The fossil fuel industry in the wake of the recent global climate change agreement

The Commodities Now website has published an interesting article on what the oil and gas firms now need to do to adapt to the transition to a low carbon economy. What do you think?

 

New Energy Futures: transforming the oil and gas industry to meet future challenges

Oil and gas firms need to expand their focus beyond short-term issues such as tumbling oil prices and over supply if they are to successfully navigate the growing range of disruptive forces that will shape the industry, according to PwC’s New Energy Futures report.

In the wake of December’s climate change agreement in Paris, the momentum to replace fossil fuels with cleaner energy sources is gathering pace and other factors, from low oil prices to geopolitical events, continue to shake the industry.

But despite these pressures, the report’s authors are clear about the vital – albeit changing – role the industry has to play in the energy transition and the opportunities for those that are able to adapt to the changing times.

Viren Doshi, PwC’s Strategy & oil and gas leader, commented: “While, for understandable reasons, the current depressed oil price dominates the headlines, it’s also important to look beyond that to consider what forces are shaping the future of the industry. US shale supply has contributed substantially to the current position – what other disruptors does the sector face?

“Global demand for affordable, reliable energy will continue to grow for the foreseeable future, but there is a new longer-term backdrop, as the world transitions to a low carbon system. Momentum to replace fossil fuels with cleaner energy sources is building, and oil and gas companies need to consider their futures in this context.

“Time and again, successful operators have demonstrated the ability to respond to challenges by taking a long term view, innovating, adapting and gauging major trends as they define medium-long term investment plans. And we are convinced that they can do so again.”

The New Energy Futures report proposes a framework that could help companies successfully navigate an increasingly complex and volatile global market over the next five to fifteen years. The framework evaluates four potential futures, where the level of disruption and the pace of change fluctuate:

  • The oil and gas sector evolves along current lines with limited government intervention. Ongoing price volatility across pricing and demand presents funding challenges, encouraging greater collaboration between operators and service providers to drive efficiency and reduce cost. Gas increasingly becomes an essential transition fuel.
  • Demand from energy consumers (retail & commercial) for cleaner energy drives the transition towards a low carbon world resulting in significant private investment in low carbon technologies. The link between economic growth and energy intensity breaks.
  • As Governments follow through on COP21 with regulation, incentives and direct investment, it drives increased energy efficiency, expansion of renewable energy demand and accelerated development of disruptive technologies. This puts further pressure on fossil fuel providers who need to find new ways of working.
  • Supply constraints are triggered through direct government action, such as implementing carbon legislation or withholding licences (e.g. Shale, Arctic), or geopolitical disruption, which can also contribute to increased volatility on a periodic and regional basis.

According to Jan-Willem Velthuijsen, chief economist, PwC in Europe, each perspective teases out a range of possible effects on supply, demand and market dynamics: “Megatrends are transforming industry and this makes navigating the future increasingly challenging. The oil and gas industry is facing a complex and difficult environment today, with historically low commodity prices, among other factors. The future will likely bring even greater uncertainty, given potential disruptive forces.

“While in practice, no single future perspective can be neatly ‘ring fenced’, this framework enables business to consider various tangible scenarios. It allows them to reassess their current strategy and plans, with implications for the operating model, partnering strategy, resourcing and technical capabilities and other areas.”

The report explores the impact of these four future perspectives on the oil and gas value chain. It states that while various elements may play out in distinct ways across different regions, it will be increasingly vital that companies are able to demonstrate:

A clear strategy and alignment with portfolio, decision making processes and capabilities;

  • An ability to be agile and resilient in uncertain times;
  • An innovative response to disruptive change using existing assets as well as technology, knowledge and capabilities;
  • A readiness to form alliances and collaborate across the supply chain, with a growing focus on efficiency gains and reduced emissions rather than cost and risk sharing; and
  • Safeguarding the social licence to operate by sustaining the trust and support of investors and wider stakeholders through increased transparency.

The view of the authors is that for all the uncertainty that may cloud the industry’s future, one thing is certain – the oil and gas industry has continually demonstrated resilience and innovation to adapt to a dramatically changing world.

Whatever the future may hold, the sector will continue to play a vital role in meeting our changing energy needs.

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