What is the future of oil?
Today oil supplies about 40% of the world’s energy and 96% of its transportation energy (Future of Oil – IAGS).
A decade or so ago, the fundamental question was: When will fossil fuels run out? Now, due to the changing face of the energy industry and the push for renewables, peaking oil demand has been the dominant concern for producers.
Oil companies are used to uncertainty not only in high-level outlooks and scenarios, but also in commodity prices, technologies, and geopolitics.
There have been some significant events affecting the industry this past decade aside from discoveries and new oil rich countries ascending. We have seen the heights of bullish optimism and seemingly limitless investment during the years of the $100 per barrel world, from 2011 to mid-2014, and the lows of the price crash and extended oil downturn, from mid-2014 to 2017.
Geopolitics continues to play a key role in determining oil prices in the markets where perceptions and expectations rule. Recent events such as the drone attack in Saudi Arabia (Sept 2019) and the global spread of coronavirus in China threatening demand suggest that prices can become increasingly volatile and demonstrates the level in which oil is so entrenched in the modern world.
Today, disruption seems to be a common theme across the industry. The oil industry faces “twin threats” to its financial profitability and social acceptability, according to the IEA.
The energy transition poses entirely new challenges for these companies and will have implications across traditional market structures, value chains, customer preferences, and political and economical drivers. This will lead to radical transformation of the industry, convergence, new entrants and new business strategies.
While there is no consensus on when world oil demand will peak and the speed of the transition, the industry is undergoing several challenges but also opportunities.
We evaluate the most prominent trends and issues for the oil industry for the next decade:
Demand, supply and power plays
Since the 2014 price crash, global fuels consumption has grown at a rapid pace, but trade disputes and a slowdown in economic growth could weigh on 2020 oil market fundamentals. The distribution and production of resources may shift in the future to create new dynamics in geopolitics.
With the USA becoming the top oil-producing country in the world, that also exports energy to its allies, the leverage of bodies like OPEC and other oil producing countries attempting to balance the market will diminish.
Ongoing, perhaps intensifying, trade tensions, which can create uncertainty, dampen growth, and lead to modifications in long-established supply chains; and the management of global oil supply security will continue to become predominant forces in this decade’s energy transition.
The digital leap for oil and gas is imminent. Digitalization will play a primary role in containing costs while improving safety by enabling reduced downtime, predictive maintenance, performance forecasting, real-time risk management and energy efficiency. A combination of data analytics and digitalization will also enable companies to optimize subsurface mapping of the best drilling locations; indicate how and where to steer the drill and evaluate the quality of oil.
Enhanced mobile computing, assisted by app-centric analytics, can increase uptime, improve productivity and reduce errors.
We can expect more innovations in facility design, operating models and contracting strategies to maintain or improve operating margins. With increased digitalization, standardization and technological innovations, cost savings to the industry will be much higher and can make a positive contribution to the energy transition.
Strengthened collaboration between industry players
Cost reduction is still the main driver of collaboration, but the focus is shifting from transferring risk to sharing knowledge, new ideas and solutions. The oil industry has traditionally shied away from this level of collaboration due to the perception that sharing data and information would expose valuable knowledge to the competition. In the future, we expect increased collaboration, standardization and digitalization to lower capital and operational expenditure.
There is significant potential for the industry to become more accustomed to openly sharing data across projects and operations, integrating supply chains and creating transparency to increase trust and raise efficiency.
The landmark Wood Review found collaboration as the vital driver for a secure future of the UK Continental Shelf (UKCS). It emphasised the need to extend a collaborative approach and mindset across all disciplines between the planning and operational side and imperative to break down functional silos. This could come in the form of rig sharing, more effective deployment of recent technology and engaging suppliers earlier in the project lifecycle etc. This can result in much-needed integration and lay the groundwork for seamless interoperability within teams.
Trust and collaboration will allow the industry to fully realise the opportunities of the future and help dual challenge of providing more energy with fewer emissions. Good leadership will be essential to fully exploit the digital opportunities that we foresee for the oil and gas industry as it contributes to the energy transformations expected.
The oil industry faces broad challenges in maintaining a sharp focus on cost efficiency, safety and sustainability and with the industry becoming significantly more risk-averse, companies will seek to work on joint ventures in order to avoid another big downturn.
The main deal activity in the oil and gas industry in 2019 revolved around the need to improve company finances and reduce debt. Investors no longer want to support expensive drilling programs with uncertain returns and expansions that create ineffective energy giants. They want to see cost reductions, internal efficiencies and increased returns while also moving towards investments that can boost their ESG credentials.
M&A activity in 2020 and beyond will be variable across the oil industry. Large corporates will continue to sell non-core assets whilst smaller companies are under increasing pressure to sell, particularly those who have substantial debt.
In the future, we could see several structured-finance deals within oilfield services as corporates continue to pay down debt.
As oil companies continue to hone their energy transition strategies, the largest volume (as opposed to deal value) will likely be in the energy transition space where energy companies will invest in other renewable companies. For example Norwegian energy company Equinor acquired 6.5 million shares (5.2% stake) in Scatec Solar for a consideration of $84m. Equinor New Energy Solutions executive vice-president Pål Eitrheim said: “Through this acquisition of additional shares in Scatec, Equinor further strengthens its exposure to the fast-growing solar energy sector”. We can be certain deals like these will accelerate in the next decade.
Oil and gas will be a major component of our energy consumption for many years to come but there will be increased pressure from governments, society and markets that will push companies to re-engineer portfolios for resilience; cost-cutting and cash flow growth now more than ever.
The future for energy demand and supply has many possible scenarios and depends on a range of factors to do with society, geopolitics, technology, and policy. While there is a clear transition towards a future that has a plentiful supply of affordable cleaner energy, this cannot happen if we just stop pumping oil tomorrow.
To create a future that has a plentiful supply of affordable clean energy, the industry cannot develop its strategies independently of governments so there needs to be a systemic approach to confront the whole spectrum of the energy issue, its production, its distribution, and its use.
The real challenge for the oil industry today will be how to become a broad-based energy company of the future and promote a portfolio of technically sophisticated and cost-effective energy. Only time will tell.