When the industry encountered difficulties in the past, it was able to cut costs, defer investments and wait for an upturn in oil prices. This time is different, as some major shifts are attributable to fundamental demand economics in the context of a flat supply curve.
Factors challenging the industry include increasing of the following:
- Environmental, societal and governance accountability: The desire to increase society’s quality of life in line with Environmental, Social, and Corporate Governance (ESG) and Paris goals has added carbon value to production and processing costs.
- Competition for capital: Years of poor returns and environmentally driven divestments are squeezing oil and gas companies’ access to capital.
- Scarcity of talent: The industry is finding it hard to recruit the next generation of workers. Recent cycles, the long-term outlook, rise of big tech and social perception are deterrents to recruitment.
While the outlook for the industry may seem discouraging, the fact is that the world needs a vibrant oil and gas industry, to secure affordable and sustainable access to energy. The key question is: How can the industry secure such future despite the significant challenges it faces?
The answer is for the industry to control (and pay for) its environmental footprint while bringing investment efficiency in line with what the market will bear. This means improvements in efficiency to lower expenditure levels by 50%—about $12 per barrel—based on target breakeven price estimate of $40 per barrel to achieve fuel economics in the transportation sector before 2030. The journey for higher returns can be achieved even with lower profit margins of $8 per barrel, along with a proportionally larger “take” from governments and increased carbon taxes per barrel, if the industry can deliver such efficiency as seen in Figure 1.