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E&P and service-sector players are increasingly challenged
to attract investors due to their financial performance, concerns
about price and oversupply, and growing global emphasis on
emissions reduction. The actions that companies and resource
holders take over the next few years will shape the success of
individual entities and the industry for the coming decades.
Financial Resilience and Strategic Choices
E&P companies face many of the same business challenges as
in 2020, but company balance sheets are now more leveraged than
ever with credit ratings for many companies under threat of
downgrade. Companies must decide how to create more resilient
portfolios to attract investment post-COVID-19, in a world
increasingly focused on Environmental, Social, and Governance (ESG)
issues and the energy transition.
E&P companies (E&Ps), integrated oil companies (IOCs),
and national oil companies (NOCs) will continue efforts to boost
operating efficiencies and cash flow through project selection and
investments to increase remote operations. Executive teams face
choices on exploration spending and basin focus, as well as their
emphasis on short-cycle and brownfield development. Some,
particularly European Majors, will pursue aggressive transformation
as they try, albeit with varying degrees of urgency, to reinvent
themselves as broader-spectrum energy players. Adjustments to NOCs'
strategies will depend on the remits set by their governments, with
most likely limiting changes to greater efforts to reduce operating
emissions. Some companies will see opportunities to acquire
discounted assets or struggling companies.
License to Operate, and to Sell
Oil and gas companies are increasingly establishing ambitious
goals to reduce the GHG emissions associated with their operations
and to reach net-zero targets in the coming decades. While pressure
to deliver is being exerted by a range of industry stakeholders
(e.g., financial institutions, governments, workforces themselves),
companies fully recognize that not only is their license-to-operate
at risk if they fail to meet these targets, but also their
license-to-sell their production into the market.
Technology and broader forms of innovation will play an
essential role in companies' efforts to deliver on emissions
reduction targets; their efforts are focused on decreasing the
GHG-intensity of their operations as this is the area over which
they have the greatest control and can provide the most immediate
returns. Carbon capture, utilization and storage (CCUS) is also
gaining renewed interest in the oil industry as not only a means to
capture and offset emissions, but also as a potential new business
area. From only 21 large-scale projects deployed globally to date,
an additional 36 are now in various planning and construction
stages.
Government Responses
Governments face increasing challenges to attract investment in
their E&P sectors. Market flux and investor constraints pushed
many upstream operators to delay planned FIDs in 2020, while
governments concluded 20 of the 55 exploration bid rounds that were
scheduled at the start of the year. Governments' actions to
increase competitiveness will depend on the extent of their
remaining hydrocarbon resources, as well as the degree to which
each has the institutional state capacity and government political
legitimacy to design and implement upstream policy changes.
Few have the motivation in addition to the institutional ability
and credibility to make significant improvements to investment
terms. However, more will lower investment barriers by reducing
entry fees, establishing permanent offering areas, and assigning
licenses via direct negotiation rather than organizing license
rounds. Countries that have both significant E&P industries and
ambitious national GHG emissions targets will increasingly couple
support of the industry with more stringent environmental
regulations and incentives to reduce national GHG emissions.
Governments of some mature producing countries will implement
moratoria on E&P activities in new geographic areas or may
completely ban future exploration, as Denmark recently did.
Redefining the Supply Chain
The E&P service sector had already been suffering severely
compressed profit margins before 2020. The ongoing global COVID-19
health pandemic, combined with the acceleration of the Energy
Transition, will force service companies to re-examine almost every
aspect of their business operations in 2021. As ESG requirements on
operators increase, setting up the systems, processes, and tools to
track pertinent metrics over time will become crucial. Moreover,
until the achievement of widespread global COVID-19 vaccinations,
the virus will continue to create logistical challenges for getting
employees to the right place at the right time and managing the
health and safety of crews, generating additional costs.
The E&P industry faces a potential "Green Crew Change." With
young professionals becoming increasingly vocal in their support of
climate-related issues, many of the brightest new minds may shun
the upstream industry, opting instead for careers in clean energy
and technology. Upstream and service companies will need to
aggressively maintain recruiting during these difficult times and
make good on their promises to operate more responsibly. Beyond the
benefits of improving business performance, maintaining R&D
spending and investments in technology will be critical to
attracting new talent to the industry.
