New research published by DNV GL finds that the oil and gas industry expects to boost investment in the energy systems of the future this year, as companies seek to transform for the long term.
A record two-thirds (66%) of senior oil and gas professionals report that their organisation is actively adapting to a less carbon-intensive energy mix in 2021, up from just 44% in 2018. Some 57% plan to increase investment in renewables, up from 44% last year, half (48%) expect to increase investment in green or decarbonised gas.
Just a fifth (21%) say they will increase investment in oil projects in 2021, as the sector increasingly comes to terms with the notion that the world’s demand for oil has peaked or will peak in the short to medium term. Expectations for an increase in natural gas investment remain steady at 37%.
The majority of senior oil and gas professionals expect these shifts in investment will lead to a wider reshaping of the industry. Eight-in-ten – 78% – believe there will be increased consolidation in the year ahead, up from 64% one year ago. Strategic reorientation may also involve asset and business sales, with 63% expecting more demergers, divestments and spin-offs, up from 46% last year.
Transformational investments come despite a crash in confidence for industry growth following the Covid-19 pandemic and subsequent oil and gas market crash. Only 39% of senior oil and gas professionals are confident about industry growth in 2021, down from 66% last year.
Shift in capital
Turmoil and Transformation, DNV GL’s outlook for the oil and gas industry in 2021, suggests priorities are shifting as investors reassess the risks of financing oil and gas projects, and as governments and industry pour billions into green recovery strategies following the COVID-19 pandemic. The research is based on a survey of more than 1,000 senior oil and gas professionals and in-depth interviews with industry executives.
“Net-zero climate policies began to proliferate in 2020, from Europe to China, and made it onto the table in the US. Long-term, net-zero policies have the potential to drive deep decarbonisation of the world’s energy system, and they are already changing the direction of the oil and gas industry,” says Remi Eriksen, Group President and CEO of DNV GL.
The oil and gas industry is moving through its third major downturn in 12 years, but the outlook for 2021 is influenced by the possibility that this downturn may be different from those of the past. Perhaps the most significant difference for the industry for 2021, is the shift in capital away from fossil fuels.
“The financial markets – through the effects of the COVID-19 pandemic – have seen what peak oil demand could look like and are increasingly factoring in changing sentiment in society towards a decarbonised future. Decarbonisation has moved from something on the horizon to an immediate priority, and there are signs that our sector may invest to transform rather than cut its way out of the present crisis,” says Eriksen.
Cost cutting will still be a universal priority (96%) for 2021, but the industry is already lean. A resilient 63% say their organisation will still achieve acceptable profits if the oil price averages between USD40 to 50 per barrel in 2021. However, there are signs that traditional cost cutting methods are hitting their limits.
“The trouble with the industry’s available cost efficiency levers is that most of them have been pulled quite hard already. Cost efficiency has been an uninterrupted priority in each of the past seven years. For some, it is getting harder to squeeze any more water from the sponge,” says Hans Kristian Danielsen, Vice President, DNV GL. “Four fifths of senior oil and gas professionals say cost cutting will be more challenging than ever in 2021.”
Significantly, the oil and gas industry is not hitting the spending brakes as hard as it did after the downturn in 2014. While the proportion of respondents expecting to maintain or increase capex in the year ahead has fallen to 62% – down from 72% going into 2020 – this is much higher than the 43% recorded following the last downturn.
The industry cut costs and waited for oil demand to rise during the last downturn, then renewed investment in oil and gas. While some in the industry are expecting a quick recovery, DNV GL research shows that most are looking longer term to transformational investments – to projects that will decarbonise the industry.
“Companies are betting long term when making transformational investments, aiming to navigate the multiple transitions taking place at different speeds around the world. While we see a crash in confidence for industry growth in 2021, we see growing confidence in the opportunities that lie in a decarbonised future,” says Danielsen.
North Sea perspective
When asked about the impact of last year’s oil price crash on the sector, DNV GL Regional Director, UK and Ireland, Hari Vamadevan, describes the impact on confidence as “a triple whammy: COVID-19, a huge impact on demand and then the price war between the Saudis and the Russians – and that led to a brutal background. That resulted in a significant consolidation and cost cutting in the industry.”
“Our survey has shown that 76% of the respondents feel there’ll be further consolidation this year – and 96% feel there will be further cost cutting,” Vamadevan continues.
“Society got a glimpse of a lower carbon world – and are very keen to try to keep it – and 66% saw their companies moving towards a lower-carbon intensity in their energy mix,” Vamadevan adds.
In terms of the increasing pressure to decarbonise affecting investment priorities in the sector, Vamadevan explains, “… that’s where the money’s flowing – towards the greener projects – and from the survey, we could see that 57% of the respondents see their future investments in the renewables area. I think that’s a really significant number, considering it’s the oil and gas sector investing in renewables.”
Additionally, 48% believe their companies would be investments in green gas, “which is very much the production of hydrogen”, he says. And 39% of the respondents thought they will continue to invest in traditional gas. “So you can really see how the future portfolio of the energy mix of the oil and gas sector is going to change quite significantly, with these investments into renewables, into green gas and into traditional gas.”
Confidence going forward
When asked about additional cost cutting within the industry, Vamadevan says, “almost 80% responding to the survey did feel that continued cost cutting would be hard; however, 90% did believe they need to find new operating models – 79% believe standardisation would allow further cost cutting – and 68% do believe that digitalisation would be the main lever – and that’s using Big Data to improve the existing efficiency of the oil and gas sector.”
This year’s survey revealed a reduction in confidence from last year – from 66% to 39%. But compared with the price crash of 2014, “the confidence is almost 11 percentage points higher,” Vamadevan says. “And I think what that shows you is that those companies that are able to navigate the energy transition so that they can transform their businesses are still feeling quite confident about the future, although not quite as confident as they were a year ago.”
Citing an “irresistible force towards the energy transition and a lower carbon mix”, Vamadevan still sees a place for the expertise of the oil and gas industry in the future, applying existing skill sets within the renewables sector.