The oil and gas (O&G) industry, in 2014, experienced a significant crash of crude prices due to market oversupply (from $110 per barrel in Q2’14 to $33 in Q1’16). As a result, oil companies had to slow their operations, postpone complex projects, reduce headcount and adjust spending. Such terms as “new normal”, “new era” and “lower-for-longer” became trendy to describe the industry’s environment. By the end of 2017 however, prices rebounded thanks to the OPEC production cut agreement ($61 in Q4’17 and to $75 in Q3’18), bringing optimism back among analysts. In September 2018, Brent price topped $80 per barrel, highest level from 2014. But the US-China trade dispute and concern over a possible slowdown in global economy dropped Brent oil prices back to $60s. Although market volatility remains, O&G stakeholders show more confidence thanks to the new trends emerged during the downturn. Those trends transformed market dynamics structurally and pushed industry stakeholders to embrace the “new normal” and to adapt their strategies accordingly.
Here are three out of the six key trends shaping our industry since the oil price crashed, and which still continue to influence the sector. Other three trends will be presented in the second part of the blog.
1) Digitization transforming O&G industry
O&G players were digital pioneers long before Big Data, advanced analytics, and the Internet of Things. The industry has long depended on high volume of data to understand reservoir resource and production potential, as well as boost operational efficiencies at oil fields. However, during the past couple of years, the industry has embraced digital solutions in full, even if developed by industry outsiders. As a result, new technologies and solutions helped players to deliver operational efficiencies across the O&G value chain, cut operating costs and create additional value from existing assets. Substantial operational improvements were made, using process automation, monitoring, predictive maintenance and introduction of smart equipment, robotics and even drones.
While the industry is still recovering from the downturn, many companies do not look at digital as the “nice to have” function anymore. It is now crucial for them to rewire their operations and to establish a complete digital ecosystem. Leading O&G companies have already introduced Digital Plans and Roadmaps. According to Ernst & Young, 89% of global O&G executives expect to increase their investment in digital technologies over the next two years. And they are now fully supported by players of different profiles, including IT giants, consultants, technical start-ups and experienced players in automation and energy management.
It is, however, important to highlight that digital transformation raises several issues such as risks around data security, need for tech-savvy workforce, cultural transformation and change in regulations, as well as standardization. Data scientists are now needed by companies to connect analytics with real business values. It is up to the O&G leaders to navigate in digital era and address risks that come along.
2) Oil companies transitioning into energy companies: adapt to survive or disappear
Energy transition is the long-term structural change of our global energy mix. Indeed, the switch from coal to natural gas, slowing oil demand growth and incorporation of renewables at the expense of fossil fuels are defined as energy transition.
The growing pressure from investors and stakeholders on O&G companies to reduce their environment impact and to demonstrate their long-term business viability pushed them to start investing in their own transition. Many players are now establishing a deeper presence in global gas and power chains, in areas like renewables, electric vehicles charging, biofuels, carbon capture and storage. Even as economic benefits from sustainable energy businesses are not the same as from the fossil fuel activities in the mid-term, recovered profitability of their upstream activities means O&G companies can invest in green energies, while still providing reasonable returns to their investors.
Pressure from shareholders to be more transparent about their means to tackle the climate change is among other reasons why O&G companies diversify into renewables and power generation. Although most of oil companies still spend a small portion of their capex on renewables, some O&G Majors have set ambitious goals. Equinor for example, plans to allocate 15-20% of its investments (up to $1 billion a year) to new energies by 2030, compared to 5% today. While O&G market remains volatile, portfolio diversification should help make sure that major players stay in the game. Commitment to new energies development foster the long-term future of the O&G players and preserve shareholder value in the energy transition.
3) Environmental protection and de-carbonization are on O&G companies’ agenda
O&G companies are more concerned about their public image than ever before, especially due to the environmental impact of their operations. O&G industry must continuously ensure that operations remain safe and environmentally responsible. At the same time, O&G players must respond to societal issues by strengthening their communications and promoting de-carbonized portfolios of the future.
The global push to reduce energy sector’s carbon footprint is streamlining the market. New strict regulations, governmental programs and climate initiatives cannot be ignored by the O&G players. Some of the biggest O&G players are already re-directing investments towards renewable developments, co-generation, flare reduction, energy efficiency, biofuels, carbon capture and storage and forestry. It is also worth mentioning that investments by European players vastly outpaced the US and Asian rivals.
Having said that, we should bear in mind that major operators cannot fully rely on these advancements, and upstream activities shall remain the core of their businesses, at least for the foreseeable future. Indeed in 2018, top O&G companies on average spent jointly 1% of their budgets on green energies. Royal Dutch Shell led the peer group with future ambition to spend $1-$2 billion per year on clean energy out of a total budget of $25 to $30 billion. Another European Major, TOTAL, has spent around 4.3% of its budget on green solutions. Despite the made or announced investments, current spending allocation shows that operators are yet to step up their investments and align their business models with the goals of the climate protection initiatives.