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Building growth strategies on shifting sands

Supply and demand fundamentals are being disrupted by trade tensions and uncertainties over the energy transition

Although the oil and gas industry has always been volatile, there was nonetheless a comfortable predictability to the boom and bust pendulum. Those days, however, appear to be over, at least for now. 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. It could be said that this year, oil and gas executives are essentially trying to set a growth course for their companies on shifting sands.

Additionally, ambiguity surrounding the future of fossil fuels, and a growing urgency around climate change pose new threats to oil and gas companies in an age of accelerating energy transition.

Given evolving government policies and consumer attitudes, particularly in the wake of the 2016 Paris Agreement, CEOs of oil companies are faced with three choices in a capital-constrained future:

  1. Double down on fossil fuels. As some mid-sized oil and gas companies such as Occidental expand their oil assets, other players are looking into investing in energy efficiency, low-emission fuel products and carbon capture.

  2. Diversify your portfolio. Currently, diversification has involved large acquisitions of natural gas projects by major oil giants. Going forward, however, alternative options such as acquiring or expanding renewable energy capabilities and offerings, or moving into petrochemicals, have grown in popularity.

  3. Go all in on renewables. Some companies have chosen to pursue innovative rebranding and reinvention in favour of renewable energy sources. Two examples are Ørsted (formerly Dong Energy), which prioritizes renewable energy over fossil fuels; and GDF Suez, which now brands itself as a "sustainable energy for all" company.

Big or small? There is a difference

In this energy transformation, larger companies clearly have the upper hand due to their massive cash reserves, allowing them to potentially buy into whatever market they so choose. Bigger players can also be more aggressive in monetising their existing resources as they make the switch. Much simpler to acquire assets such as production lines or utilities or to invest in non-traditional markets than to grow these product lines organically.

Smaller independent companies meanwhile have much less room to manoeuvre, needing to focus on their traditional strengths, while working on freeing up cash for diversification through judicious costs management. A safer option for the risk-averse is to opt for strategic alliances in order to share costs and profits with larger oil companies, since they lack the scale or business model on their own to properly pursue alternative investments.

What should your priorities be?

In this period of transformation, oil and gas executives of companies of all sizes need to pay attention to four strategic and tactical considerations:

  1. Create a strategic identity based on your capabilities. Maintain useful aspects of your existing business, while divesting the remainder to free up capital.

  2. Realign portfolios to focus on strengths and new growth areas. When adjusting portfolios, most companies have opted for new asset plays or portfolio rationalisation. Major M&A, however, could prove risky In this environment, and smaller tactical acquisitions are more likely in reinforcing existing capabilities or building new ones.

  3. Invest in agility through digital innovations. The oil and gas industry has made digitisation a key priority, as new technologies can increase efficiencies in project management, operations and supply chain. Drones, robotics, artificial intelligence and virtual reality can also make exploration and extraction more efficient.

  4. Cultivate and hire the right talent. Commodity price volatility is followed closely by talent as the two most significant business threats for oil and gas executives. Quality people with digital skills-from data scientists to software engineers—could help you implement a creative digitisation strategy.

 

To read the full PwC Oil and gas trends report, click here

To discuss what these trends mean for your business, please contact:

Adrian Del Maestro
Director, PwC UK

Reid Morrison
Global Energy (Oil & Gas) Advisory Leader
Principal, PwC US

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