Oil prices have bounced back from historic lows to $75 a barrel in a year, fueled by the hope of an impending economic recovery in the post-pandemic world. However, even with the near-term market optimism, there is increasing certainty among the OFES leaders that the medium- to long-term demand and pricing premium for their products is structurally declining.
An industry under pressure
The global movement to decelerate hydrocarbon extraction has steadily grown and now—with more and more companies and countries signing on to the Paris Agreement and national sustainable development goals—has become unstoppable. As individuals and industries in developed countries scale back on fossil fuel consumption, demand growth has slowed—a deceleration exacerbated by the global pandemic.
Investors, for their part, have seen the “writing on the well.” In an environment characterized by muted fossil fuel demand and growing calls for decarbonization across the energy chain, investors have pulled back their funding for capital projects in the industry. Even the most optimistic forecasts do not see capital expenditures returning to 2019 levels until at least the middle of this decade. This does not bode well for OFES companies. The resilience of most of their business models, as currently structured, depends on a steady infusion of capital into the industry.
Reducing costs by renegotiating contracts with suppliers, slashing selling, general and administrative expenses, or even fundamentally redesigning the way services get delivered won’t offset the systemic challenges now at play.
It's not all bad news
Accenture believes there is untapped potential for OFES companies to attract investor interest in new, non-hydrocarbon-intensive areas that support the energy transition agenda. For example, there are significant investments being made in “emerging energy” solutions—ranging from electric vehicles and smart grid infrastructure to electrified heat pumps. There’s no reason OFES companies can’t or shouldn’t claim a piece of the new energy investment pie.
"Emerging energy" investment trends (US$ billion)
Reclaiming relevance through diversification
Pursuing new opportunities will require today’s OFES companies to diversify. Rather than taking a defensive posture to salvage what they can from their traditional businesses, OFES must now “play offense” and branch out into new areas. We see companies pursuing five significant value pools, albeit at different levels of maturity.
Investment in revenue diversification by key OFES players
Diversification in action
OFES companies need to be able to fund the organic and inorganic investments required to build these new businesses. While the improving market for OFES should increase cashflow and enable some new investment, most companies will require divestitures of their traditional businesses to make this pivot at scale.
As important as funding, it’s the recognition that making this pivot will require significant changes to the culture, capabilities and organizational structure of OFES businesses.
Companies must make five key changes to pivot successfully.
1. Reflect commitment in organization structure
OFES businesses need to be bold with the positioning of their diversification initiatives in terms of their organizational structure.
2. Focus on a more robust strategy and marketing functions
As OFES companies diversify and learn how to win and sell in many new markets with many new customer segments, they will need more robust strategy and marketing teams to guide the business.
3. Embrace partnerships
Most of the pivots OFES businesses will undergo will be faster and more successful through partnerships that can augment the unique capabilities present within OFES companies today.
4. Welcome new talent strategies
Similar to partnerships, OFES businesses will also need to embrace new strategies for how they acquire and develop talent.
5. Foster a culture of innovation
OFES companies have been ingenious in their ability to drive technology breakthroughs within the oil and gas industry, but fostering a culture of innovation that rewards colleagues for taking risks outside of the safe havens of the “traditional business” is a very different approach and not something many OFES companies have been successful at in the past.