products or services, expanding into new customer segments, entering new geographic markets and forging new strategic alliances or joint ventures. These ranked behind only digitisation efforts as the greatest expected drivers of growth.
Second only to geopolitical concerns, cybersecurity is a risk area the industry is most concerned about in the year ahead. For midstream companies, the pressure to reduce or eliminate these risks owes to very real threats. A May 2021 ransomware attack on the IT network of a major US petroleum pipeline caused fuel shortages and exposed vulnerabilities. The incident triggered prescriptive cybersecurity measures through a series of directives issued by the Transportation Security Administration (TSA).
Cybersecurity monitoring and reporting requirements continue to evolve and expand not just for midstream, but for companies across the industry. And, they’re turning to technology for help.
Across energy, respondents say they plan to significantly or moderately increase spending on several technology areas to better manage risks, which include cybersecurity. Among these areas are data analytics (82%), process automation (82%), an integrated risk management platform (81%), reporting and visualisation (80%), workflow management (78%) and detection and monitoring of risks (76%).
In an era marked by volatile pricing at the pump and steadily increasing competition, gas stations, refineries and other downstream energy companies are more heavily engaged in collecting data. And they’re collecting more customer data than ever. Nearly all of the respondents to PwC’s 22nd Annual Global CEO Survey say that the data they gather on customer needs and preferences, elicited through a variety of customer interactions, is essential to informed decision-making.
In the energy sector, in order to remain competitive, companies need to collect customer data as well as data on the pricing patterns of competitors. Collecting, retaining and protecting data is inherently risky when it comes to privacy and cybersecurity concerns, issues around competition, and regulatory requirements. In fact, 93% of energy companies say they are concerned with the impact of data protection laws, including regulation of cross-border data flows, on their business.
Worldwide, investment in the transition to clean energy reached nearly $800 billion in 2021. Energy companies are stepping up innovation by increasing spending in technology to a greater degree than most other industries except financial services, according to our survey. In fact, more than three-quarters (78%) expect to increase their investments in risk management technology in 2022. Businesses are tasked with accessing the capital needed to grow the business during the up-cycle, and continuing to demonstrate financial discipline.
The industry is boosting spending across all areas of risk management technology, with a focus on process automation. Energy companies are increasing spending on process automation (82%) and data analytics (82%). Other priorities include an integrated risk management platform and reporting and visualisation tools.
Energy companies are counting on R&D tax incentives to make investments economical — this includes investments in renewables to achieve net zero goals as well as risk management technologies. More than half say that R&D tax incentives are very important when it comes to making decisions about investments in technology around cyber (59%), cloud (58%), digital (55%) and ESG (51%).
Almost one-third (30%) of energy companies say they are realising benefits from the implementation of a panoramic and integrated governance, risk, and controls system. They also cite gains from balancing first- and second-line resources (27%), investing in first-line risk management processes and tools (26%), increasing collaboration among the three lines (25%), and defining or resetting risk appetite and risk thresholds (25%). Other gains result from investing in a risk-aware culture and considering behavioural risks, and quantifying new risks to assess risk exposure and to adjust risk appetite.
Responsibility for risk management at energy companies varies depending on the type of risk: The CFO is in charge of financial risks, according to nearly three-quarters (71%) of respondents, while more than half (54%) say that the COO is tasked with operational risks. One-third (33%) say that the CEO owns strategic risks. As the cleaner energy transition evolves — along with ever-changing risks — it will be increasingly important for the C-suite and other leaders to cross lines of business boundaries to work together, taking an enterprise-wide view of the risks. Survey respondents appear optimistic that they can make progress moving in this direction. Energy companies believe strongly that the risk function will deliver essential outcomes in 2022 and 2023. Survey respondents expect to see a more risk-aware culture (56%), increased shareholder value (55%) and faster decision-making (51%). Also forecast are increases in customer trust and higher returns on strategic investments.
Like companies in many sectors, energy businesses are challenged with finding the right talent at the right time. Whether it comes to in-house employees or suppliers, organisations face obstacles around the so-called Great Resignation and lingering perception issues that may lead to rising talent overlooking the energy industry for career opportunities.
More than three-quarters of survey respondents cite lack of required skill sets among risk owners (78%) and risk functions (76%) as significant or very significant challenges to managing risk. And only one-third say they are addressing those gaps in a formal and enterprise-wide manner.
However, companies have ambitious goals about enhancing their talent pool: 82% plan to add technology and digital capabilities to the risk function workforce, and 75% plan to add headcount to the risk function this year.
Principal, Energy, Utilities and Resources Cyber, Risk and Regulatory Leader, PwC US