How the Oil and Gas industry is changing and what we should learn from it!
The Oil and Gas Industry is going through turbulence. The welts from the trade war and the “lower for longer” period* were still throbbing when the avalanche Coronavirus (Covid-19) descended. In the Pre Covid-19 era, resilience for the industry meant a focus on cost improvement, environmental compliance and the life cycle extension of mature assets. Reinvention never really beckoned as fortunes were built on models that worked for decades. It made sense to remain lean to ride out the storm.
This 2020 crisis is a bit more ruthless making some business enterprises appear an unfit match!
Some business models are likely to be archived as they are a bit stiff. They are not attired to brace for the times to come.
The effects of Covid-19 on the oil and gas markets were seen through its impact on air, land and the social movement behind going green.
Travel restrictions crippled global air trade driving declines in jet fuel demand.
Consumption patterns no longer supported the growth in manufacture of plastics and other petrochemicals.
Social distancing impacted the driving sector causing reduced demand for gasoline.
What is likely to be more enduring is what Covid-19 has done for the green revolution. It has elevated the conversation on the energy transition and what the future of energy is likely to be.
Crises often unmask issues that were overdue to being addressed. The market in turn responds to such crises by demolishing existing models, structures and mindsets often leading to better values, systems and leaders more resilient to change.
What may seem like a crippling trifecta to the industry could instead hustle progress. The Deep water horizon oil spill sparked innovations in oil spill management and the Fukushima disaster in Japan changed how the world viewed nuclear energy. The latter allowed for the market expansion of the safer alternative of LNG.
In present time, we have witnessed how enterprises have had to adapt their way of conducting business during a pandemic.
Vacuum cleaner manufacturers becoming ventilator providers and fashion designers expand their lines to include personal protective equipment.
If crises always leave a legacy of innovation, it will be interesting to watch what the new oil and gas sector is going to reveal.
For quite some time regulators, investors, the public and green party politicians have upped the pressure on oil and gas companies to adopt more sustainable practices. Some companies responded by shedding their old coats, instead opting to re-brand in favor of the new climate order. Danish Oil and Gas completely divested its oil and gas assets to become Orsted. Statoil was renamed Equinor, BP re-branded to Beyond Petroleum and Shell has become a rising powerhouse in renewable energy.
“Now, more and more people want their energy to come from renewable sources and they want to know where it’s come from. We noticed a change and want to be at the forefront of that change.”
Shell Energy’s Ed Kamm
If customer is king then changing customer sentiment will usher in a new world order. Accelerated production of clean energy is likely be the new game. Price volatility and uncertainty that made billions before is now just another bitter pill.
Once stock market gems for generations, shares in oil companies, are no longer a source of lucrative investment return. With sluggish demand for oil and gas likely to be the “new normal”, companies are searching for other revenue streams. They understand that their business can only grow if it is relevant to the market. No company executive wants to be responsible for not preventing its company from going extinct.
“What the world wants from energy is changing, and so we need to change, quite frankly, what we offer the world.”
Bernard Looney, Chief Executive Officer of BP
Make no mistake, oil and gas will continue to remain an integral part of the global energy mix. There is however no guarantee that global demand will bounce back to pre-pandemic levels any time soon.
In response, some companies are shedding oil and gas assets like a pair of old acid wash jeans. After all, the asteroid has struck and with it comes the sprint for a new purpose. Shell has delayed new fields in Gulf of Mexico and the North Sea and BP has promised not to expand its oil and gas footprint into new territories.
These companies are positioning themselves away from their association with natural resource extraction to ones more sustainable in nature. Some refineries have already been repurposed eg. Eni in Italy with its biofuel plants. They are generating more profits than their core hydrocarbon business.
The Global oil and gas giants are no longer just drillers. They will be the electric companies of the future playing a pivotal role in the electrification of the construction, transport and industrial sectors. This is evidenced by how they are allocating capital.
BP plans to increase investment in low-emission businesses like renewable energy by tenfold in the next decade to $5 billion a year, while cutting back oil and gas production by 40 percent.
Royal Dutch Shell has also won a deal to build a vast wind farm off the coast of the Netherlands.
France’s Total, owns a battery maker and has, several large investments in solar power in Spain and a wind farm off Scotland.
In Trinidad and Tobago a consortium formed by Lightsource Renewable Global Development Limited (Lightsource BP), Shell Trinidad and Tobago Limited and BP Alternative Energy Trinidad and Tobago Limited submitted successful proposals for a 92.2 MW of electricity from solar photovoltaic (PV) sources at Couva and a 20 MW of electricity from solar PV sources at Trincity.
Just as cavemen made way for the powerful era of man. So too this crisis will force an evolution. Sometimes the old stone becomes something timeless but, it never stops being a wheel.
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*a catch phase referencing prolonged depressed prices likely to continue into the future:
Designer of Mask -Gisda