…and reducing costs. It’s a scary and complex forecast where survival and prosperous existance will depend on getting together, in many ways. It’s the end of an era. And a big task for the next generation involved in this field of action.
The oil and gas sector must reinvent itself. This is how it could be done
The global oil and gas industry has faced difficult times before, but the situation it confronts in 2020 is unprecedented. The short-term outlook is complex, as the erosion of demand caused by the COVID-19 pandemic has staggered an already challenged industry. The medium- and long-term outlooks are also uncertain in the context of the pressures for decarbonization, structural changes in societal habits reducing energy intensity, and abundant energy supply availability. The industry may need to reinvent itself.
When the industry encountered difficulties in the past, it was able to cut costs, defer investments and wait for an upturn in oil prices. This time may be different, due to deep changes in energy demand economics in the context of a flat supply curve.
For example, in the context of transportation, electric vehicles (EVs) may have the upper hand by 2030, particularly if the cost of carbon emissions is factored into the equation. Due to major improvements in the cost and efficiency of batteries, the total cost of ownership (TCO) for EVs could drop sharply, putting pressure on the price of fuel for internal combustion engines (ICE) and pushing the target breakeven to below $40 per barrel. Alongside that, carbon taxes could also increase prices by $3 to $8 per barrel of oil, changing the cost curve. To maintain double-digit returns at that breakeven level, the industry will need to reduce its unit expenditure by more than 50%— to about $12 per barrel as shown in figure 1, below.
Similarly, the demand for alternative energy sources to replace coal and gas is increasing rapidly. The industry had been looking to liquid natural gas (LNG) to serve as a transition fuel, particularly in key markets such as China and India, but this role is predicated on the basis that gas-fired power is competitive vis-a-vis renewable alternatives and coal. For this to happen, upstream LNG costs need to be reduced by as much as 40% by 2025.
1. To make decent returns in the future, the industry must halve its expenditure per barrel . The call to action, to challenge the status quo and to reinvent, is growing louder.
One fundamental area of change is how the industry works together to address these challenges. Plain and simple, collaboration is key to the industry’s future. Operators must collaborate not only with each other, but with their ecosystem. There are major opportunities for performance improvement that are untapped – Accenture has identified potential gains of at least $320 billion.
2. Despite the challenges facing the sector, huge opportunities remain.
Many of these gains can only be achieved through companies working together. Enablers such as sharing data can unlock close to one-third of that value. Some prominent examples of the benefits that derive from collaboration among companies and suppliers include:
• $7 billion through enhanced sharing of warehousing and logistics assets
• $15 billion through standardization of parts and equipment
• $9 billion through reductions of unplanned downtime
• $10 billion through improvement of recovery factors through new technologies
• $20 billion through minimization of wells and facilities overdesign
• $14 billion through reductions in excess drilling and completions services
To make collaboration work at-scale, however, the industry must establish basic principles and design blueprints to forge alliances at the local, regional and global levels. The industry has experimented with collaborative models in the past. For example, as part of the ‘Logic’ project in the UK, North Sea producers shared seats on helicopter flights; standardized industry contracts, such as master service agreements; and shared certain types of information on weather and job certifications.
Similarly, Malaysia’s CORAL (Cost Reduction Alliance) 2.0 initiative promoted collaboration among upstream producers. CORAL 2.0’s programs included reduction of drilling costs through optimization of planning and well design, operating practices and the application of new technology. Producers explored joint sourcing and implementation strategies to establish common planning and scheduling of logistics resources through an operation control tower. PETRONAS, Malaysia’s national oil company (NOC), calculated that CORAL 2.0 has led to savings of nearly $1.2 billion since its inception in 2015.
While these and other initiatives have enjoyed success on a local or national basis, no efforts have been truly launched at scale to make collaboration a norm rather than the exception. But this is set to change.
Taking action – the path forward
The Oil and Gas community of the World Economic Forum is joining forces to explore initiatives aimed at fostering collaboration between oil and gas industry companies and its ecosystem.
Key initiatives include:
1. Creation of global networks and hubs: Establishment of regional hubs to facilitate the sharing of offshore logistics, warehousing and surplus inventory to unlock $14 billion annually from higher utilization of infrastructure and reduction of excess inventory.
2. Facilitation and arbitration of global standardization initiatives: Standardization of equipment specifications for procurement of bulk materials and packaging, which is estimated to generate 10% to 20% reduction of capital expenditure on equipment and up to 40% schedule compression, along with other important benefits.
3. Standardization of datasets and digital collaboration platforms: Development of common standards for data architecture and APIs among the oil and gas ecosystem, enabling data exchange and laying the foundation for the implementation of digitalization and data-driven decision making.
4. Alignment on future workforce requirements: Study of the implications of the Fourth Industrial Revolution on the industry, including the identification of upskilling and reskilling needs and opportunities for cross-industry redeployment.
The oil and gas industry faces multiple challenges and must plan for an increasingly complex and uncertain future. The industry’s success largely depends on the ability of its leaders to identify critical signals and to act decisively.
One key decision is to pursue collaborative initiatives at the local, regional and global levels. By working with industry peers as well as with suppliers, and by urging suppliers to join forces and collaborate with each other in strict compliance with competition law and anti-trust guidelines, the industry can decrease waste, improve efficiency, lower its breakeven costs and reduce its carbon footprint. Collaboration, in combination with actions by governments and regulators, can help the industry to better deliver for all its stakeholders and play a key role in the transition to a clean energy future.
Source: World Economic Forum