Companies operating in the oil and gas sector must continue to meet the energy demands of governments, industrial sectors, and individual consumers. At the same time, they are expected to dramatically change the way they have historically operated and demonstrate tangible results on Environmental, Social, and Governance (ESG) objectives. Balancing these competing priorities is key to successful transformation. Success hinges on the balance between doing good for society and remaining profitable. They must do both to maintain investor, employee, and public confidence. This means creating more value for every dollar spent while making progress towards future growth and the sustainability of the business.
Across the energy sector, organizations must embrace technological innovation, increase efficiency, find new avenues for growth, ensure energy security, and satisfy heightened stakeholder scrutiny—while maintaining financial, safety, and reliability targets. In this challenging business environment, companies must find—and fund—the right balance of investments to deliver the most meaningful results.
Overcoming Disruption: Navigating Change in Turbulent Times
Oil and gas companies today are facing the most volatile conditions the sector has ever experienced. Even prior to the geopolitical unrest of 2022, the industry was suffering acute effects from the COVID-19 pandemic. In 2020, global oil demand hit an all-time low, followed by a steep rebound in 2021, and 2022 is on track to surpass pre-pandemic levels of demand with forecasts estimating near-term continuous growth. Further complicating the situation, the sector has suffered the same supply chain issues that have plagued all industries.
The oil and gas industry perpetually seems rife with uncertainty and a potential volatility. Between rising and diminishing consumer demand, price fluctuations, and of course, geopolitical issues where one global supplier or another threatens to cut off supplies, every day holds surprises and risks. But 2022 seems to be upping the stakes in terms of risk and uncertainty.
In its magazine Drilling Down, KPMG provided an assessment of the top risks facing oil and gas organizations for the remainder of 2022 and beyond. The report considers the uncertain state of global oil supply and demand, the impact of decarbonization efforts, the ramifications of Russia’s invasion of Ukraine, and the rise in production and demand for electric vehicles. These factors, paired with inconsistent global efforts toward decarbonization, increased pressure from social and environmental activists, along with the industry’s own operational challenges in recruiting and retaining employees to replace an aging and retiring workforce, have yielded unprecedented pressure and scrutiny on the industry.
When it comes to global energy transformation efforts, it seems like it is one step forward and two steps back. While global energy transformation efforts to reduce emissions are being baked into policies around the world, it’s not a one-size-fits-all approach and it’s happening at different speeds in different countries. And as events in Europe illustrate, politics have a major impact.
Investing in Change: World-shaping Decisions
This scrutiny has bred skepticism. Almost daily, we read reports from environmentalist and investment communities questioning whether the oil and gas industry can navigate today’s challenges and deliver sustainable energy products to meet climate objectives. But one thing is certain: the significance of the decisions made by oil and gas companies cannot be overstated.
“To make a switch from a global economy that depends on fossil fuels for 80 percent of its energy to something else is a very, very big job,” said Daniel Yergin, the energy historian and Vice Chairman of S&P Global who has a forthcoming book, “The New Map,” on the transition now occurring in energy. But he noted, “These companies are really good at big, complex engineering management that will be required for a transition of that scale.”
As governments around the world work to implement effective climate policies and incentives, oil and gas companies are looking to adapt and reinvent—scrutinizing and optimizing their portfolios to meet changing demands while maintaining profitability required to invest in the new technologies and innovation that will fuel the energy transformation. And there is no one-size-fits-all solution in terms of what that technology mix looks like.
In Europe, many companies are doubling down on renewable energy projects, including solar, wind, hydrogen, and biofuels, according to a Rystad Energy analysis reported on by NPR last summer. China National Offshore Oil Corp, one of the country’s three state oil and gas companies, recently announced increased spending on clean energy, with renewables accounting for over half of its output by its net-zero deadline of 2050. Malaysia has committed to reducing greenhouse gas emissions by 45% based on GDP in 2030, and Indonesia has set that target at 29% reduction by 2030. Meanwhile, US companies are investing heavily in carbon capture, utilization, and storage (CCUS), the technology that prevents or recovers carbon dioxide emissions. According to a 2023 IEA report, close to 50 new US carbon capture projects were announced for the industry and fuel transformation sectors between January 2020 and August 2021 alone.
Complementing these investments in new technologies around the globe, oil and gas companies must also continue to upgrade, repair, and maintain existing equipment to run at peak efficiency, including finding and fixing methane leaks in wells, pipelines, storage tanks, and gas processing facilities, and installing greener equipment across their operations.
But when and where should companies spend for maximum impact during this period of reinvention? How to ensure the right projects are greenlit at the right time to deliver on financial and environmental objectives? How to adapt plans quickly to respond to rapidly shifting geopolitical landscapes or unpredictable extreme weather events?
Reinventing for Tomorrow: Investing in the Right Place at the Right Time
Reinvention of a century-old sector can only succeed if underpinned by rigorous strategy and investment planning supported by consistent day-to-day decision-making. In a sector with operational horizons that stretch to decades and investment choices that have global consequences, this means that all stakeholders—from regulators and investors to consumers and employees—must understand how investment (and divestment) decisions contribute to long-term objectives.
At Copperleaf®, we believe transformation at this scale requires three key elements, beginning with a (re)definition of value to incorporate new metrics—including social and environmental benefits and risks—that can be weighed alongside traditional factors to determine the relative value of all potential investments.
Decisions were once largely determined by the core elements of safety, reliability, and cost. Now, energy companies must also consider community, governance, decarbonization, and resilience targets in their definition of value.
Once defined, these value drivers must be embedded both into long-term capital planning and the everyday decisions that drive results. And, finally, tangible results must be clearly demonstrated to internal and external stakeholders.
Copperleaf has been supporting organizations across the energy sector with asset management and investment planning best practices for more than two decades.
In the next article in this series, we explore how Copperleaf helps companies define and embed value into long-term planning and day-to-day operations to optimize investment planning and management for the energy transition. In the final article, we provide examples of how our clients use decision analytics to ensure their investment plans are driving long-term strategy to maximize value.