The oil and gas industry enters the new decade with a full agenda. Organizations across the value chain face the pressure of several evolving threats and opportunities, while navigating current market volatility. Most of the industry must work to balance short-term tactics with decarbonization and business transformation to ensure long-term competitiveness.
In our last industry outlook (for 2019), 76% of senior oil and gas professionals were confident about industry growth – more than double the figure from 2017. For 2020, however, confidence in industry growth has stalled. Our latest survey finds 66% of respondents confident of industry growth in the year ahead. This is still a strong majority, confirming the new-found resilience to lower prices and volatile markets that we reported last year. However, looking ahead to 2020, enough doubt has crept in to correct the upward trend in industry confidence.
Nevertheless, the story beneath this weaker optimism holds several positives for the oil and gas industry. While there is persistent uncertainty and growing complexity, the industry is also taking bold decisions, building greater efficiencies, and rising to long-term challenges as the world pivots to a lower-carbon energy future.
Capital and operational expenditure levels in the oil and gas industry are a world away from those of five years ago, when deep cost-cutting initiatives were kicking off in all segments, as the industry fell into a major downturn. Companies slashed budgets to survive, removing costs in bulk and cutting the excesses that had crept in during the years of high oil prices.
Cost efficiency is not just about short-term belt-tightening, however; it must be a long-term priority if efficiency targets are to be met. Many expect lower-for-longer oil and gas prices to prevail, while the cost of renewable energy is expected to continue to fall over the next 30 years, making those sources increasingly competitive with oil and gas. Indeed, two-thirds (66%) of respondents to our survey say that most of their cost-efficiency initiatives since 2014 have become permanent changes.
The industry is now building new efficiencies on top of those hard-won gains, not just to survive, but to thrive. As a result, parts of the industry have become impressively lean. In our survey, some 46% say that, if the oil price were to average less than USD50 per barrel in 2020 (Brent-WTI average), their organizations would still achieve acceptable profits. This is a large proportion, given that only one of the past 15 years (2016) saw annual average prices under USD50 a barrel.
The oil and gas industry is moving through an inflection point on the transition to sufficient, sustainable, affordable and emission-free energy.
The percentage of respondents reporting that their organizations are actively adapting to a less carbon-intensive energy mix has jumped from 51% to 60% in one year. The proportion expecting to increase or maintain investment in decarbonization has leapt to 71% for 2020, compared to the 54% expected for 2019.
The industry appeared to step up the priority of decarbonization in 2019. This is evidenced in steps ranging from reducing emissions from traditional oil and gas operations, to investing in renewable energy and supplementing natural gas supplies with greener gasses such as hydrogen and biomethane.
This shows greater recognition of the urgency of the world’s climate problem, and also of the fact that a transition away from unabated use of fossil fuels will involve a combination of various sources and measures.
The digitalization of the oil and gas industry continues at pace, despite both short-term uncertainty, driven by the oil and gas supply-demand equation, and long-term uncertainty about the rate and dynamics of the global energy transition. Digitalization has been key to efforts to improve efficiency since the 2014 downturn, but it is a trend far from its peak potential, and one that will be increasingly important as renewables become more competitive.
Almost all respondents (92%) expect either to increase or maintain their level of spending on digitalization in 2020. When we look purely at the expectation of increased spending, we see a strong and steady rise in investment over the past four years, from 39% for 2017, up to 65% for 2020.
Respondents who believe their organization is an industry leader in digitalization are more confident in their organization’s prospects, more resilient to volatility in the oil price, and are pursuing greater investment in the energy transition.
Despite lessening in severity relative to 2019, skills shortages and an ageing workforce remain top-five barriers to growth for our survey respondents’ organizations. Some 45% of respondents say that the industry will face a critical skills shortage in 2020.
Shorter Tenure respondents are more likely to believe digitalization is critical to their organizations’ survival, compared with Longer Tenure respondents. Shorter Tenure respondents are also more likely to want their organizations to move faster to reduce their carbon footprint.
Our research suggests that progressive stances and tangible steps forward on both digitalization and decarbonization can potentially help attract and retain younger talent. At the same time, our survey shows that all the universally applicable boxes need to be ticked, from remuneration to long-term progression opportunities.
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New Directions, Complex Choices: The outlook for the oil and gas industry in 2020