The COVID-19 pandemic and energy transition toward renewables have unlocked the transformation of the oil and gas industry, according to a new report by Deloitte Insights.
The combined effect has pushed companies to adopt low-carbon, highly efficient, and agile ways of working — creating the platform for oil and gas companies to examine their purpose and value drivers, and face the fundamental question of what businesses should, and should not, be in.
In this complex and fast-paced environment, uncertainty in decision-making is acceptable, but confusion isn’t, the report, Portfolio transformation in oil and gas, said.
With more than $230 billion in impairments and asset write-offs in 2020 alone, the financial (and even environmental) argument for fossil fuel divestment appears strong.
A decade of unusual crude dynamics and accelerating energy transition is prompting many oil and gas companies to wonder if there is long-term value in the fossil fuel business.
The high-growth phase of the oil market has come to an end, but the compelling reality is that oil demand will likely not evaporate anytime soon.
The gap between the extent of reliance on hydrocarbons now and a potential “green economy” has created an investment, portfolio, and strategy conundrum for oil and gas companies — whether they should stay and capture the remaining, albeit uncertain, value in hydrocarbons or embrace the broader energy scope.
The report examined if and when oil and gas companies should capture hydrocarbon value or embrace green energy.
It assessed 286 listed global oil and gas companies as the basis for the report and to tackle what it said were five myths around portfolio building in the oil and gas industry.
Myth 1: Agility and flexibility always deliver gains.
Reality: Only 16 per cent of companies analysed that made frequent changes figured in the top quartile.
“Having an agile and flexible portfolio (especially one that includes short-cycled shales) is often hailed as a silver bullet for oil and gas companies to unlock new value. If done correctly and consistently, agility and flexibility can create tremendous impact,” the report said.
“But if portfolio optimisation is ‘overdone’ or done indiscriminately and follows oil price cycles, it can destroy the value and trust of stakeholders.”
Myth 2: Being bigger and integrated is better.
Reality: More than 70 per cent of large and integrated companies delivered subpar performance.
“Size and integration make strong strategic sense when used to exploit market access and supply chain efficiencies, or to offer a stable investment avenue,” the report said. “But in today’s lacklustre hydrocarbon scenario, the cons of this strategy are beginning to outweigh its pros. In fact, in some cases strong balance sheets and integrated reporting structures could be hiding inefficiencies in portfolios of large companies.”
Myth 3: Oil has lost its lustre
Reality: Two-thirds of oil-heavy portfolios delivered above-average performance.
“Even as oil reaches peak demand, demand is expected to slowly plateau over the coming decades and is projected to remain above 87 MMbbl/d until the end of this decade.
“In a decade marred by disruption and acute price pressure, oil generated significant value for many low-cost oil operators and their stakeholders.”
Myth 4: Every “green” shift is profitable and scalable.
Reality: Only 9 per cent of portfolios that became greener figure in the top quartile.
“If judged by the growing interest of investors, there is a perspective that green portfolios and sustainable business models are can’t-miss and must-own investments of the future. And while costs have fallen considerably, the relative economics of green energy businesses are yet to deliver consistent results.
“In cases where O&G companies have made investments in renewables or clean tech that are complimentary to their core business, they have seen benefits. Although the green shift is inevitable in the medium-to-long term, striking a right balance between hydrocarbons and green energy can be essential in the near term.”
Myth 5: Shale’s pain makes all other portfolio options an obvious choice.
Reality: 18-45 per cent of non-shale portfolios analysed delivered below-average performance.
“Put simply, it’s less about where one drills and more about how one drills—through operational excellence, companies can create a differentiated value irrespective of the resource including shales they are in.”
The report said determining the “green” choices to pick and prioritise was not easy, given the growing number of options.
“Natural gas, which started with a big promise in early 2000s is now competing with renewables for electricity generation.
“Blue hydrogen is becoming a more realistic option for some applications, and even green hydrogen is moving from a distant horizon to a possible future. The cost of electrolysis is declining, and new pilot projects are demonstrating the value of using hydrogen in more and more applications — and this is reflected in the project pipeline for green hydrogen ballooning five times year-over-year in 2020.”
An assessment of media mentions and sentiment around low carbon and new energy solutions found renewable power — primarily solar and wind energy — was mentioned most frequently.
“A higher share of renewables might not directly translate into profitable growth due to fragmented and fierce competition,” the report said.
“The tide seems to also be turning for green hydrogen whose costs are expected to drop by about 64 per cent by 2040, supported by strong regulation and improving cost efficiencies.
“Market sentiment appears most bullish on biofuels/renewable fuels, given their strong regulatory mandate and an accelerating shift toward biofuels/renewable fuels.
“Boeing, for example, has already announced delivery of airplanes capable of flying on 100 per cent biofuel by the end of this decade.
“Carbon capture, utilisation and storage (CCUS) had the second-most positive sentiment backed by stronger climate targets, investment incentives, and increasing investments — investments in projects has doubled to $27 billion since 2010.
“While stronger policy making and cost efficiencies likely supported the sentiment for electric vehicles, the massive drop in battery storage costs seem to be supporting the sentiment for energy storage. (Battery storage costs have dropped by 75 per cent to $150/MWh since 2015).
“While one capability may emerge slightly ahead of the other, organizations would likely benefit from spreading the risk and choosing a combination of clean energy capabilities.
“On the basis of our text analytics over the past 2-3 years, renewables, mobility and storage, and green hydrogen emerged as the most frequently mentioned combination out of the new energies.
“Integrated O&G companies are strongly placed to maximize the value from such combined projects.”