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.
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These trends are persistent and global. While individual companies can develop strategies to minimize the damage, the players will need to work together to meet demand challenges, recruit next-generation workers, attract investors and pay for its environmental footprint.
Exploring all options
To meet ambitious goals over the next 10 years, the oil and gas industry must explore all options including recovery factor, unplanned downtime, customization, inventory surplus, idle wells, and logistics and warehousing.
There are major opportunities for reductions in both capital expenditures (CapEx) and operating expenditures (OpEx). Moreover, the exploration, development and production cycle for the oil and gas industry has many processes and practices that can yield efficiency gains.
The power of collaboration
Despite current conditions, the lack of sustained pressure on margins has meant that many companies have not yet been forced to take drastic action. Instead of confronting the industry cost structure head-on, companies tend to cut operating costs, hunker down and hope that oil prices will go up.
The fiercely competitive, zero-sum mindset prevalent throughout the industry has led companies to invest heavily in customized products, seeking to differentiate themselves from their peers. Companies protect their own data, but they also protect their knowledge of best practices and other learnings that, if applied across the industry, could lower costs.
Companies replicate non-core activities in areas such as finance and the back office. Rather than sharing underutilized assets, companies add assets and create complex systems to monitor, maintain and update them.
The path forward
Accenture is working with the World Economic Forum to explore initiatives aimed at fostering collaboration among oil and gas industry companies and suppliers by:
The oil and gas industry faces multiple challenges at present and must plan for a difficult and uncertain future. The industry’s survival—and its eventual return to sustainable profitability—depends on the ability of industry leaders to make the right decisions now.
One key decision is to pursue collaborative initiatives at the local, national and global levels. By working with industry peers as well as with suppliers, and by urging suppliers to join forces and collaborate with each other as appropriate, the industry can decrease waste, improve efficiency and lower its breakeven costs.
Collaboration, in combination with needed actions by governments and regulators, can help the industry recover while playing a valuable role in the transition to a clean energy future.