How to manage energy transition in oil & gas

Done right, the move towards carbon neutral offers companies new and exciting opportunities.

The industry is embracing the energy transition story

We’re seeing a rapid shift in mindset across the oil & gas industry. Fuelled by climate change, a drive for greater sustainability and consumer pressure, companies are setting out long-term plans to go carbon neutral and diversify their energy mix.

Today’s economic challenges could see these plans accelerate. With limited growth opportunities within oil & gas, companies are having to adapt to survive.

There’s also a wider imperative. It’s now generally accepted that without the support of oil & gas, the route to carbon neutral will be a lot more challenging and expensive. In short, for a more sustainable future to become a reality, it’s essential that both oil & gas operators and the industry’s supply chain are able to fully participate.

Operators are leading the charge

Operators are already demonstrating they have the core knowledge and competence to successfully transition into different energy sectors.

In recent years, we’ve seen large operators making positive moves in this direction. Some are now well advanced in making the switch to ultimately deliver ‘energy’ products – putting electricity and hydrogen on a par with oil & gas in their energy mix.

Spain’s Repsol, for example, has plans to become a net-zero emissions company by 2050 with plans (at least before this year’s economic challenges surfaced) to develop around 400 to 500MW of new renewables projects per year. Meanwhile, Danish power firm Ørsted (formerly Danish Oil and Natural Gas), is now among the world’s largest renewable energy companies, having sold off its oil & gas business.

Supply chain the key to wider energy transition

As operators transform themselves into ‘energy’ players, this offers up new opportunities for the oil & gas supply chain. Energy transition should give this part of the industry a much-needed boost, particularly if the UK continental shelf fails to quickly recover, paving the way for the creation and implementation of new technology.

Supply-chain companies are typically the engine behind oil & gas operations. By diversifying they will help support the development and implementation of industry-wide transition. We’ve already seen successful signs of supply-chain diversification. Good examples of companies which have successfully diversified across multiple energy sectors include marine services company James Fisher and Sons, which now includes offshore wind, wave and tidal arrays in its focus markets. Services company EnerMech, meanwhile, provides engineering, mechanical, electrical, instrumentation and inspection services for offshore wind developments.

 

  

Meeting the challenges of diversification

Diversification can help futureproof oil & gas companies against volatility. However, while diversified companies should be able to weather any storm more easily, the process does not come without challenges.

While it’s easy to draw parallels between different parts of the wider energy industry (such as oil & gas vs offshore wind), it is never going to be a like-for-like match. Successful transition means understanding the differences in expected revenues, safety & quality systems, commercial agreements, contractual terms and operational practices.

Knowing how to prepare for these challenges – understanding and allowing for the changes required – will be crucial. Diversification will always involve a degree of uncertainty, so companies need to fully commit to succeed. It might seem like going back to basics, but it’s essential to do the research so you can fully understand this new market and the various competencies required to deliver your product or service effectively.

Despite the rapid changes taking place, it’s more prudent to take smaller steps, rather than attempting a quantum leap. Care must be taken to evaluate whether a company has all the critical components in place to compete:

• Will diversification be organic or through acquisition? It’s often faster (and perhaps easier) to grow through acquisition but the overall success factors are typically lower.

• Can you quantify what your company does better than existing competitors (who may be more established in the new field)? What does outperformance mean – is it more robust safety processes, or providing higher quality products & services? Competing on lower costs alone promotes a race to the bottom, which can result in reduced quality that’s transferred somewhere else in the supply chain – such as higher repair and maintenance costs.

• What’s your long-term goal? Is your aim capturing the largest market share in the new sector or participating as a key player?

One major challenge for companies is accessing the investment required to accelerate transformation. This is a key area where government funding and support will prove crucial. Diversifying your business may seem daunting, but we’re fortunate that there is a great deal of support available within the UK. Oil & gas is fundamentally a private enterprise, but there is still a wide range of support resources from organisations including government bodies and various trade associations.

As an example, the Department for Business, Energy & Industrial Strategy (BEIS) establishes partnerships between the UK Government and industry sectors, creating opportunities to boost productivity, employment, innovation and skills. The government also funds R&D grants and tax relief schemes, as well as providing many other business support services.

The industry has the talent to make energy transition a success

There are a great many factors to consider prior to diversifying. The one thing that’s not up for debate is that the oil & gas industry, particularly the supply chain, is highly capable. There is a tremendous amount of talent within UK oil & gas. This expertise, which has developed and matured over time, has undoubtedly played its part in mitigating the cyclical nature of the industry.

This talent has a huge role to play in this sector’s recovery and retaining it should be a priority. The wealth of knowledge and experience has proven to be highly exportable to adjacent sectors and has helped several companies to successfully diversify in the last few years. If the global energy transition is to be a success, then our talent should play a vital role in it.

Steven Cowie is a senior industry figure with more than 30 years’ experience. Contact him here.

For more information on how Archer Knight can help your business development and diversification get in touch info@archerknight.com