Historically, the oil and gas (O&G) industry has proven to be nothing if not resilient. However, the COVID-19 disruption has tested the mettle of even the largest and most dynamic companies in the sector, and leaders at many O&G companies in the United States already see that 2021 is full of more challenges to come. Factors shaping that view include uncertainty stemming from the persistency of the pandemic, predictions for lower oil demand even after a recovery, and a new U.S. administration aiming to achieve a 100% clean energy economy and net-zero emissions no later than 2050.
Based on the state of the industry at the start of 2021 and other dynamics, we see the following challenges — and opportunities — for O&G companies this year and likely well beyond:
1. Companies steadfastly focused on reducing their environmental impact will likely see their reputations rise in a marketplace where they will be closely observed.
The O&G industry continues to make significant R&D investments in new technologies to help decrease and capture greenhouse gas and alter drilling programs to reduce emissions from flaring associated gas.
We expect that O&G companies that haven’t relaxed their efforts to reduce their environmental impact will be well-positioned to see their reputation rise going forward. Additionally, we expect environmental, social and governance (ESG) reporting to become an even more important tool for O&G businesses to communicate with shareholders and the public. This is a positive move, as it will allow companies to start publicly documenting their focus on carbon neutrality, providing them with a competitive advantage. In the U.S., all eyes will be on the Securities and Exchange Commission’s actions, which may lead to more comparable reporting across the sector.
2. The carbon neutral trend is spiking, and O&G companies need to respond.
The Biden administration’s plan to build a more sustainable economy got a pre-inaugural boost at the end of 2020 when Congress directed more than $35 billion in funding toward clean energy programs, including R&D for new technologies to reduce emissions. While the legislation does not mandate reductions in carbon emissions that the Biden administration seeks, this move is the most substantial federal investment in green technology in a decade. The Energy Act of 2020 includes language stating that the U.S. Energy Department must prioritize funding for research to power the United States with 100% “clean, renewable, or zero-emission energy sources.”
Leading O&G companies are already on board with helping the world to achieve net-zero emissions, and now there is even more pressure on other major players to make the same commitment and demonstrate meaningful activity and progress. Banks and investors want to see companies focusing more on sustainable activities, and this trend underscores why ESG reporting is becoming increasingly critical.
3. M&A activity in the industry is heating up.
We anticipate that the industry trend toward investing more in renewables will continue to lead the rise in M&A activity in the year ahead. Other responsible investments like clean energy and energy storage will help drive some of this activity as well. Look for restructuring mergers, mergers of equals and Chapter 11 auctions to spur deal-making, too.
4. Traditional O&G companies will diversify into offering renewable energy sources.
The shift to renewable, clean energy is an important commitment for O&G companies for the long term. In a recent industry survey, well over half (57%) of senior O&G professionals reported that their organization plans to increase investment in renewables, up from 44% last year.
But the transition isn’t easy. One of the most significant hurdles is the fact that the move could erode companies’ stock prices in the near term. O&G companies are valued on their ability to pay dividends in the near term, but renewable firms are often valued on their expected future earnings. Another issue: Renewables, like oil and gas, are a capital-intensive business, and the train to ROI typically runs slow.
So, while companies betting on the future of renewables stand to win big over time, they still need to figure out how to deliver returns to their shareholders in the interim. It is possible that they may have to alter their strategic intent narrative with the street, with ESG reporting being an enabling vehicle in this regard.
5. Expect to see more investments from the industry that will drive and support electrification.
Even before automaker GM announced its commitment to create an all-electric light-duty vehicle lineup by 2035, the Biden administration was making moves to help speed America’s transition to EVs. And now less than 100 days into the Biden administration, the new Biden infrastructure plan will take investment in electric vehicles, renewable power and the electric grid to a new level.
As electrification grows, the need for charging infrastructure will increase. We’re already seeing leading energy companies investing in electric car charging stations and other infrastructure that supports electrification as well as related ventures, such as battery storage and batteries designed for ultra-fast charging. Meanwhile, hybridization is gaining traction around the world, as more policymakers see mixed-power vehicles as a way for their governments to move the needle on climate goals.
So much is changing in the O&G industry — and rapidly. It’s critical for companies to think about how they can accelerate transformation and stay relevant. For some O&G firms, the thought of more disruption is unpalatable coming out of one of the most difficult years for business in modern history. But if they want to find their place in the emerging energy industry of the future, they need to act now to explore new business models, implement new technologies and automate their operations, elevate their ESG reporting, and stay more attuned than ever to the expectations of their stakeholders.