Happy New Year. For the energy industry, truer words have never been spoken. After a banner year, the first weeks of 2022 suggest the trend of record cash flows and returns will continue. It is a heady time for oil and gas companies, to be sure. It’s also potentially a dangerous one.
Why? Because euphoria often begets complacency. And that’s something the industry can’t afford.
No rest for the weary
For some time now, we’ve predicted that the 2020s will be the make-or-break decade for oil and gas companies. That’s because the energy transition has been picking up speed and structural shifts—particularly those related to financial returns and sustainability—have been accelerating at a steady pace. The environment in which oil and gas companies operate is permanently changing. They have no choice but to adapt. And they have no time to waste.
Many companies are entering 2022 in a decidedly upbeat mood, buoyed by high commodity prices and improved macro fundamentals. Their cheeriness is justified. What’s not justified is a delay in their reinventions.
The rollercoaster of events over the past 18 months has shown just how vulnerable the energy industry is, in its current form, to volatility. We’ve gone from an energy crisis of abundance to an energy crisis of shortage. We’ve gone from lacking storage for oil and gas to lacking oil and gas to put in storage. We have gone from calls on OPEC to cut production to calls on OPEC to produce more. We have gone from negative oil prices to multi-year highs for oil, record prices for gas, and even an astounding 300+% jump in carbon prices in certain markets. We’ve gone from celebrating spot markets as panaceas to calling the same markets culprits. We have gone from bankruptcies due to low prices (mostly in upstream businesses) to bankruptcies due to high prices (mostly in energy retail). And we’ve gone from having energy being the worst performing sector in the stock market to being one of the best.
As the industry adjusts to what will likely be a multi-year period of high prices and high returns, it may be tempting to downplay, if not ignore, certain warning signals blinking on the horizon. Consider the potential impact that a multi-year period of high commodity prices will have on the industry. The shift from oil and gas to other (now more economically appealing) energy sources and solutions will only intensify. The industry’s current good fortune may well contribute to its accelerated decline.
There are also the issues of energy sustainability and security. Despite the industry’s windfall performance, the energy system as a whole hasn’t progressed meaningfully toward its net-zero 2050 goals. The transition from record emissions reductions in 2020 to near record emissions growth in 2021 confirms how complex and difficult the net-zero journey will be. More bad news… the energy crises and events in energy markets around the world confirm that energy accessibility and affordability continue to constitute major challenges, especially for the overwhelming majority of the world’s population who lives in non-OECD countries that are still energy poor. Nearly two billion people remain underserved and heavily reliant on energy for prosperity and development. Windfall industry profits are of little interest or value to them.
As predictions of a commodity super-cycle reach a crescendo and the industry closes the chapter on one of its most profitable years ever, the urgency for oil and gas companies to act is greater not less. Downturns always follow times of exuberance in the industry. And they have, historically, become progressively worse. There’s no reason to think this trend won’t continue. To prepare for that eventuality, oil and gas companies need to not only transform into agile and adaptive enterprises that thrive in good times and bad, but also bolster energy security (availability + affordability) and energy sustainability. These objectives should be the top priorities for oil and gas companies in 2022.
If they plow their largesse back into their businesses without transformational changes, they will only perpetuate the status quo setting the stage for a repeat of previous decades’ industry inaction. Crucially, failing to take action now will also obliterate all hopes of saving our world from temperature increases below 2 degrees Celsius. The urgency is real. So is the opportunity. The time to act is now.
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Five areas of action
The previous decade was painful. The current one need not be. To avoid a repeat, energy companies should use 2022 to build the foundation for launching and/or accelerating their reinventions. We believe five areas of action will set winners apart in 2022.
1. Accelerating the transformation of the core business.
Last year, we introduced the Accenture Reinvention Index to identify leaders in the race to reinvention and to understand what they are doing to transform and future-proof their core businesses. Underpinning the bulk of their efforts is a decisive focus on compressing their digital transformations. In this regard, they stand apart in an industry that has traditionally lagged in scaling digital innovations.
The wisdom of their approach is growing increasingly clear. Back in 2019, we found that the top 10% of companies in digital transformation generated twice the value of the laggards (bottom 25%). Since the pandemic, we’ve seen the gap widen from 2X to 5X outperformance of leaders over laggards. We’ve also witnessed the emergence of a new category of players that we call leap-froggers, those that have jumped from lagging to leading. Both groups—leaders and leap-froggers—take a more expansive approach to realize digital technologies' full potential. They connect more than two times the number of processes across the enterprise. They invest in building agile, intelligent enterprises underpinned by cloud, data and artificial intelligence (AI). They use technology to dismantle organizational siloes, connect the enterprise and make better, faster, analytics-powered decisions. In short, they have flipped their investments in technology from operations to innovation, agility and systemwide resilience.
Moving into 2022, all energy companies will need to take similar actions and embrace technological advancements as both the catalyst and enabler of fast change.
2. Embracing more dynamic approaches to capital allocation.
2022 is the year for companies to clarify the role they wish to play during and after the energy transition and actively scale new models to drive differentiation and future growth. Big investments are needed to not only achieve the required rotation, but also meet the needs of an energy system that will continue to grow. In fact, we’ve estimated that the successful transition to a new energy system will require cumulative capital investments of more than $100 trillion between now and 2050.
The nature and scope of the investments individual companies make will, of course, depend on their role in the energy future. But regardless of the archetype they select, all companies will need to be able to allocate their capital more dynamically and more wisely. With technologies, energy sources and demand pathways all evolving so quickly, oil and gas companies will no longer have the luxury of long-range capital planning. They will have to significantly compress their capital planning cycles from years (or even decades) to months. And they will need to zero in on one or two opportunities, while deprioritizing investments in technologies or assets that are less lucrative. In 2021, we developed the Accenture Energy System Model (patent pending) to help companies make capital decisions more dynamically, based on absolute value creation. We believe this model will be a valuable tool for all companies looking to position themselves as winners in the energy future.
3. Expanding collaboration—particularly to improve ESG performance.
With the need for new energy solutions and innovations surging, 2022 may be the year we see oil and gas companies shift away from selective collaborations to unbounded partnerships with others inside and outside the industry, including customers and suppliers. One task that could benefit significantly from extended collaboration is the formation of credible environmental, social and governance (ESG) metrics.
The societal and financial pressure on oil and gas companies to measure and continually improve their ESG performance is mounting. Yet, there are few agreed-upon metrics at this point. Companies are largely left to their own devices to identify the performance factors that constitute success. Clearly, there’s an opportunity for oil and gas companies and their stakeholders, including the investment community, to define true measures of environmental performance and accountability. A uniform methodology—created by and for the industry—would go far in helping companies advance their environmental initiatives.
Another related opportunity for collaboration lies in eradicating direct emissions—in particular, methane emissions, which have a 20-year warming potential that is 84X that of CO2 and are estimated to contribute up to 25% of global warming. Current industry pledges to cut methane emissions by 30% by 2030 will not suffice. For one thing, those pledges will not have the necessary mitigating effect on global warming. For another, they call into question the future of natural gas. Many industry experts believe that for gas to be a viable transition fuel in the years ahead, the amount of methane lost during gas production across the full gas chain cannot exceed 1.5%. It currently may be as high as 4%.
The good news is that technologies—from ground sensors to drones to satellite imagery—are now available to help companies better identify the sources of fugitive methane leaks and the impact that planned, unplanned and fugitive leaks have on the environment. Detection is the first step to mitigation. However, big challenges remain. In a given oil basin, for example, many companies may be operating hundreds of wells at any given time. Drone or satellite sensors can detect the presence of methane over the basin. But, given plume dynamics, attributing that methane leak to a specific operator’s infrastructure is still quite challenging.
As detection technologies advance, and as ESG standards and regulations around methane become more stringent, it makes sense for the industry to unite in its pursuit of net-zero methane. While end-to-end system-detection solutions may still be far off, there are already many opportunities for companies to work together or with their suppliers to share platform technologies, data, know-how and even collective services that benefit the industry as a whole.
Tackling the methane problem requires multiple, yet incomplete solutions—or, as we like to say, progress over perfection. It requires the involvement of all players, big and small. And it requires a new definition of collaboration and new view of ecosystems as transformation accelerators and drivers of new innovation. We are hopeful 2022 will be the year the industry makes a collaborative push.
4. Accelerating the development of a future-ready workforce.
The compressive transformation that is now occurring across the industry requires a similarly compressed approach to workforce development. In 2022, we will likely see oil and gas companies place less emphasis on equipping their workforces with traditional oilfield technologies and, instead, reskill their workforces to create new energy solutions and build their digital advantage.
As part of this effort, companies should focus on developing the entrepreneurial skills of the workforce. Doing so will enable them to move more rapidly from experimentation to the scaling of innovations in areas such as carbon capture, usage and storage (CCUS), hydrogen, sustainable fuels and storage. Importantly, the development of entrepreneurial skills will also be critical to the creation of new and profitable commercial and business models that will generate and serve demand from energy consumers of the future.
5. Strengthening cybersecurity.
Oil and gas companies’ transformations will increasingly rely on new technologies such as Internet of Things (IoT). Unfortunately, their dependence on these new technologies exposes them to more cyber threats. We’ve already seen this occur. According to the International Energy Agency, cyberattacks against energy companies pose a significant and growing threat. At the end of the previous decade, the sector won the dubious distinction of being the number one target for bad actors, representing 16% of all attacks worldwide. Those breaches come with significant costs. In 2021, the energy industry’s cost per data breach averaged more than $4 million.
The good news is that cyber resilience is top of mind for industry CEOs—and the top focus of their digital investments, ahead of AI and analytics. In 2022, we predict that companies will continue implementing innovative solutions such as autonomous identity management to lessen their risk. We advocate that they can further enhance their cybersecurity resilience by doing three things.
First, they should migrate their data infrastructures to the cloud. Second, they should work to integrate and synchronize the security of their operational technologies (OT) and information technologies (IT). We are hopeful that in 2022 energy company leaders will realize that a bifurcated and siloed security posture compounds the difficulty in creating effective incident response procedures, contingency plans and attack simulations. Third, they should build in multiple layers of defense that include enhanced threat intelligence, threat-hunting capabilities, passive listening defenses such as Operational Technology Anomaly Detection systems, and frequent cyber posture testing.
In 2022, Accenture will continue exploring these five imperatives (and other opportunity areas) to offer additional insights and guidance to energy companies seeking to launch or accelerate their transformations. Our goal is to help more companies become leaders in the industry—and in the energy transition.
As we enter 2022, the energy industry is more optimistic than it has been in nearly a decade. And for good reason. Events over the past year have given the oil and gas industry a much-needed financial shot in the arm. I share the industry’s optimism—not only for its short-term financial outlook, but also for the longer-term opportunities that can now be pursued.
Oil and gas companies have an unparalleled chance to use their good fortune to fund their reinventions. Those that make the right investments can achieve the 5X outperformance in revenue growth we have seen from other industry leaders. They can transform to become agile organizations, able to withstand whatever economic or market conditions that come their way. And they can accelerate the creation of an energy system that is secure and sustainable. In short, 2022 is their year to cement their relevance and future-readiness.
Disclaimer: The views and opinions expressed in this document are meant to stimulate thought and discussion. As each business has unique requirements and objectives, these ideas should not be viewed as professional advice with respect to the business.