The traditional strengths of the oil and gas sector could help fund and fast-track new energy solutions – if companies act now.
- While decarbonization is the long-term goal, security of supply is a critical imperative.
- Renewable energy use is growing, but today, oil and gas represents over half of all energy consumption with whole industries dependent upon oil and gas.
- Oil and gas has a significant role to play both in energy delivery today and in enabling the energy transition for tomorrow.
As the global energy complex decarbonizes, is it inevitable that oil and gas companies (which account for over half of CO2 emissions) will gradually disappear? Will they become relics of a bygone era when we were unaware of how the burning of fossil fuels would affect the climate, less nimble and innovative than their emerging competitors?
Not so fast.
“Beyond the current crisis, in which security of supply has become a top priority, the oil and gas sector can, must and will play a role in solving the climate crisis,” says Saulius Adomaitis, EY Global Oil & Gas Leader. “It is essential, therefore, that the sector not only survives, but thrives.”
The competencies and market reach necessary to bring about a rapid and complete transition to low carbon energy are found everywhere in today’s oil and gas companies. Keeping those companies profitable and harnessing their strengths could serve to hasten clean energy’s arrival.
The oil and gas sector can, must and will play a role in solving the climate crisis. It is essential, therefore, that the sector not only survives, but thrives.
Saulius Nerijus Adomaitis – EY Global Oil & Gas Leader
Capital, capabilities and the confidence to scale clean energy solutions
We’ve seen a remarkable shift in perspectives around the outlook for oil and gas. Talk of the end of oil has been replaced by a recognition of the sector’s importance in the here and now, and the role it will play as the energy market transforms. Oil and gas account for 55% of global energy consumption and whole industries remain dependent on oil and gas, with no viable substitutes in the near term.
But beyond this, we see a growing acknowledgment that the very ingredients needed to ensure a successful energy transition – plentiful capital, technical expertise and experience in complex operations and markets – are abundant within the oil and gas sector. Instead of falling afoul of the decarbonization agenda, what if oil and gas companies could use their capital and capabilities to lead it?
We believe there are five ways oil and gas companies are primed to accelerate the development and commercialization of the renewable technologies that will drive the energy transition:
1. Capital strength
Enabling the energy transition will require up to US$5.8 trillion each year to 2050, according to some estimates. The oil and gas sector’s deep experience of raising capital, even in the most competitive of markets, as well as its ability to maintain robust balance sheets and consistent returns, means it is well equipped to fund innovative new energy businesses.
2. Market intelligence
Renewable energy markets continue to develop at pace. As technology advances and clean energy options grow, making choices about the best fuel source for each initiative will become more complex. The oil and gas sector has long harnessed market intelligence to direct the right energy to the right place at the right time at the right price.
3. Supply chain excellence
The oil and gas sector moves US$4 trillion in value through its supply chains annually. That’s about 4% of the global GDP. Around the world, renewable energy projects are growing in size and scale. Bringing these projects to fruition will require orchestrating complex ecosystems of suppliers, partners and assets. Oil and gas companies’ deep experience of managing complicated global supply chains, optimizing assets and mastering the logistics of deliveries will be especially valuable in a more complex, connected renewable energy market.
4. Cost optimization through technology
Decarbonization remains a priority for the energy industry, but tough economic conditions, including soaring inflation and higher supply chain costs, make it harder to deliver large-scale clean energy projects on budget. Oil and gas companies have a track record of using technology to reduce costs at scale – digital technologies have improved unconventional oil and gas productivity over the past decade. This ability to continually apply digitally driven innovation can help ease profitability pressures, which are likely to intensify as competition increases between molecules and electrons, and between fossil and green energy.
5. Risk management
Deploying the amount of capital necessary to make a difference for the planet is fraught with the possibility of cost overruns and delays. Oil and gas companies are highly skilled in identifying and mitigating risks inherent in large projects, as well as those that come from operating in multiple jurisdictions and in a highly volatile market.
Building readiness for a different energy future
This combination of capital and capabilities creates a resilience that will define the winners in a more uncertain energy future. Resilient companies don’t just weather tough conditions – they continue to innovate despite them. Oil and gas companies have long honed the ability to adapt and flex quickly as markets fluctuate. Now, whatever future path they embark on (including some possible scenarios detailed below), organizations will need to become even more innovative and agile.
For most organizations, however, there is still a need to address critical gaps in skills, technology and talent, some of which are a legacy of historic underinvestment in the sector. Oil and gas companies that plan to transition into new energy companies will need to consider the capabilities they need to make the move successfully. For example, many will need to improve customer centricity to better understand new customer segments and make smarter decisions around which markets offer the greatest opportunities to redeploy capital and people. Additionally, maintaining profitability amid a transforming energy market will require oil and gas companies to focus on the following priorities:
Building digital carbon capabilities
The ability to collect, process and report carbon emissions data will be the most important enabler to success in a decarbonizing world. Oil and gas companies will have to operate differently than they do today. Reducing operational emissions is the first step, and we see several oil and gas majors making good progress, with initial efforts to reduce carbon intensity focused on the wellhead and refinery. According to EY analysis of 2020 figures, some of the biggest integrated oil companies have reduced upstream scope 1 and 2 greenhouse gases by around 20% since 2017. In time though, the ability to generate and leverage real-time, highly granular data will become increasingly important, both to keep pace with evolving regulatory requirements, and to meet the higher expectations of investors, customers and other stakeholders. Carbon credits will become the tradeable output from decarbonization investments, and a significant opportunity for companies with the right skills and technology, culture, data, and market awareness.
Keeping companies profitable while they transition into new energy businesses will require a sharper focus on costs. Digital technologies offer potential for vast productivity improvements through speeding up processes, cutting downtime, reducing the use of materials and eliminating mistakes. Recently, we’ve seen an operator leverage technology to integrate multiple applications and data sources to reduce well planning time from an average of 12 months to two. The most competitive and successful oil and gas companies will be those that accelerate the digitization trend: adopting new tools and techniques, including the Industrial Internet of Things (IIoT), analytics, big data, and robotic process automation (RPA) to transform operations from the wellbore to the back office.
Creating an intelligent enterprise
Oil and gas companies are awash with data that describes how the many parts of the company are operating and performing. But in most organizations, this data is siloed across the company, which makes it helpful to optimize individual departments, but almost impossible to get a single, comprehensible picture of the business. Adopting the systems and skills to create a more connected, agile, intelligent enterprise can unlock the true value of data to guide better decisions around capital allocation, recruitment and incentivization.
Transforming the back office
As companies reshape for a different future, focusing talent and resources on improving core competencies can help guide successful transformation. For most oil and gas companies, these core competencies revolve around extracting the maximum value from the hydrocarbon. Non-core functions, such as tax and finance, cybersecurity, payroll, and compliance, while critical, do not directly improve extraction and production of resources. We see more of the sector’s leading companies moving towards a next-generation back-office experience, working with managed services partners who combine best practice, top talent and leading technology to truly transform the back office, allowing leaders to focus on the core business.
Planning for growth and transition
While the hydrocarbon era will end eventually, no one knows how quickly. Now is the time for oil and gas companies to consider their own strategies to transition when the time comes, and to grow sustainably in the meantime. This means determining their role in addressing immediate challenges to energy supply security. Oil and gas economics are as favorable as they have been for some time, and capital is abundant. Companies face a trade-off between continuing the core business while prices are good and pursuing new energy opportunities that may offer lower returns now, but the potential to create more value in the longer-term. Some companies will use cash from legacy businesses to fund alternatives while others will divest those businesses. As companies rebalance, we may see assets in the hands of private companies that are less subject to the pressures that come with raising capital in the public markets.
The time is right to seize the opportunity of an evolving sector.
The oil and gas sector is at a crossroads. Conflict and volatility have dramatically improved the short-term outlook for incumbents, and prices and returns remain high for legacy businesses. But the imperative to plan for a new future is more urgent than ever. Despite the current crisis, the pace of the energy transition is accelerating. Oil and gas companies are better positioned than many in the energy sector to lead the race to decarbonization, but only if they act now to build the readiness to succeed in a very different future.
Recent geopolitical events have created uncertainty in the global energy market, shining a light on the critical role oil and gas has in the global economy. While the role it plays today has come into sharp focus, what may be less obvious is the role it could play in the energy transition. Oil and gas companies have the scale, scope, expertise and experience to lead the race to decarbonization.