For years, O&G companies have struggled to achieve profitability, capture investors’ interest and secure public trust. Those challenges have been exacerbated recently by an abundance of supply, the growing decarbonization momentum, and the structural shifts in consumer behaviors. Many companies’ relevance—and even their social license to operate—are called into question.
And that was before COVID-19. The pandemic brought about a demand disruption that no one could have foreseen. It was a jolt to the energy system—a strong indication that returning to “business as usual” might be unlikely.
What is clear for many in the industry is that challenging established paradigms and looking into reinvention is essential for success. That mandate is forcing industry leaders to grapple with two fundamental questions: What should their portfolios look like? How would they win by investing in the right capabilities and ways of working?
The need to change course
Despite prices averaging above $70 per barrel over the last 10 years, free cash flow from core operations has been insufficient to maintain shareholder returns above the cost of capital. The leverage ratio of total debt to total liquidity has more than doubled since the depths of the 2008 financial crisis, and the industry’s share of the S&P 500 has been cut by more than half over the last 10 years.
Despite these warning signs, O&G companies still have a fundamental role in the energy future—particularly when it comes to enabling nearly a billion people to access secure, affordable and sustainable energy. But O&G will no longer be the undisputed energy leader, as other sources will assume dominant positions.
Where to play in the energy ecosystem of 2030+
O&G companies, as well as their supply chain partners, face a crucial choice about future portfolio strategies. In a decarbonizing economy, and in an industry where profit pools are shifting downstream away from fossil fuels, incumbents must decide what to offload, where to diversify, what to optimize and which new market opportunities to target.
Broadly, three different portfolio strategies are emerging:
Go deep on oil and gas
The Oil & Gas Specialist: Winners will double down on cost and operational excellence, while reducing the carbon intensity.
Introduce energy diversification
The Energy Major: Some O&G companies will broaden their focus on both hydrocarbons and electrons and place an emphasis on end customer needs.
Become a new energy and solutions provider
The Low-Carbon Leader: The third option involves making a full pivot towards a carbon neutral future.
How to win in the next decade and beyond
Once they decide the role they want to play in the future energy ecosystem, companies need to consider how they can maximize their chances of success. Affirming their relevance will require new behaviors and new mindsets. Long-standing orthodoxies in five areas must be set aside to make room for the innovations that will power the energy future.
The way O&G companies move forward to win will depend on their unique circumstances and the portfolio strategy they choose to pursue.
The amount of change will take years to be accomplished and can certainly feel overwhelming to industry executives and participants. This is particularly the case after a rough 2020 where virtually all oil and gas companies had to make difficult choices.
Companies can turbocharge their journey over the next 12-18 months with this journey blueprint below:
Set a bold North Star
Declutter your portfolio and organization
Reset collaboration expectations
Turbocharge customer-centricity focus
Accelerate the human and technology journey
Challenges and opportunities in the oil and gas industry
The O&G industry has gone through difficult times before. But the scale of challenges it now faces calls for urgent action. To remain relevant in a decarbonizing world, oil and gas players need to revisit old paradigms and define strategies for reinvention.
The challenges should not be understated. But the opportunities are clear. There are numerous routes to a sustainable and profitable future for O&G companies. To secure that future, ‘let there be change’.