Stakeholder Commentary: Creating a new sustainable future for the Oil and Gas industry

Global energy sector leader Jan Egil Brændeland writes on the challenges facing the global Oil and Gas industry as it navigates through the COVID-19 pandemic and measures up to climate change. Excerpts:

After the shocks of 2020, the Oil & Gas (O&G) industry must now reshape its future. And while fluctuating economic cycles are nothing new to this sector, the impact of COVID-19 and its ramifications is unprecedented.

Many companies around the world are struggling to survive. People are working from home. Entire sectors are periodically forced into temporary stasis, and all of this is impacting
demand for O&G. So, how does the future look for O&G over the next decade and beyond?

Energy transition and a radically different sustainable Oil and Gas sector Between now and the end of the decade could see a completely transformed O&G sector. Long-term demand is not going to rise, and the industry now faces the urgent challenge of transformation towards sustainability.

Since the middle of last year, capital markets and the wider global economy have rebounded faster than initially anticipated. In the darkest weeks of Q2 2020, there was a distinct feeling of economic dread.

However, as we move through the first month of 2021, recovery continues at a global level.

While this is positive news, obviously the pace of economic recovery around the world is highly unstable.

For example, the UK is now in its third national lockdown as two new strains of COVID-19 continue to cause chaos. The US and much of Europe are also battling rolling lockdowns and restrictions when cases arise.

Predictions for the true normalisation of economic activity depends heavily on how the pandemic plays out through the winter.

More importantly, perhaps, it depends on how long the vaccine rollouts take and when the general public will be protected.

Assuming that this is a realistic outcome for some point in mid-2021, there will still be immense economic challenges ahead.

Muted business investments in the labour market alongside significantly lower customer spending, the inability of tourism to get back up and running and the myriad other major impacts of the pandemic mean that the idea of returning to pre-pandemic normality is just not going to happen.

Demand for oil and gas is rising but stays lower than pre-pandemic levels.
We saw demand for O&G plummet by 25% in April 2020. Since then, it’s risen sharply and finished the year with a loss of 8%. For this year it seems that oil demand will recover some more but remain about 4% lower than pre-pandemic levels, according to the base level case. Although estimates from Rystad Energy put it at 7% lower in 2021.

Stocks have also underperformed by significant levels, as the industry continues to struggle against the need for mass redundancies and cyclical layoffs. In 2020, US O&G businesses made 14% of permanent staff redundant. Research from Deloitte shows that 70% of the pandemic job losses sustained last year will not return by the end of this one.

All in all, we are in a pivotal year of change for the O&G industry. Companies are struggling to survive and there will be a long-term steady decline in demand for petroleum. This is now a fact as a combination of consumer pressure and international emission targets force the industry to find ways to change.

Trends are shifting the O&G industry towards sustainability
There are various short-term trends that we will see throughout this year across the global O&G sector.

Traditional production methods will have to begin changing, and the next 12 months will likely sort out the industry leaders from those who will fail to grasp the urgent need for transformation and sustainability.

Digital transformation will be accelerated by O&G companies looking to reduce costs, maintain operational flexibility and optimise their capital ahead of future challenges. This is a key move for any company in this space. Without digitisation, cost-cutting and intelligent strategising, there will be no way to deal with the next few years of changing demand.

The dynamics of the O&G market have changed, and in turn, this alters the financial outlook for shale operators in the US in particular.

Shale oil is produced by fracking, and it’s driven up the US domestic production of crude oil since 2014. Since then, the US became the biggest producer of crude oil in the world according to information from the Energy Information Administration.

Fracking is deeply unpopular environmentally, and the incoming administration in the US intends to move away from it. It should be noted that the President has not said that fracking will be banned, but that he wants to “gradually move away from it.”

Biden says that fracking is necessary until renewables are universally adopted. The only other countries that extract enough shale oil to make money on it are China, Canada and Argentina.

Most countries that still use fracking for shale oil have taken some kind of step to at least regulate the practice. But it remains contentious and unlikely to survive in a world that is increasingly demanding proof of environmentally conscious operating practices from the energy sector.

In other words, the very future of the shale industry depends entirely on how it can work itself into a greener future.

Digital transformation is key for the energy transition
Energy transition and digitalisation were already underway pre-COVID, but the pandemic has accelerated them. They’re here for the long-term and forced into the short-term. Digital transformation will be the key to energy transition strategies for O&G companies throughout 2021.

Digitisation will not only enable automated operations but will also set emissions targets for the short, medium and long term. There is now little choice for energy companies in showing the evidence for their emissions targets. We’ll see more of this kind of credible reporting from companies in the sector as they become openly accountable for energy transitions towards sustainability.

The future has been forced forward for the O&G sector. While moves were being made towards sustainability and energy transformation before the pandemic, years’ worth of commitments has been made in mere months.

Changing towards a brand-new future for energy production is not going to be easy, and O&G companies are going to have to make big choices. Not every company will succeed, and the
following factors will dictate the changes of strategy and direction O&G will take in
2021:

1. For the US, there will be an impact from the new administration and a renewed focus on clean energy.
2. The continued increase in impact investing across socially responsible and environmentally viable projects.
3. Change in demand from consumers and end-use patterns.
4. Consolidation of an industry that is changing fast in a permanently low-priced
   environment.

The decisions made by O&G companies through this year will change the path of the industry for the next decade.

About the Author
Jan Egil Brændeland is a well-respected and experienced business leader within the global energy sector. He has around 27 years of experience at the executive level with recent roles as President of Oil & Gas and more recently Executive Vice Present of Global Sales at KBR Inc.

Jan was also one of the founders of SOCAR-KBR LLC which, since its establishment in 2015, has grown to 350 employees and a yearly turnover of USD 100 Million/year.

Jan served on the board of directors of SOCAR-KBR LLC from March 2015 until August 2020. Jan left KBR Inc in December 2020 and is now an independent consultant and advisor for the Global Energy Sector.