Companies will reinvent themselves by practising capital discipline, focusing on financial health, committing to climate change, and transforming business models, says Deloitte
Oil & Gas companies are looking to reinvent themselves by practising capital discipline, focusing on financial health, committing to climate change, and transforming business models says '2022 Oil and Gas Industry Outlook’ report released by Deloitte.
In a survey conducted by leading consulting firm, Deloitte, nearly two-thirds of oil and gas (O&G) executives were highly positive about strategic changes made by their organizations.
The Oil & Gas industry has rebounded strongly throughout the year with oil prices reaching their highest levels in six years. Yet there still remains uncertainty over market dynamics in the coming year. Therefore, as per the report, choices O&G companies make and the trends they prioritize will decide the path forward and reverberate in their decision-making through the coming decade. This indicates that the journey of transformation has just begun for the industry, and simply managing or riding oil price cycles aren’t options anymore.
The report explores five trends, from M&A activity to fuel retailing that will likely influence the direction of the industry over the next 12 months.
Trend 1: High oil prices to boost energy transition plans
Oil prices have recovered to around $80/bbl after turning negative in April 2020. But conventional wisdom would suggest that at high oil prices, O&G companies display less capital discipline and would focus more on the core business than on new sustainability opportunities. Consequently, it has often been assumed that high oil prices could slow the energy transition. However, 76% of surveyed O&G executives state that oil prices above US $60 per barrel will most likely boost or complement their energy transition in the near term. A strong oil price enables investment in riskier and expensive green energy solutions, such as carbon capture, utilization, and storage (CCUS). Given that no single stakeholder can provide the necessary investment and absorb all commercial risks associated with building a CCUS industry, all participants in the entire O&G value chain become important, as they’re involved in more than half of planned CCUS projects.
Trend 2: ESG plays a larger role in M&A transactions
Oil prices have been rising since the start of 2021, bolstered by recovering demand and capped supply from OPEC. However, upstream M&A activity, which typically follows oil prices, remains well below pre pandemic levels. While the ongoing capital discipline of O&G companies is the primary reason behind the lull in upstream M&A activity, limited visibility of buyers into the carbon profile of sellers or their assets is a growing factor. Companies pursuing their net-zero goals are either looking to acquire low-carbon-intensity barrels or divest the high-intensity ones, implying that there might be an acreage consolidation or portfolio restructuring on the horizon. But a large resource size and an attractive offering price may not be enough to elicit a response from a buyer focused on meeting its net-zero targets. Therefore, M&A (Merger & Acquisition) activities would need not only to be financially accretive, but also to support ESG (Environment, Social, and Governance) goals.
Trend 3: Business models shift to enable a new energy era
The oilfield service (OFS) sector had slashed costs and optimized operations to stay afloat even before the pandemic. Being traditionally dependent on upstream cycles, the sector is now likely to see a permanent structural shift as rapid energy transition shifts the scales of O&G revenues and spending. With margins at the mercy of another price cycle and reduced spending, many OFS companies are crafting a new strategy for the future of energy. With a broadening decarbonization mandate across industries, companies have an opportunity to lead the way for customers by fully reengineering traditional OFS business models and solutions outside the traditional “oilfield” services and to other industries. However, digitalization will only help to a certain extent. The sector needs to get even leaner and greener. Providing integrated solutions for decarbonizing upstream projects, implementing subscription-based revenue models, or diversifying into the low-carbon space could be key enablers of the future OFS strategy.
Trend 4: Convenience supersedes fuel as the new anchor to attract customers
Apart from the disruption created by the electrification of transportation, traditional fuels (diesel and gasoline) also face competition from other low-emission fuels, such as hydrogen, and renewable fuels. Furthermore, the generational shift from baby boomers to millennials is changing the fuelling preference of consumers from brand and price to convenience and user experience. The interplay of the energy transition with changing demographics is creating a challenge for many fuel retailers, who must transform their operations to attract and retain a new generation of customers while also adapting to a changing fuel mix. Eventually, companies that would be best suited to thrive during the energy transition are likely to be those that strive to move beyond fuel offerings. The companies can work toward this goal by incorporating convenience as a core function of the customer experience and expanding to a full suite of products and services.
Trend 5: Greener jobs to help secure retention of the workforce
The oil price crash of 2020 triggered the fastest layoffs in the history of the US O&G industry. Prices have nearly doubled since then, but only about 50% of lost jobs have come back. The cyclical hiring and laying off of employees is adversely affecting the industry’s reputation as a reliable employer, and a tenured, aging workforce is reducing the available talent pool. Even for O&G companies with progressive strategies and healthy balance sheets, it would be difficult to differentiate themselves from the workforce in a tight labor market.
The commitment to decarbonization could be the best recruiting pitch, but more than 75% of survey respondents believe that flexible and agile workforce structures that empower remote, hybrid, and cross-border teams would help companies compete and retain talent in today’s tight labor market.
Making the business case: How operational data management is securing huge savings in the chemicals industry
Subscribe To Our Newsletter & Stay Updated