Accenture Strategy

Will oil and gas companies go all in or go in all?

August 26, 2019

RESEARCH REPORT

In brief

Oil and gas companies no longer compete just among themselves. Companies from other industries are looking to capitalize on the energy transition.
Oil and gas players can address this industry convergence by positioning themselves as generalists or specialists.
Regardless of their choice, digital technologies will be critical enablers of their future competitiveness.
Three actions will set them on the right course for continued relevance.

As the world transitions to more sustainable forms of energy, several industries are stepping onto what has historically been oil and gas companies’ turf. Oil and gas executives are clearly aware their industry is in upheaval. In fact, 82 percent believe their current business models will be unrecognizable in five years.¹

To maintain their competitive agility, oil and gas companies can’t ignore the increasing pace of industry convergence. They need to tackle it head-on by embracing one of two distinct approaches to value creation. Specifically, they can transform their core business by becoming specialists, or they can pivot to new opportunities as generalists.

Choosing the right option is critical. But making the right choice is harder than many think.

Energy companies have a choice

This accelerated pace of change puts tremendous pressure on oil and gas companies to determine when and how to position themselves. The good news is that they really have just two options. They can become generalists that pivot to new value-generating opportunities. Or they can become specialists by strengthening and transforming their core business.

Generalists generate incremental value by diversifying their holdings and capabilities across the energy value chain. They embrace the energy transition and its accompanying industry convergence by investing in (sub)segments of adjacent industries such as integrated gas or renewables, which typically offer either higher returns or lower volatility.
Specialists on the other hand remain focused on a specific segment of the energy value chain. They surgically select the assets or products they want to develop or the markets they want to lead. Although specialists are subject to higher return volatility when commodity prices fluctuate, they can boost their ROIC and enjoy intermittent higher average returns. Exploration and production specialists, for example, do well when oil prices—and returns on invested capital—are on the rise.

For both groups, competitive agility is key. The wise use of digital technologies is equally critical.

Other industries are stepping onto what has long been oil and gas companies’ turf. These interlopers aren’t just positioning themselves to monetize their capabilities in a cleaner, lower-carbon world. They’re accelerating the energy transition.

The digital path to relevance

Only 7 percent of oil and gas companies use technology advances to drive their financial performance.² This means the industry is leaving billions of dollars of value on the table. In the age of industry convergence, oil and gas players can no longer ignore digital’s potential. Automation, augmentation and digitally-enabled ecosystems are particularly relevant—supporting everything from cost reductions and talent sourcing to better decision-making and consumer connectedness.

While generalists and specialists both need to embrace digital technologies, they do so in different ways. Generalists focus on automating processes and optimizing decisions with analytics. Specialists use automation, as well as augmentation and ecosystems to shine during periods of high commodity prices and compete during down-cycles.

Accenture Strategy has found that digital technologies can unlock significant EBIDTA value for oil and gas companies.³

30%

for upstream players

15%

for downstream players

It’s time to make the move

The speed of industry convergence is likely to increase as hydrocarbon demand growth diminishes, as more stringent carbon regulations are enacted, and as consumers more strongly voice their desires for less carbon-intensive, end-to-end energy-related products and services.

To ensure prosperity for the world’s growing population and to power the world’s expected economic development, oil and gas companies need to define the areas in which they can maintain a competitive advantage. Leaders are already taking three actions:

Choosing whether to be a generalist or a specialist.
Enabling their decisions with the right digital strategies.
Engaging with larger ecosystems to identify further opportunities for digital plays and collaborations.

Others would be wise to follow their lead.