Many oil and gas companies will take advantage of the recent surge in oil prices to fund their net-zero pledges, Deloitte said Nov. 9, a notion that defies the common assumption that high prices would slow the energy transition.
“A strong oil price enables investment in riskier and expensive green energy solutions, such as carbon capture, utilization and storage (CCUS),” Deloitte said in its 2022 Oil and Gas Industry Outlook. “Given that no single stakeholder can provide the necessary investment and absorb all commercial risks associated with building a CCUS industry, all participants in the entire O&G value chain (from EPCI, oilfield service (OFS), upstream and midstream to downstream) become important, as they are involved in more than half of planned CCUS projects.”
Deloitte identified five trends for the industry in its outlook, detailing how ESG challenges and the energy transition are influencing strategic decisions in the areas in M&A, OFS, retail and the workforce. The authors defined four archetypes of companies in terms of approaches to monetizing the low-carbon environment.
“Net-zero pioneers” and “green followers” are most likely to leverage this high-price phase to aggressively fund their vision of making sustainability their core business, the report said. By contrast, “low-carbon producers” and “hydrocarbon stalwarts” will most likely use this time to optimize and decarbonize their hydrocarbon operations.
Two other trends emanating from high oil prices contradict conventional wisdom, Deloitte said.
- Production and capital discipline: Fewer DUCs, small production increases for 2021 and a 4%-5% projected reduction in debt signal that “the industry is no longer just managing the cycle.”
- Joining the net-zero club: U.S. oil and gas companies and Canadian oil sands producers followed their European counterparts in making net-zero commitments in 2021.
ESG and M&A
Upstream M&A activity has not followed rising oil prices in a departure from the norm, Deloitte noted. In the first eight months of 2021, the number of deals was down 30% from the same period in pre-pandemic 2019. The value of those deals was off by 46%.
Capital discipline is certainly a primary cause for the lack of an M&A comeback, Deloitte said, but it’s not the only reason. Buyers aiming to fulfill net-zero pledges will likely hesitate to pursue deals without knowing a seller’s carbon profile.
Those companies would seek to either purchase low-carbon-intensity barrels or sell high-intensity ones. That could mean acreage consolidation or portfolio restructuring. While large resource size and a good price may have been enough to close a deal in the past, a buyer intent on meeting net-zero goals is now more likely to walk away.
“Therefore, M&A activities would need not only to be financially accretive, but also to support ESG goals,” Deloitte said.
However, citing Enverus data, Deloitte acknowledged that only 12% of upstream transactions so far in 2021 referred to emissions reductions, decarbonization synergies or improving ESG performance as primary reasons for the deal. That might be due to a lack of uniform reporting standards or lack of clarity as to the impact of ESG reporting on valuations, Deloitte said.
New strategies for OFS
OFS spending is expected to be 25% below 2019 levels until 2025, an indication that the sector is already positioning itself to operate independently of upstream cycles, Deloitte said. Companies can take advantage of decarbonization mandates across industries, the authors said.
“Many large service providers have already diversified beyond core services,” Deloitte said, noting that one large OFS company had restructured its business by making big bets on cloud and edge computing. Halliburton and Baker Hughes have partnered with startups and academic institutions to push forward with technology development for energy and industrial applications.
There are limits to the digitalization trend, though.
“The sector needs to get even leaner and greener,” the report said. “Providing integrated solutions for decarbonizing upstream projects, implementing subscription-based revenue models or diversifying into the low-carbon space could be key enablers of the future OFS strategy.”
Partnerships, alliances and consolidation seem to be already gaining importance in the sector, Deloitte said, with low carbon poised to be the new driver. In 2021, 20% of OFS deals involved a company with renewable energy operations, compared to 5% of deals between 2017 and 2020.
Make it convenient
Brand preference has been eclipsed by convenience in the fuel retailing sector. That can be attributed to Millennials, who consider convenience and user experience to be more important than brand and price, Deloitte said.
Retailers must also adapt to a changing fuel mix, with automakers transitioning to electric vehicle (EV) production that could account for 50% of new car sales by 2030. But simply adding charging infrastructure will not be enough, the report said, even though about two-thirds of Deloitte’s survey respondents in the industry consider alternative fuel offerings as a key requirement for transformation.
“Even front-end operations of fuel retail outlets must be redesigned to focus on nonfuel offerings such as convenience stores, groceries, pharmacies and curbside pickup of e-commerce products,” the report said.
Keeping the talent
The challenge of attracting and retaining talent intensified when the COVID-19 pandemic hit, and the oil and gas industry responded to crashing oil prices with the fastest layoffs (107,000 jobs) in its history. Deloitte made the following recommendations for companies to cope in the energy transition era:
- Provide industry-leading health care and well-being;
- Develop new compensation benefits, an example being BP’s share award program for all global employees, regardless of hierarchies;
- Develop agile workforce structures to match skills to projects, with reskilling programs and vocational training to reduce the skills gap; and
- Build avenues for career growth through cross-skilling programs in the new energy space, with new roles such as carbon reduction analysts or emissions control officers.
“While traditional roles such as geophysicists and petroleum engineers remain core to the business,” the report said, “new and evolving skills such as digital design, data science, design thinking or cybersecurity are the needs of the hour.”
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