Every oil and gas company will remember 2020 as a year to forget. Industry leaders started the year in a state of urgency, facing a set of challenges that have been years in the making. The threat that renewable energy technologies pose to demand. The abundance of oil supplies that may never be used. The world’s growing impatience for a low-carbon future. And mounting investor pressure for reliable returns—and meaningful environmental, social and governance (ESG) actions.
Then came COVID-19. The pandemic threw the industry—and the world writ large—into disarray. The jolt to the energy system was extraordinarily painful. It’s fair to say the oil and gas industry experienced 10 years of transition in just a matter of weeks. Oil demand collapsed. So did coal consumption in some markets. Emissions also plunged. And green policy-making accelerated. Aftershocks are likely to play out across the industry for quite some time.
A wake-up call
In many ways, the pandemic was the wake-up call the industry needed. It illuminated the fragility of “business as usual” systems and mindsets. And it brought into stark relief the need for oil and gas players to embrace four structural shifts that are redefining the playing field and creating new and sustainable sources of competitive advantage.
Shift 1: Purpose and focus
For decades, oil and gas companies have built their business models around the assets they own and the resources they can pull from the ground and commercialize. Now, they must become much more society- and customer-focused. The new world will be about delivering resources and solutions that meet consumers’ needs and address societal concerns. Oil and gas companies also have an opportunity—and imperative—to realign their purpose to ESG outcomes. And that should also be accretive, not dilutive, to financial performance. Our analysis finds that companies with consistently high ESG performance were more profitable, delivering 2x returns to shareholders and 4x margins.
Source: Arabesque ESG performance analysis 2020
Shift 2: Portfolio
Oil and gas companies have traditionally managed massive portfolios of assets that were as broad as they were rigid. Operating successfully in 2021 and beyond will require companies to take a much more strategic look at their holdings and build the agility to pare down and scale up asset classes as conditions dictate. Our analysis suggests oil and gas companies that lighten their portfolios can achieve up to twice the returns of peer companies with higher portfolio intensities.
Source: Accenture analysis of Thomson Reuters and Factiva data, 2019 (risk adjustment based on company Z-scores)
Shift 3: Source of competitiveness
Production volumes and oilfield technologies have historically distinguished oil and gas leaders. But in a world with an overabundance of supply, the amount oil and gas companies produce offers no competitive edge. What will set leaders apart is their ability to focus on producing those resources that deliver the greatest value. Similarly, in a world of shrinking demand, mastery of oilfield technologies is no longer a source of particular advantage. Much more valuable is mastery of digital technologies that connect the organization and optimize the end-to-end value chain. In fact, we’ve found that companies that integrate digital technologies across their operating models grow twice as fast as digital laggards. Oil and gas companies have the chance to achieve similar results by focusing on digital technologies to reimagine their core business—and expand into new segments of the energy system.
Source: “Pivot to Value with Living Systems”, Accenture 2020
Shift 4: Operating model
For years, oil and gas companies have streamlined and optimized various functional areas such as discovery and production to operate as efficiently and cost effectively as possible. This was a necessary step for an industry challenged to generate healthy returns and attract investor attention. But in the new age of oil and gas, functional excellence will not be sufficient. Companies now need to build operating models that enable value chain agility and fast responsiveness to market fluctuations. New skill sets and ecosystem collaborations will play a big role in creating the agility and responsiveness that’s now needed. Other industries have leveraged partnerships to develop new customer value propositions and drive product and service innovations. There’s no reason oil and gas companies can’t do the same. And there’s one very good reason why they should: EBITDA growth. Our analyses show that truly agile companies grow their profitability much more substantially than others over the long term.
Source: Accenture Organizational Analytics research 2019
These types of shifts are not unique to oil and gas. In the technology industry, several large incumbents were decidedly product-focused and operated on the assumption that consumers would continue buying their closed and proprietary software, devices or hardware components. They’ve now wised up and found new paths to growth by: focusing on solving customers’ problems (including reducing their carbon footprints); anchoring on open architecture and cloud-based, industry-specific innovation; and streamlining their portfolios and simplifying their operating structure.
For certain retail players, the focus was on building a physical footprint to tap into demand, scaling to drive system-wide competitiveness, and maintaining arm’s length relationships with suppliers to squeeze out costs. That mindset has since evolved into a focus on customer experiences and value propositions, technology-enabled competitiveness through, for example, intelligent supply chain management, and collaboration with a wide digital ecosystem to unlock new channels and growth.
Technology and retail companies have navigated these shifts successfully over the past decade. It’s now time for oil and gas companies to follow their lead.
Moving forward, oil and gas companies will need to reimagine their roles in the energy system, their relationships with their customers, and their responses to the structural shifts taking place. As described in Decarbonizing Energy: From A to Zero, the ultimate destination for oil and gas companies in the coming years will take three archetypal forms. Each is distinct in its scope and business model. Each one stands alone in how it will embrace the industry’s structural shifts and use those shifts to create new sources of competitive advantage.
Source: Accenture analysis
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- The Energy Majors, an archetype neither limited to nor the default pathway for the oil majors of today, will carve out a role in both oil and gas and an electricity-dominated energy system. They will build competitive positions in both hydrocarbons and low-carbon fuels. And they will respond to the industry’s structural shifts with a customer-centric focus, a diversified portfolio of assets and solutions, and an unmatched ability to add value across the full, integrated energy value chain. They will create their competitive edge through margin excellence.
- Oil and Gas Specialists, which can emerge from today’s oil majors or pure play operators, will double down on operating the cleanest, highest-margin portfolio of oil and gas assets—in any part of the value chain. With an agile operating model and strong ecosystem partnerships, they will lead the charge to minimize emissions from their operated assets and look for selective and adjacent growth pathways that leverage their existing or complementary technical competencies such as in carbon capture, utilization and storage (CCUS). Cost excellence will drive their competitiveness.
- Low-Carbon Leaders will exit their current roles in the hydrocarbon production arena, monetize their core assets, and stake their claim in clean energy frontiers. They will lead the energy transition with digital innovation and investments in alternative resources such as offshore wind, biofuels or hydrogen. Ecosystem relationships will be key to developing low-carbon solutions and services.
Making your move
2021 is the year for action. Oil and gas companies need to explicitly determine the archetypal form they want to take in the years ahead. And then they must start taking actions to fulfill that ambition. These actions comprise both “no-regret” activities that carry little risk and “step-out” activities that can help solidify their new role—and their competitive advantage—for years to come.
For example, companies that want to position themselves as Oil and Gas Specialists will need to take four key actions, starting now.
- Cleaning the core. In the short term, this may involve shifting to lower-emission hydrocarbon portfolios. Beyond that, they will have to step up their investments in “green” R&D that reduces emissions from their hydrocarbon supply chain and builds on their technical skillsets.
- Building non-hydrocarbon areas of specialty that are adjacent to the core. CCUS is a logical place to start. Over time, pivots to hydrogen or biofuel businesses may make sense.
- Becoming an efficiency leader. Oil and Gas Specialists will transform their cost structures and bolster their agility at every turn. How? By rebalancing their portfolios, establishing a frictionless supply chain, and applying analytics to continually optimize the asset mix. Step-out actions to drive additional efficiency gains may include introducing intelligent and autonomous operations and optimizing margins across the value chain.
- Redefining the brand. To thrive, Oil and Gas Specialists will need to appeal to the market, as well as the future workforce. This means redefining the company’s purpose and its image as a leading digital innovator in the field of energy. Beyond these no-regret activities, leaders will need to ultimately reinvent their business models to engender trust.
Pacing the speed of change
There’s no question that oil and gas companies should start transitioning in 2021, if they haven’t already. The conditions necessitating the structural shifts described above are unrelenting and will only intensify in the coming years. Yet, launching a journey of such magnitude and import can be daunting.
While the pace of change may differ depending on an organization’s maturity, size and ambition, there is a journey roadmap that all companies can follow to direct their actions and keep their transformations on track. It loosely organizes activities around three time horizons:
- Now (0-6 months). All oil and gas companies face an urgent imperative to return to profitability quickly. Immediate actions must focus on transforming core operations, technologies and talent for competitiveness. This may mean introducing integrated decision modeling, cost and margin forensics, and intelligent operations to enable better, faster decisions in all areas of the organization.
- Next (6-12 months). Building competitiveness is one thing. Building enterprise resilience is another. It is about strengthening the core business to enable longer-term growth and wise pivots to new areas of opportunity. The implementation of an integrated digital IT backbone, a frictionless supply chain and new risk management capabilities are some of the key steps in the "next" horizon.
- After (12+ months). True leaders of the energy transition will ultimately leapfrog industry margins with sustainable business models that not only attract investors, talent and consumers, but also serve a vital role in the world’s energy future. At this stage in the journey, companies will need to focus on clearly articulating their purpose and brand, organizing themselves fully around the customer, and optimizing margins at every turn.
Of course, there is likely to be some overlap of activities from one journey segment to another. The exact timing of activities is much less important than the general sequence of actions and the momentum it generates.
Our analyses show that oil and gas will continue to account for more than half of the global energy mix in 2040. This prediction may offer comfort to those oil and gas companies looking to operate as they have for generations. It shouldn’t. While oil and gas will continue to be important sources of energy, the way these resources will be consumed and the expectations for how these resources will be extracted, refined and commercialized will be completely different.
To retain their license to operate, companies need to meet the moment. They need to embrace the structural shifts, not run away from them. They need to rethink their role in the energy future. And they need to take actions to rebuild trust—and reinvent the value they bring to the world. If 2020 was the year that showed how fragile the industry is in its current state, 2021 must be the year that demonstrates how resilient, enduring and vital the industry can be again.
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.