The PricewaterhouseCoopers 22nd annual Global CEO Survey included insights from 3,200 CEOs to look at specific industry trends and provide strategic recommendations for the future. In the Oil and Gas industry, the boom and bust cycle that, while volatile, was understood by industry players seems to be changing.
Per the report, “A combination of erratic and sometimes inscrutable commodity price fluctuations, ambiguity about the future of fossil fuels and increasingly contentious trade negotiations around the world are upending traditional supply and demand fundamentals, bringing a host of new challenges with no clear answers.”
One area of concern is the increasing urgency related to climate change. It shows no signs of slowing down and is impacting government policies globally, as evidenced by the 2016 Paris Agreement. The public dialog is also a driver as it will continue to make headlines around the world.
According to the report, there are three choices for oil and gas companies.
Push full speed ahead on fossil fuels
This is an approach being adopted by a number of midsized companies. According to the International Energy Agency, fossil fuels will still comprise 75% of global energy demand in the year 2040. “Significant investment from some O&G players in energy efficiency, low emission fuel products and carbon capture underscores how important some companies think innovations in these areas are, especially in a carbon-constrained world.”
Diversify your portfolio
To date, this strategy has been marked by significant acquisitions by larger players known for natural gas projects. In the future this approach may require “more unorthodox strategic moves, such as acquiring or expanding renewable energy capabilities and offerings.” Or a focus on secondary markets such as petrochemicals. Foreign demand from petrochemicals will account for a third of oil gains by 2030 and almost half by 2050 according to the report.
Go all in on renewables
Reinventing your business in the renewables space has worked for both Dong Energy in Denmark and French company GDF Suez. In fact, Dong (now called Orsted) has cut its carbon emissions by 50% since 2006, and expects to cut it by 96% by 2023.
Company size may dictate the strategy taken. Larger companies have the financial resources to adapt quickly to changing conditions and capitalize. Their ability to acquire an adjacent company means they don’t have to build out capabilities in-house. They can also invest in nontraditional arenas without significant impact to their bottom line.
Mid sized and small oil and gas companies must be more judicious in their decision making as they don’t have the same deep pockets. The report notes that they should “focus on their traditional strengths, while emphasizing more prudent and disciplined management of their cost curves to free up cash for diversification.”
The report also calls our four “essential strategic and tactical facets” that you need to consider:
- Create a strategic identity based on your inherent capabilities and a vision for how those capabilities can best be employed in the energy sector in the coming decades.
- Realign portfolios to focus on strengths and new growth areas
- Invest in agility through digital innovation
- Cultivate and hire the right talent
“Oil and gas companies are confronting a turning point, one that requires strong decisions about their strategies for surviving and thriving in uncertain times. The faster and more proactive they are in setting a course for the future, the better. Most important, these companies need to determine their role in the new environment: diversifying or doubling down on fossil fuels or renewables. Foresight may be the most important capability they need.”
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