The energy industry is experiencing the dual shock of the COVID-19 pandemic and oil market disruption thanks to a collapse in demand and a surplus of supply. There are, however, other powerful forces at work reshaping the industry, including the shift to renewables and the convergence of the energy and power industries. Energy leaders cannot cling to the business models of the past, they must seize the opportunity and transform.
These powerful forces are unstoppable and transformational. The industry is moving away, some will say permanently, from hydrocarbons and toward renewable sources. Solar, wind, tidal, and geothermal energy will comprise more of the global energy mix. A more disruptive change will come in mobility from battery-powered electric vehicles that are already replacing gas- and diesel-powered cars. Then there is “green hydrogen,” which uses renewable energy to extract hydrogen from water through the process of electrolysis.
As renewables become more viable, the boundary between the energy and power sectors will blur. Traditional utilities will build and operate “refueling” infrastructure, either battery-charging or hydrogen-distribution stations. Consumers will expect an integrated energy experience, with interchangeable sources used seamlessly to power their homes, vehicles, and workplaces.
Simultaneously, environmental sustainability is exerting a decisive influence on the energy industry. Several of the world’s largest oil and gas players have pledged to shareholders to reduce their future net greenhouse-gas emissions to zero, forcing a substantive and rapid shift in their portfolios and investments.
The result is that these forces mean that changes that energy leaders expected in five to ten years are happening now. Organizations should therefore reorient their companies accordingly. Each segment of the industry must take a different path.
National oil companies (NOCs) need to protect future revenue. They must become stronger advocates for domestic decarbonization, as a means to improve their environmental stewardship at home and to maximize the availability of hydrocarbons for export. To extract the most revenue from their remaining hydrocarbons as global demand shrinks, NOCs should increase their investments in fuels trading, distribution and retailing, and other segments at the end of petrochemicals value chain.
As the lines blur between the energy and power sectors, NOCs should invest in solar- and wind-generating capacity for power. They should champion hydrogen as an emerging energy source for transportation. Rather than partnering with international oil companies (IOCs) for their technical energy expertise, NOCs can work with power and digital companies to support the reskilling of their workforce. Doing so will enable NOCs to meet all of the various needs of consumers—electricity at home, petrol or battery-charging for their cars, and any other energy need—through a set of bundled, integrated offerings.
IOCs must choose between being oil and gas specialists or energy leaders because areas of profit along the oil and gas value chain are shrinking. Hedging bets will no longer work. A handful of massive IOCs has long dominated the global oil and gas industry. They have the financial might to invest in technology- and capital-heavy upstream exploration and production. They possess the large-scale assets required to compete in downstream refining and petrochemicals. These strengths are no longer sufficient.
To become oil and gas specialists, some IOCs can consolidate and vertically integrate. They can invest in digital to become hyper-efficient and squeeze the most revenue from every hydrocarbon molecule. Only those companies that aggressively manage their cash and balance sheets will survive.
Other IOCs that seek to become energy leaders can secure large-scale assets in renewable power generation, storage, and distribution, for example by buying a large utility player. Their focus has to be on reskilling their workforce to succeed with a very different operating model. These companies must invest in digital, but with the goal of becoming centered on customers and more responsive to them.
Major service companies are likely to experience a knock-on effect as their core market contracts. These firms help build the oil companies’ facilities, deliver and maintain their wells, provide specialist maintenance, and operations equipment and services. To maintain their margins, service companies have to consolidate and use technology to differentiate in terms of helping customers get more from remaining reserves at ever greater efficiency and sustainability. Similarly, some service companies can follow their customers into renewables, hydrogen, and power sectors. Already some seismic survey companies spend more time surveying offshore wind farm locations than oil and gas opportunities.
The future of the energy industry has arrived. The only question for energy leaders is whether they will allow the unstoppable forces of change to overwhelm them, or if they will take the steps necessary to transform and secure their own place in that future.