The new face of the oil industry: The Big Four
- Written by Vlad-Adrian Iancu
The PricewaterhouseCoopers (PwC) report is here and it seems to be asking the right question. Can the industry handle yet another change? Rest assured business is not closing down, far from that actually. The demand for energy will never end, not in the civilized world at least. We want it reliable, we want it affordable and we want more of it. That is the mantra for now. Amidst these challenges a new possibility is arising. How long before it becomes the norm? The low carbon system is real and it is becoming the face of the future. Will the companies get with the system or sail against the tide? Let’s see what washes ashore.
Adaptability is the keyword. To stay on top of the game you have to be able to navigate the playing field. This report claims to be a manual of sorts, both for new and old companies. As they see it, the era of oil and gas may be reaching its climax and the market dynamics will need to change along with geopolitics and government action. Every change can produce a new future and the team is trying to come up with the most probable one. They narrowed it down to four, four different approaches that will shape the industry as we know it. Before talking about tomorrow we should analyze the world of today. In five to fifteen years we might be looking at a rather different picture, but for now fossil fuels are still in the centre of attention. 80% of the primary energy demand is made up of oil, coal and gas. Give and take but it is still a huge amount. The biggest hit we take is from the transport sector that has still to come up with a viable alternative. Even though renewable and nuclear energy are envisioned to rapidly grow, by 2040 fossil fuel will still hold 75% of the global energy demand. But the powers that be have stopped the game, after COP21 and considering the heavy talk about climate change, have decided that it is actually high time we switched to the low carbon economy. Cleaner energy sources might be seen as small potatoes right now but the ball has started rolling and the outcome is clear. Start preparing your company for this change or you will be left behind. In short, oil prices are dramatically low and even a blind man could see what effect it has had on the industry. Layoffs and budget cuts are only the beginning. But this stage of sudden death might bring about some interesting changes. Man is an adaptable being and when put under pressure he might come up with a much needed solution. Technology is here to save the day and digital oilfields or drones could provide a refresh for a struggling industry. Investments have also become nothing to write home about as more and more companies are discontinuing expensive projects. It’s hazardous to say that anyone is certain of what the future holds, as trends and factors could provide a wild card, but for the time being we could still try to make up a theoretical framework. And PwC has done just that.
Drivers of change
PwC framework has been developed by taking into account five megatrends and how they intersect. The five pillars of this plan are as follows: technology breakthroughs and innovation (efficiency improvements and low carbon solutions), climate change and resource scarcity (renewable energy and storage solutions), demographic change (new consumption patterns and responsible consumers), a shift in economic power (the balance between established and emerging markets) and rapid urbanization (mass mobility solutions). Disruption was also a big factor and customer behaviour, competition, technologies of service/production, distribution channels and government and regulations were taken into account. These were all the main topics considered and the questions they produced were answered. Their analysis produced four results dubbed ‘drivers of change’. These are supply and demand driven and influenced by markets and governments. The four perspectives produced take on the possibility that the oil and gas sector evolves along current lines with the same rules, low carbon economy is accelerated by consumers, retail and commercial, and energy efficiency is achieved, the government makes good on its promise of a greener world and finally the restrictions imposed will trigger supply constraints. On a closer look these perspectives are actually linked and maybe they will all come to fruition in one form or another.
The first perspective features the promotion and acceptance of gas as a transition fuel. The appetite of investors will decrease and will become very selective due to volatile prices and transition to low carbon solutions. Not everyone will survive these cycles and the ones that do will move towards low carbon technologies. As oil will still be indispensable, price, convenience and affordability will continue to be dominant factors. The ones that profit will be the gas suppliers. High levels of investments will be needed to find and develop new oil and gas reserves and also for renewables. These will generate a competition between countries for investments and technology. But collaboration will be a key factor for operators and service providers to bring their resources together and realize standardization to reduce cost. Mergers and acquisitions will also be a valid solution.
The second perspective will see a shift from the traditional norm of consuming energy passively. Consumers will limit their carbon footprint and promote energy efficiency as developing markets will also make the leap towards a more efficient and sustainable energy future. Bottom line is that the link between economic growth and energy demand will be weaker. Urbanization will see an increase and solutions for shared transportation will bring down the usage of fuel. Mass-scale storage solutions will also promote the sale of electric vehicles. Companies will be forced by the public to make better energy choices and energy demand will plummet as green energy becomes affordable. In an environment where supply is ever-present and in surplus and the demand for oil is decreasing both national and international producers will have to adapt or suffer the consequences of remaining carbon-based.
The third perspective deals with how governments will shift the demand. The change will be managed and accelerated both by investments and parameters set by international accords. Carbon taxes will be implemented on consumption and a circular economy based on recycling will become mandatory as oil consumption will also take a hit. Gas will still be accepted as transition fuel. In order to battle pollution, governments will start to subsidize home improvements and provide low carbon R&D credits for industrial consumers. This push will lead to technological advances in renewable and environmentally friendly devices and energy efficiency. The use of fossil fuels will further be displaced and mass transit will accelerate the electrification trend. The oil and gas production will exceed demand but gas will have it better due to a more environmentally friendly profile. Companies will have to find new ways to navigate the low prices but the government will support their transition. Oppose this and they will suffer.
The fourth way deals with how the government’s actions and geopolitical events will eventually trigger supply constraints. The supply environment will be dictated by government attitudes in regards to climate change commitments and geopolitical upheavals. Investments will be in favour of supply from renewables and green sources. Enter gas and bio fuels. The transition from oil to gas and further to low carbon will be supported and imposed by governments. This will lead to fragmented supply, increased prices and risks. To prevail, the companies will need strong portfolios and stability through the cycle. Emission legislation will take hold as part of environmental protection and bans on fracking may become widespread and regulated harshly. The pressure will be on to adapt to low carbon economy and market dynamics will change as OPEC might be replaced by a gas equivalent. Oil and gas prices will rise but keep in mind that managing the carbon footprint will require investments in carbon abatement technologies.
Some views from around the globe are also mentioned in the report and these mostly focus on cost reduction, technological innovation, stability, new resources, investments, alternative energy resources, market changes and government interventions. Regardless of the perspective that is closest to reality, it could be none, one or all; companies should be prepared for the next five to fifteen years according to PwC.
Upstream companies should balance their portfolio in order to tackle different levels of risk exposure, increased regulation and political instability. Stakeholders support will need to be preserved through periods of volatility. They will be faced with the decision of entering the renewable markets and social media will play a deciding role. Innovation will be vital as focus may change because of government impositions and investments in technology will be the key to remaining competitive. Managing resources and even collaboration will help the upstream companies prevail.
Midstream and trading business will have clear strategic opportunities based on the evolution of hydrocarbon flows. Fossil fuel projects may be halted by either consumers or governments and companies should find ways to gain the trust and help of both the legislative body and general public. Traders will have to make sure that they can take the heat generated by the attention. As price volatility is still a factor there will be major opportunities for trading. For large oil and gas companies these capabilities of trading are now essential and will become more so in the transition to the low carbon economy.
For Downstream segment the evolution of demand for transport fuel products will be paramount. Flexibility will be the key in this fast changing environment along with innovation and efficiency. Business models might also be subject to change as the competitive edge will be the difference between effective and ineffective fuel marketing.
The Oilfield Service providers will also need to adapt to the carbon constraining regulation and cost managing according to their core capabilities. Portfolios will also have to be balanced along with innovation and further standardization.
In order to survive this period all the companies should find a strategy tailored to their own goals and capabilities, keep their eyes on the global map and respond accordingly, keep their resilience while fighting for innovation, be open to the possibility of collaboration and finally ensure that they have the support of their stakeholders. This report might have hit the nail squarely on the head or it might have been miles of the mark. One thing is certain: this is not the first time the oil and gas industry has been in a tight spot and it may very well not be the last. We just have to wait and see, but it’s better to wait prepared.