HOUSTON—The global oil and gas system is undergoing a sea change as the world transitions to a clean energy future, and some in the industry just won’t have what it takes to survive, a panelist said Sept. 17 at the Gastech Exhibition & Conference.

De La Rey Venter, executive vice president for integrated gas ventures at Royal Dutch Shell, described how the industry’s growth is diverging into two megamarket segments—one resembling the classic marketplace of big volumes sold long term to big buyers and an intensely competitive marketplace of the future where power shifts from a few large customers to many smaller ones.

While the first segment seems familiar, it has changed profoundly, Venter said.

“This used to be our bread-and-butter market segment,” he said. “It used to be a friendly place, relatively predictable with decent returns, but not anymore. Profitability has hollowed out within this market segment as barriers to entry come down and the appearance of so many new players on the global scene continues to drive increasing commoditization within this market segment.

“Those with big, diverse, global supply and customer footprints will continue to earn a decent living within this segment,” he added, but warned that “for others, this will increasingly become a difficult place within which to thrive.”

The second megamarket incorporates the forces of change that are driving the world’s energy transition. Among them, Venter said:

  • A power shift from big regulated utilities to individual customers, businesses and cities that increasingly demand clean energy;
  • Energy demand that is tied to a strong social conscience;
  • Customers who are increasingly electrifying consumption;
  • Customers with an openness to new habits;
  • A willingness to engage with new technology; and
  • Customers who want their energy suppliers to be deeply committed to a sustainable future.

Different Investor Base

“This emerging segment is so very different from the wholesale market segment,” he said. “For starters, it comprises millions of accounts, and securing and serving these customers requires very different skills sets to what we’ve been using in the past in our LNG and gas marketing businesses.”

Peter Coleman, CEO and managing director of Australia-based Woodside Petroleum Ltd., also noted the competitive challenges of the emerging marketplace.

“Traditional companies, structured like our own, have to compete in this new world against players who have fundamentally different financing requirements and financial structures to what we do, and are attracting a fundamentally different investor base than the one that we would typically attract,” he said.

“So, we’re trying to dress ourselves up and turn ourselves into something that a contemporary investor would want to invest in,” Coleman added. “It’s a difficult transition, for us, as a market.”

Competing in this marketplace requires a combination of the capabilities and systems already at work in corporate trading businesses as well as global retail and business divisions, Venter said. But developing these skills sets is difficult and challenging to bring to scale. On top of that, individual product margins in the segment are thin.

“Therefore, I think, many aspiring players in this second segment will fail or get bought out,” he said. “Others will find that the best they can do is to offer a subset of these products within a very defined geographical footprint. But it is where a lot of quality demand growth will be in the future, and it is a segment that we have a lot of confidence in because in so many ways it plays to the strengths of a company like Shell.”

Meeting Expectations

Another supermajor navigating the transition is BP. Shareholders passed a resolution in May, Climate Action 100+, requiring the company to align its strategy with the climate goals of the Paris Agreement that was drafted in late 2015.

“I think that is going to be an expectation of companies,” said panelist Susan Dio, chairman and president of BP America.

Dio said she expects the industry to rely on technological innovation to respond to multiple expectations.

“We’re faced with a dual challenge,” Dio said. “We’ve got growing population. Today, there’s about 1 billion people that don’t even have access to electricity, and so the demand for energy is going to continue to increase, yet we need to be producing energy at half of the carbon emissions that we do today.”

The industry is at a critical juncture, Coleman said, and needs to decide what the future will look like. But that requires a big picture approach that, he hinted, may be difficult for many to grasp.

“Despite these headwinds that we’re facing, the industry continues to grow at a rapid pace,” Coleman said. “How do you actually change what you are doing? How do you change your business model—how do you actually destroy what’s been successful—when today we’ve been more successful than we ever have in growing our market?”

But not getting ahead of climate issues carries tremendous risk. Coleman said it’s unlikely that regulators will force change on the industry. He expects a climate-linked cataclysmic weather event, or maybe two, in a developed country to ultimately result in a massive shift.

“I think everybody realizes that what we’re trying to do here in getting to a lower-carbon world is an expensive change in the energy mix,” Coleman said. “But it will come.”