Oil and Gas Companies Pivot to Diverse Post-Pandemic Futures
Remote working and travel slowdowns have aided many countries to reduce COVID-19 infections and deaths. However, the secondary impact has been to hammer the oil and gas industry worse than almost any other sector.
The price of West Texas Intermediate crude oil dropped to $11.57 per barrel in April, down from $63 in January. In addition to government lockdowns, the industry was forced to manage the fallout from the Saudi Arabian-Russian impasse on production cuts. These two factors have driven the market to where the supply has far outpaced demand.
The consensus among Infosys clients is that the ongoing cash crunch will last for the next 18 to 24 months. In that time, the energy industry will need to focus inward to adjust its cost structure (discretionary vs. non-discretionary), lower capital expenses, and minimize impact on its employees.
This retrenching poses important questions for industry leaders, particularly about innovation and digital transformation. After decades of slow evolution, the industry started catching up after the oil price crash of 2015-16. Executives now must decide whether to continue those efforts or put them on hold.
The answer is not simple, and there are factors to consider beyond COVID-19 or even the current supply and demand imbalance. There are three distinct paths the industry is taking, driven by politics in different countries and regions. These represent structural shifts fueled by diverging views of how countries, super majors, and national oil companies each see the future of energy.
Industry innovation and digital transformation will continue for many companies during these difficult economic times, only on different paths with different visions, goals, and desired outcomes. The three petroleum industry paths are represented by:
- Oil and gas companies in the United States, Russia, and OPEC.
- European oil and gas companies.
- Broader energy ecosystem in China, India, and rest of world.
Path 1 — Fossil fuel productivity>
While surprising to some, the U.S., Russia, and OPEC are following similar paths. They are all fossil fuel oriented, conservative, inward focused countries (at least in the short-term) with leaders notable for their powerful public personas.
The super majors, national oil companies, and independent producers will likely focus on innovation and digital transformation that reduces their costs to produce a barrel of oil or cubic foot of natural gas. They will find efficiencies through production and brownfield optimizations, autonomous drilling in shale formations, reducing cost of shale extraction, maximizing offshore yield, and increasing refinery yields and margins. Concerned about price volatility, some of these companies have also expanded into energy trading and risk management after neglecting those options for decades. Path 1 companies will tend to choose oilfield services, information technology, and digital partners who can expedite these changes.
Given the immediate cash shortage, the companies will look for self-funding initiatives and solutions from their partners. These oil and gas businesses have the most to lose, given their size and standing in the industry and the world economy. They will try to improve their bottom line while maintaining the top line.
Path 2 — Fossil fuel + renewables
Driven by BP, Shell, Total, Equinor, and Eni, the European group has already pivoted to a future led by renewables and alternative energy. Their liberal nature, climate change concerns, and leadership personas are driving their decisions. Innovation and digital transformation will focus on a net-zero carbon future, scaling of renewable infrastructure, carbon capture and storage, low carbon energy, sustainability, and tapping into adjacencies (spawning new noncarbon-centric business ventures). Oilfield services, IT, and digital service providers need to create new offerings geared to these alternative approaches.
These countries and companies walk an especially tricky path. They will have to pay for this transformation with money from businesses they are trying to minimize. That risks creating cash flow problems at the very times that investment is needed. Members of this group have generally allowed themselves a 30-year window to complete their transformation, so there may be time to determine how to work through market crests and troughs. But if some of these countries and their citizens adopt a more conservative perspective, they may be caught in an economic no man’s land: stuck between an unsustainable fossil fuel present and unattainable renewable future.
Path 3 — Entrepreneurial energy
The companies and countries treading this path might be the biggest long-term gainers; they have little to lose and everything to gain. None have huge reserves of fossil fuels (except coal in China and India). They can, however, innovate their way to an energy future of their choosing. The innovation and transformation required by Path 3 countries and companies could be the most exciting for digital transformation partners and the service companies. Since most of these will be greenfield, startups, and early incubators, the potential is enormous.
The Chinese government is expected to invest heavily in innovation and research projects. Beyond China, there is a tremendous opportunity for private industry to co-invest in energy startups, build them from the ground up, and help them grow. These are unique opportunities for the major consulting, IT services, and engineering firms. These Path 3 countries and companies are the most likely to adopt the fail fast approach, which could limit cost exposure for everyone involved. Working with this group, oilfield services companies could eventually morph into broader energy services firms, expanding their horizons beyond traditional fossil fuels.
Choosing a path
Whatever a company’s or country’s direction, the need for innovation and digital transformation is greater than ever. The decisions now will drive these agendas and economies for decades.
Meanwhile, their consulting, technology, and services partners need to align their offerings to each set of needs. That includes evolving well beyond current capabilities, much like the oil and gas companies are doing themselves.