RESEARCH REPORT

In brief

In brief

  • Today, oil and gas exploration and production (E&P) companies face disruption and pressure resulting from six directions.
  • In this environment, oil and gas companies need to redouble their efforts to convince investors they are worthy.
  • Before embarking on a new path, every company must get five factors right.
  • Accenture shares various pathways to profitability including a middle ground of potential profitability—and renewed investor interest.


Today, E&P companies live in a completely different world as they face disruption and pressure. Low commodity prices, an overabundance of oil, and returns on invested capital (ROIC) that are lower than the weighted average cost of capital are just some of the challenges that have brought operators to their day of reckoning.

As they contemplate their next moves, E&P companies might be pleased to learn they have more options than they realized. But less time than they thought to make their choice.

The energy industry is facing pressure from six directions including:

The oil and gas industry is facing pressure from six directions.

In this environment, oil and gas companies need to redouble their efforts to convince investors they are worthy. Most see only two paths to profitability. The first involves continuing to operate as they have in the past—but with some significant changes. Companies on this trajectory will need to maximize their asset efficiencies, capture CO2 and methane emissions, and reduce energy intensity and waste from their operations.

The second path companies envision takes them away from their core business altogether, toward electricity-linked energy. These companies see the 50 percent decline in fossil fuel consumption by 2050 as a catalyst to abandon oil and gas. They are succumbing to compressive disruption, abandoning bad debt and looking for alternative sources of value. As they contemplate sunsetting their oil and gas operations, the move to renewables holds particular allure.

The truth is that resetting or sunsetting their oil and gas capabilities are not the only options for E&P companies. There is a broad middle ground of potential profitability—and renewed investor interest.

Returns, not reserves, are hiding in plain sight

To succeed in the new energy world, E&P and other upstream companies will have to fundamentally question their approach to creating value.

As the importance of exploration and appraisal recedes, they will need to adopt a “winner take all” mindset in well-defined areas of specialization. We see four new future roles for today’s E&P players:

  • Value chain specialists
  • Asset class specialists
  • Geographic specialists
  • Ecosystem specialists
E&P companies will need to think carefully about which pathway(s) makes the most sense—operationally and financially.

Regardless of the future they choose, E&P companies need to start thinking today of how they will operationalize their transition to a new, specialized business model. There are five key attributes every company needs to get right before they embark on their new path.

External positioning

E&P companies need to effectively communicate the changes—and the financial reasons underpinning it—to their stakeholders.

Transparency

Every E&P company should strive to achieve greater transparency in all that they do. Markets demand it. And companies benefit, too.

New ways of working

As E&P companies consider their options for specialization, they should challenge the orthodoxies of their legacy operating models.

Capital and corporate structures

The different pureplay options open to E&P companies require different capital and corporate structures.

Talent

New skills, capabilities and roles will be needed. Recruiting, hiring and training will all be different. Remote working, too, must be considered part of the workplace strategy moving forward.

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Expect more

As E&P companies continue to face compressive disruption and fall out of favor with investors and a more climate-conscious public, many are simply ignoring the problem.

Others are running away from hydrocarbons for seemingly safer shores. Few are considering a third option: specializing in the critical functional areas, geographies or asset classes in which they have expertise. Transitioning to become pureplay providers represents an untapped opportunity and offers a viable—and profitable—path forward.

Muqsit Ashraf

Senior Managing Director, Lead – Energy Industry Sector


Herve Wilczynski

Managing Director – Strategy & Consulting, Energy Upstream Lead


Manas Satapathy

Managing Director – Strategy & Consulting, Energy

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