Oil & Gas
Drivers
All industries are being shaped by the global Megatends of Globalisation, changing Demographics, Climate change and Technology innovation. Shaped by the these trends and now the pandemic, the industry is being defined by five major drivers:
Demand
Demand for energy will grow by 50% over the next three decades to sustain increasing levels of prosperity. However, most of that growth will come from new energy sources such as nuclear, hydro or renewables. Fossil fuels’ share of the energy mix will drop from 85% today to 65% by 2050.
Oil demand is expected to peak at the end of this decade as demand in road transport is projected to decline 75% by 2050 after peaking in the early 2020s, driven by slowing growth in the number of cars on the road, increased efficiency, and accelerating uptake of electric vehicles (EVs), with bio- and synfuels decreasing demand for crude oil further.
Gas will be the strongest-growing fossil fuel and will increase by 0.9% from 2020 to 2035. It is the only fossil fuel expected to grow beyond 2030, peaking in 2037. From 2035 to 2050, gas demand will decline by 0.4 percent. This relatively moderate decline is due to hard-to-replace gas use in the chemical and industrial sectors, which limits the impact of an accelerating decline in gas used for power.
Even in 2035, oil & gas will still account for roughly half of the global energy mix.
COVID-19 resulted in a significant drop in demand but this has largely recovered especially driven by geopolitics.
Sustainability
The O&G industry is responsible for 10% of global GHG emissions through its direct scope 1 emissions from operations and another 31% through its indirect scope 2 and scope 3 emissions.
Increased societal pressure and regulation continue to drive a shift in the environmental, social, and governance (ESG) imperative for oil & gas. Around 91% of global CO₂ emissions are now covered by net-zero targets.
Given the magnitude of the industry’s emissions, however, simply diversifying into low-carbon energy alternatives will not be sufficient to reduce emissions to acceptable levels. Scope 3 emissions, which are associated with the use of the sector’s products, remain the dominant challenge, at more than three-quarters of the sector’s emissions footprint.
New Geopolitics
The energy industry is particularly vulnerable to geopolitical events. In particular, Oil & Gas makes up more than 50% of the total global energy supply.
The Russia's invasion of Ukraine invasion has made a tenuous situation much worse for energy markets, particularly in Europe. The imperative for oil and gas companies, working in concert with governments, is to mitigate the potential disruption of oil and gas supplies from Russia.
The fallout from Ukraine is only the latest example of how concerns over energy security alter the direction of policy, with impacts on supply and demand in many regions. The 1979 energy crisis, which occurred in the wake
of the Iranian Revolution, kick-started the global interest in renewable energy. It also led to an investment in research and policies that accelerated the transition away from oil. Japan, for example, enacted its Energy Conservation Act, which has helped to decrease oil’s share of the country’s energy consumption from 72% to
just 38% today.
Together, these factors will ensure that oil prices remain high and markets tight, and will mean that geopolitical issues and government policies will have a continued impact on the Oil & Gas Industry.
Regulation & Safety
Regulation has always been a significant part of the Oil & Gas industry. This includes Health & Safety, Environmental, Prospecting Rights and Waste management.
Employee safety and minimising accidents will remain a high priority for the sector, continuing the trend of a more than 70% reduction in the number of fatalities since 2010.
Oil & Gas companies now face significant legislative and stakeholder pressure to demonstrate pathways to net-zero emissions. By 2025, a net-zero commitment and/or pathway will be a standard piece of governance for international businesses.
Future Value
Despite oil prices averaging above $70 per barrel over the last 10 years, free cash flow from core operations has been insufficient to maintain shareholder returns above the cost of capital. The industry’s share of the S&P 500 has been cut by more than half over the last 10 years.
This decline in returns as well as the energy transition means that transformation has just begun for the industry, and simply managing or riding oil price cycles aren’t options anymore. Their operating environment will likely be characterized by carbon taxes, increasing margin pressures, diminishing talent pools, and cost parity between combustion engine and electric vehicles.
Oil & Gas companies are likely to have to manage two strategies:
- Maximising returns from the significant but declining demand for Oil & Gas. To attract the investments they need, industry players will need to increase their returns by 50 to 100% —improving their returns on capital from mid-single digits to low/mid-double digits This means that breakeven oil prices will need to come down from $50 per barrel in early 2020 to just over $25 per barrel. Analysts believe that the industry can gain approximately $500 in operational inefficiencies driven by digital transformation.
- Investing in low-carbon ventures, including renewable power
generation, carbon capture and storage, green hydrogen, and new forms of electric mobility. Oil & Gas companies now report allocating 23% of their capital to new business ventures and by 2030 at least 3 of the large oil majors are expected to move into the top 10 renewable players. These moves are blurring the business boundaries, however, the challenge is that the business models in a decarbonised system remain uncertain.