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Outlook: How oil and gas companies are fueling reinvention

in Industry
Outlook: how oil and gas companies are fueling reinvention
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The oil and gas industry has rebounded strongly throughout 2021, with oil prices reaching their highest levels in six years. While the industry’s recovery is better than expected, uncertainty remains over market dynamics in the coming year. Our 2022 outlook explores five trends that will shape the path forward for oil and gas companies.

A period of transformation

As we move into 2022, many oil and gas (O&G) companies are looking to reinvent themselves by practicing capital discipline, focusing on financial health, committing to climate change, and transforming business models. The positivity of such changes is reflected in our survey, where nearly two-thirds of O&G executives state they’re highly positive about strategic changes made by their organizations.

The journey of transformation has just begun for the industry, and simply managing or riding oil price cycles aren’t options anymore. Over the next 12 to 18 months, O&G strategists should:

  • Streamline and optimize their resource portfolios
  • Embrace and develop smart goals for the energy transition
  • Attract, train, and retain employees in a tight labor market
  • Come to terms with additional environmental, social, and governance (ESG) requirements
  • Purpose-driven, tech-enabled, and human-powered organizations with smart interim goals and progressive communication and disclosure strategies can make it happen.

The oil and gas industry has rebounded strongly throughout 2021, with oil prices reaching their highest levels in six years. While the industry’s recovery is better than expected, uncertainty remains over market dynamics in the coming year. Our 2022 outlook explores five trends that will shape the path forward for oil and gas companies.

One.

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 $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.

Two.

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 prepandemic 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 activities would need not only to be financially accretive, but also to support ESG goals.

Three.

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.

Four.

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 fueling 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. How can companies 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.

Five.

Greener jobs and differentiated benefits can help secure return and retention of 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 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 to the workforce in a tight labor market. The commitment to decarbonization could be the best recruiting pitch, but more than 75% of our 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.

Courtesy Deloitte

Tags: Oil and Gasoil companiesRebound

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