As the energy transition accelerates, the current global energy system has become increasingly unsustainable. We need to change how we produce and consume energy to accommodate a 2 billion growth in the global population1, and the associated increase in consumption. New environmental challenges are also appearing as government’s, cities and companies set and accelerate targets to get to Net Zero emissions. There is now an opportunity for the oil industry to take the lead in the energy transition. Can it make 2020 the year of a major strategic shift?
The oil industry is at a critical juncture. It’s focus on the timing of Peak Oil Demand is detracting from the importance of other peaks already reached. The oil industry is likely to have already reached Peak Value, (in 2019, the oil industry was the worst performing sector on the S&P 500 index2). Oil companies continue to write down asset values as their performance outlook worsens. The industry also appears to have moved past Peak Trust; as stakeholder concerns grow, so does oil industry investor and social activism. Peak Globalization, with trade wars and national policies flattening global growth, represents further headwinds for the industry. These are characteristics of a compressive disruption that will increasingly constrain the freedom open to the industry just as it needs to sustain investor support for a rotation to new systems and businesses to find new value.
Pathways to Green
As compression tightens, oil companies now need to follow the value, which is already migrating further downstream (see Figure 1). The focus should be on the energy intensive sectors which are harder to green (and need support) and where consumer behaviors are shifting. Accenture Research shows that the B2B market is changing fast, not only due to the net zero targets, but also as expectations for better experiences, and deeper, more personalized levels of service grow. This is allied to the fact that each of these sectors in turn is equally being disrupted by many of the forces affecting those that supply them.
New downstream “value over volume” strategies will require oil companies to seek out pathways to better participate in the sectors they serve3; not least because they are in fact starting to differentiate their own outputs based on the quality and volume of the energy they consume to produce them (e.g. Green Steel4). The route involves creating new business models which are more circular, more customer centric and support innovation in the sectors they serve. This route will also allow them to better participate in the unlocking of circular strategies that are addressing decarbonization in these sectors (many of which have been focused on circular concepts long before the net zero carbon commitments of the big oil and gas players)
Figure 1: Value is Migrating Downstream
CLICK TO ENLARGE FIGURE 1
Source – Accenture based on Company Data
A Sector and Customer Approach?
How can the oil industry better participate in the sectors it serves? There are opportunities. Take aviation, where the route to decarbonization is more challenging than, say, road transportation, as battery weight and the cost of cleaner fuels make its transition not only more complex, but much more costlyi. With airline passenger numbers projected to double to 8.2 billion by the end of the 2030’s5 and aviation emissions increasing, it also offers prospects to both facilitate its path to decarbonization as well as to capture new growth.
We see numerous openings for oil companies in a greener aviation industry:
- Increase investment and innovation to better participate in the aviation transition
- Develop and engage in aviation ecosystems that will develop break through thinking and open value
- Define an aviation participation strategy that can represent a ‘Base Camp’ from which further sectoral and customer insight and innovation can be developed
- Focus on developing differentiated aviation products and services that are increasingly customer centric and based on more circular ecosystems
In advocating that the industry must take a sectoral and customer backed approach to the Energy Transition, a reversal of typical oil and gas industry fundamentals is required. The industry must now navigate a path which pushes it closer to its end user sectors and customers, reversing traditional logic from supply push to differentiated demand pull. While the core business transformation must accelerate, this approach will be hugely exciting, energising and game changing for energy providers. There is still time to execute this, but, as the industry continues to play catch up with its customers, there is also no time to waste.
1 Source – United Nations “Growing at a slower pace, world population is expected to reach 9.7 billion in 2050” 17 June 2019 https://www.un.org/development/desa/en/news/population/world-population-prospects-2019.html
2 Source CNBC “Here are the energy stocks some strategists would buy as the S&P’s worst-performing sector catches a bid”, November 22nd, 2019 © 2020 CNBC LLC via Factiva
3 Such as chemicals, power, industrials, marine, aviation and road transportation
4 The Disruptive Potential Of Green Steel” Rocky Mountain Institute, September 2019 © 2020 Rocky Mountain Institute https://rmi.org/wp-content/uploads/2019/09/green-steel-insight-brief.pdf
5 Source IATA Press Release, 24th October 2018 - https://www.iata.org/en/pressroom/pr/2018-10-24-02/