A. TRENCH and E. POWELL, Partners in Performance
Time is running out on transformation for the oil and gas, refining and petrochemical industries. In just the past decade, these industries have undergone significant changes to their economics and business models. Additional changes to operational structure, human capital and public/private partnerships must take place if these industries are to follow through on clean energy goals for 2030, 2040 and beyond.
While these pressures remain foremost in the minds of operators, several obstacles to progress exist, and many organizations have yet to operationalize and execute a future-proofed strategy that can take advantage of new business opportunities while also delivering on stakeholder expectations for decarbonization and overall transformation. Closing the gap between strategic direction and implementation will be the deciding factor in who survives, who thrives and who fails going forward.
A matter of trust. Stakeholder relations for oil and gas, refining and petrochemical companies are increasingly complex. After generations of executing a one-dimensional pathway to value creation, the industries must now manage the needs and expectations of society, government, competitors, logistics, consumers, local government and employees. Stakeholders’ demands also hold greater weight than ever before on companies’ social license to operate.
Within this context, oil and gas, refining and petrochemical companies are operating in an era of unprecedented uncertainty. While a consensus exists on the pressing need to decarbonize and make strides towards energy conversion, these companies and government agencies do not often see eye to eye. Expectations are misaligned on both sides of the aisle, leading to a growing atmosphere of confusion and mistrust. Many companies are now building on their own concepts and pathways, independent of their peers; however, such moves are leading to a lack of collaboration and/or integration that is contributing to an overall lack of trust in the industry and suspicion from stakeholders. This lack of trust extends to government, as well.
“This is a multifaceted multi-stakeholder challenge, and the lack of trust is sadly part of the fabric of the industry. Uncertainty is the enemy of investment and, in this case, it is most definitely a people problem,” said Alexandre Oliveira, Director and Co-leader of Partners in Performance’s Global Oil and Gas Practice.
For example, the Inflation Reduction Act passed in the U.S. in August was heralded as a major climate triumph for the country. Indeed, the legislation does include a first-ever waste emissions charge targeting methane emissions; however, it is widely expected to increase oil and gas activity in the U.S., as it also mandates a resumption of oil and gas leasing of federal lands and waters.
“The IRA has accelerated energy transition ideas, pathways and economies like never before. First-of-a-kind-engineering (FOAKE) will quickly move from ideas on the page to shovel-ready projects,” offers Eric Powell, Director and Leader in Partners in Performance’s Energy Transition Practice. “If we learn from history, no one player can go at this alone. Players across the energy complex, geographies and political lines will have to partner in ways never seen before. If we learn from the past, we understand that recognizing this convergence and wiring the new energy ecosystems the right way will be imperative to de-risk these exciting FOAKE projects.”
In another example from the U.N. Climate Change Conference (COP26), the International Energy Agency (IEA) was commissioned to create a plan to achieve net-zero emissions by 2050. The plan included the recommendation to halt fossil fuel investment. Despite this recommendation and the prominent status of hosting the COP26 conference, the UK government stands by its decision to continue to allow exploration in the North Sea, with the only caveat being that those oil companies pledge to reduce emissions.
This example is representative of the inconsistencies and misalignment between what is being said by government agencies and what is actually happening on the ground.
Mixed messages run counter to companies’ aversion to risk, especially when it comes to new endeavors that are not backed up by decades of experience in the field. In the absence of consistent government policy and a clear directive to commit long term, many companies are holding back on their energy transition investment because there is uncertainty around whether it will pay off. Additionally, they are generating a much higher return on their core business. Without a clear indication or mandate to invest in energy transition, companies will naturally serve the needs of shareholders by continuing to invest in the more profitable part of their business.
Setting an example. The lack of trust between government and these companies stems mainly from a lack of clear evidence that conversion strategies are practical and profitable. Both government agencies and oil and gas, refining and petrochemical companies are risk adverse and must demonstrate to their respective stakeholders that funds will be allocated towards projects with a clear path to success. One solution is to seek implementation at the state and municipal level where the path towards completion is shorter, results can be realized faster, and fewer parties are needed to reach consensus. Already in progress throughout the U.S., these case studies can serve as proof-of-concept examples for larger public/private partnerships.
Unintended consequences. This disconnect is also driving uneven investments in production and capital projects around the country, which in some cases is reducing production of needed products, generating increased costs for the public. To again use the UK as an example, energy bills have increased by ~80% over the last few years due to the shortage of gas. As the public demands lower-cost energy, governments could be forced to bring back less-expensive coal-fired power stations—another scenario of the potential impact of what is happening being in opposition to what was intended.
This environment has led to a dichotomy in the oil and gas, refining and petrochemical industries. Some companies, mainly those in the European sector, are leading the vanguard in terms of energy transition and committing significant resources toward achieving a cleaner model for operations and sourcing. Others have chosen to continue their legacy strategies, waiting for an increased consensus to be reached while laying bets that fossil fuel-based operations will always produce a favorable return.
Internal challenges. On top of external forces, many organizations will, by necessity, become unrecognizable from what they are today. Presently, a general lack of organizational awareness persists around the degree of transformation required to fully align the operating model to the new strategy and operational imperatives; this is driving a lack of pace and urgency to implement. The extent to which the organizational structure, behaviors and culture must be transformed to be successful in the “new normal” will be a massive undertaking—one that should already be underway.
One of the most important examples of this internal transformation is the changing role of human capital. Transformation requires partnership, focus and personal commitment at every level of the organization. This need, however, often runs counter to embedded culture and expectations in the industry itself. Frontline workers, for example, become accustomed to sudden spikes in hiring/layoffs depending on market conditions. The COVID-19 lockdown also led to an increase in automation, monitoring systems and technology meant to enhance productivity. Securing individual participation in these measures, and bringing employees in line with corporate strategy, presents one of the most significant hurdles to implementation and success.
Transforming industry. Amid these obstacles to progress, many companies have not yet established a clear action plan for decarbonization and energy conversion. Most have set aggressive goals but fail to realize that conversion on this scale comes with a wide array of unexpected variables: long-term utility contracts, securing permits on design changes, training an effective workforce, and navigating the complexities of an increasingly divided political landscape, among others.
The first steps are essential. While transformation is not easy, it will create an opportunity (if well-managed) for companies to reinvent themselves and drive a sustainable and more profitable business. We see three core considerations for oil and gas, refining and petrochemical companies.
Managing the current asset portfolio. Regional differences in demand-supply dynamics and regulations will drive the need for companies to reassess their current asset portfolio and capital allocations. This drives the need for a more dynamic approach to capital reallocation and investment decisions
The opportunities that still exist to invest in continued production will require innovation to adopt a more ‘”light CAPEX” approach by leveraging modular facilities and easy-to-decommission plants that allow for shorter lifecycles. As demand shifts to “greener” energy solutions, companies must seek ways to repurpose their existing assets to leverage infrastructure and integrate their asset base with new businesses (e.g., turning refineries into carbon-utilization facilities and redefining retail gas stations into charging stations of the future).
Lastly, the successful divestment or exit from legacy assets will also require a credible path to lower emissions or transformation.
Establishing strategies for new business. Although oil and gas will still be a major source of energy in the future, the growth of demand for “cleaner energy” solutions presents an opportunity for the industry to diversify into new energy businesses.
These businesses and markets act significantly different to traditional oil and gas, refining and petrochemical businesses—often, they provide lower returns, more repeatable, shorter cycles and direct customer demand. It is important for companies to truly evaluate these new business opportunities and determine an operational strategy that is aligned with the expectations of their stakeholders. They should be aware that applying the same previously used operational strategy will not work.
The good news is that the economics of clean energy are changing. The base cost of wind, solar and battery/electric continues to decrease to the point where decisions that were made less than 5 yr ago based on cost are no longer relevant.
To operationalize these new energy business opportunities, companies must understand how the business will integrate with the existing core business and organizational model. Should the new business be a separate entity with tailored financial performance metrics, or be rolled into the existing organization? Will the new business be used to “vertically” integrate energy for existing core business or as an entry into new markets?
An operating model that fully aligns with the expectations of the new business and fosters innovation must be established and supported by organizational culture and behavior of action, performance and continuous improvement.
Improving existing operations. Companies that wish to adapt and thrive need a clear, credible and compelling roadmap that they can deliver against. Outcomes should be short-term and contain immediate questions for all organisations to answer, such as:
Effectively responding to these questions requires a navigable roadmap that can be practically implemented and aligned internal processes to enable successful execution.
Takeaway. Industry is at a crossroads. The interplay between stakeholders, government, society and employees is driving a lack of alignment and trust that is clouding the path forward. However, expectations for oil and gas, refining and petrochemical companies have and will continue to change significantly. Industry pressure to reduce its carbon footprint to maintain its social license to operate will only increase.
It is essential to understand that, while companies debate internally on how they should participate in the energy conversion story, factors affecting this equation are changing faster than the industries’ ability to act. The economics of change have evolved to the point where nearly 60% of all decarbonization efforts are net positive. Conversion measures have also advanced such that even small, individual initiatives can make a significant impact. An army of workers is no longer necessary to make progress.
While each company’s journey will differ based on its global footprint, regional conditions, prevailing local legislation and regulation, every organization should be evaluating its core business model and exploring the possibilities of “new energy.”
While a challenging road lies ahead, this is a unique opportunity for companies to redefine who they are and how they plan to diversify. The “energy companies of the future” will have a roadmap for the future, a plan to operationalize it and measurable progress for others to follow. Those that fail to act now will not survive. HP
ALAN TRENCH is Director, North America, for Partners in Performance. He has 30 yr of experience in the oil and gas industry working in strategy development and execution, organization, operational improvement and CAPEX management. Trench has held positions at Schlumberger, McKinsey & Company and Total. He joined Partners in Performance in 2013 to lead the company’s oil and gas practice, supporting clients in their journey to achieve superior performance.
ERIC POWELL is Director, North America, for Partners in Performance. He has consulted extensively on energy transition and innovation, ranging from advising a major city commission on a higher and better use of their LDC and LNG facility to advising a global private equity on EBITDA enhancements on its multi‑geography district energy investment. Powell has held roles with a global remit at various multi‑national energy providers, serving diverse corporations, private equities and policy makers across the Americas, Europe, the Middle East, Africa and Asia.