Top 10 challenges in Oil and Gas industry.
The Oil and Gas industry is going through massive disruption and, as we continue to be extremely dependent of these organic sources of energy, we have to look at the emerging new macro and micro trends affecting this global industry.
The Oil and Gas industry investments in the energy renaissance will continue to shift. As a result, new innovative trends will flow from the upstream sector to midstream infrastructure, refinery operations, and petrochemical facilities. The Upstream operators in the oil and gas industry will focus on harvesting value from recent discoveries and acquisitions through more efficient operations, looking at measuring the risks the industry is facing and the application of new technologies and innovations.
The challenges for this industry come at the same time with some fantastic opportunities emerging for the sector. In the issue of Petroleum Review, February 2012, the Energy Institute listed the top 10 opportunities for oil and gas industry in 2012.
Following on this report as well as the study by Ernst & Young on the top 10 risks for oil and gas companies, we elaborated some thoughts on the subject and made a highlight on ‘Challenges’ rather than view current issues as ‘Opportunities’.
Below are the top 10 Challenges the Oil and Gas Industry:
1. Frontier acreage and access to reserves.
‘Frontier acreage’ challenge represents exploration and development of new fields that previously regarded as too difficult, too expensive or too politically unstable to justify operations. I would add also the remote locations, with newly discovered reserves, like Arctic, far North Sea, pre-salt basins in deep water of Brazil etc. Access to reserves involves competition for access to proven reserves what became more difficult in comparison to decades ago due to expansion of government role.
2. Unconventional resources.
These resources were not commercially viable until recently. Only due to technology advancement, ‘unconventionals’ became so popular nowadays resolving partially the issue of global demand.
The unconventional resources are shale gas, oil sands and coalbed methane (CBM). Although it is a convenient solution for our energy needs, the technology it involves, i.e. hydraulic fracturing, raises debates among communities and professionals about harm it makes to nature conservation and water resources. This in turn might impede its development through government unfavourable legislation.
3. Conventional reserves in challenging areas.
This represents mostly unstable political regime, what in turn leads to lack of security for investments. There are countries with unstable political situation (Nigeria, Lybia, Iran) or areas with new discoveries in unfamiliar environments where environmental legislation is represented by soft law. (Arctic Environmental Protection Treaty).
4. Rising emerging market demand.
As per the Energy Institute, 51% of oil and gas respondents reported making significant investments to achieve growth in emerging markets, i.e. China and other Asian economies. Since performance in emerging markets mostly is dependent on government pricing policy, a significant risk is involved for any foreign direct investments and creates the issue of ‘bargaining power’ of the state.
5. NOC-IOC partnership.
I would not call this a stable partnership. One of the main goals of this partnership from the IOC viewpoint is access to acreage, which is another big challenge. National Oil Companies (NOC) are the gatekeepers of their national reserves, while International Oil Companies (IOC) are the gatekeepers of their advanced technology. The growth of NOCs not only in their states but also outside their home markets, will lead to increase in power and possibility to acquire the necessary technological knowledge, what have to be very alarming for IOCs future concerns.
6. Investing in Innovation and R&D.
Every company understands nowadays, that R&D and Innovation is a key to growth and prosperity. This position creates severe competition between market-players with sufficient resources for R&D.
7. Alternative fuels, including second generation biofuels.
The environmental pressure and market demand that oil companies experience today force them to explore new industries, i.e. renewables. According to Petroleum Review, 47% of respondents had already invested in ‘cleantech’. This urge requires additional resources, company policy and revised strategy.
8. Worsening Fiscal terms.
The fluctuation of fiscal regime in Host-Governments makes enormous pressure on oil companies, creates insecurity for the entire company financial strategy and investment policy. According to the first meeting of UK OIl and Gas Fiscal Forum, (Oil and Gas UK), the industry needs secure and predictable fiscal regime as there is £2.3 billion drop in expected tax revenues due to dramatic fall in exploration drilling and production. Thus, measures to stimulate investment need to be introduced as a matter of urgency. Brasil might be another example of concerns with oil and gas industry fiscal regimes, (Deloitte), as current tax policy is extremely complex and impedes the growth of the industry. Innovation in tax regimes is another ‘headache’ for Operating companies. China recently introduced experimental resource tax on crude oil and natural gas products with 5%-10% on sales. (BBC).
9. Price volatility and role of speculators.
The role of speculators involves huge debate between the leading energy agencies, as well as investment institutions and governments. However, this is only one of the influencing factors on oil and gas prices. The fundamental economy drivers play currently main role in reaching the equlibrium in natural gas prices. As we see, the abundance of supply today leads to lower prices. US is a perfect example. (FT).
10. Corporate social responsibility.
This challenge includes relations with various stakeholder groups, health and safety concerns, i.e. human rights, employee rights, stakeholder rights, environmental protection, community relations, transparency and corruption issues. CSR requires oil companies to success in each criteria in order to build a reputation as a reliable potential partner for public-private strategic partnerships: cross-sector and government.
The above challenges represent only tiny part of concerns of this extremely complex industry. However, it provides brief overview of trends the interested party, whether it is oil company or investment institution, needs to take into consideration while building its strategy.