Operating at the centre of an international political debate over industry tax incentives, offshore drilling legislation, and alternative energy, the industry is faced with a unique set of challenges, complexities, and uncertainties.
In the longer term, primary energy demand is forecast to plateau in the 2030s as renewables penetrate the energy mix, global electric vehicles sales expand to over 100 million, plastics become more regulated and gas and oil consumption reduces as more efficient industrial production methods are implemented on a global scale.
Innovation and agility are crucial to enabling oil and gas companies to respond to these challenges. Almost all the business leaders in the natural resources sector responding to BDO’s recent survey on global risk believe that greater agility within their organisation will help them build a more successful innovation strategy to be more competitive, while 85% say there is an appetite for greater agility within their business.
Regulation is seen as a key driver for change. Nine in 10 survey respondents say that the disruptive impact of regulation makes a successful innovation strategy critical to their businesses surviving in the long term.
Changes in regulation are driving research into alternative energy sources at the oil giants. Companies such as Royal Dutch Shell, Total and BP have in recent years accelerated spending on wind and solar power as well as battery technologies. At the same time these companies need to continue to improve processes and profits. “One of the key issues for the industry is the cost of exploration and the cost of the infrastructure that’s required to extract oil or gas for the power network,” says Ruth Ireland, partner and UK national head of BDO’s Risk Advisory Practice.
The ongoing decline in new oil and gas discoveries has focused attention on using new technologies to revisit existing projects. While production on the Permian basin was thought to have peaked in the early 1970s, new technologies for oil extraction such as hydraulic fracturing and horizontal drilling have increased production dramatically, transforming what appeared to be a source in decline into second place in the world’s leading oil fields. Other examples include BP’s re-engineered Mad Dog Phase 2 in the Gulf of Mexico, and Shell’s redevelopment of the Penguins oil and gas field in the North Sea.
Innovation is the key to making these projects pay. For example, BP believes that technology can reduce average production costs by up to 30 per cent by 2050. “Technology can help predict where you should drill; it can help reduce exploration costs and new extraction techniques can transform production,” says Ireland. “If your business does not embrace the technology, others will, and they will overtake your business to produce energy faster, more efficiently, and cheaper.”
Meanwhile smaller companies are responding to the agility challenge by taking advantage of their expertise in specific production techniques and their ability to adapt quickly to changes in the business and investment environment. In the North Sea, for example, smaller operators such as Neptune Energy and Tangram Energy are stepping in to take over certain fields as the larger companies start to leave.
The changing technological environment, with developments in AI, better use of data, and blockchain, offer huge opportunities for oil and gas companies to innovate further and better manage their costs and risks. For example, BP is combining real-time information from sensors with its own models and analytics to optimise output. It estimates such digital tools boosted oil production by more than 30,000 barrels per day last year.
Oil and gas companies are also working together to build operating models around specific capabilities. An example is the merger of Technip with FMC Technologies, which brought together FMC’s experience in subsea equipment manufacturing and technology with Technip's deep-water engineering and equipment installation expertise.
Previous partnerships in the sector, usually joint ventures, were generally entered into by necessity because of local country politics or to share cost and risk, says Ireland. “Future partnerships could additionally be driven more by the need to innovate, to have more environmentally-friendly ways of working, and to embrace technology,” she says.
Technology brings its own risks, with cyber threats one of the greatest. 43 per cent of survey respondents feel their businesses are unprepared for computer crime, a percentage which appears uncomfortably high given the critical infrastructural assets involved and the highly complex nature of the networks and processes within the industry.
Although 32 per cent of respondents say they are unprepared for further technological change, 77 per cent believe that the disruption brought by new technology makes it critical for their businesses to have a successful innovation strategy. “They see technology as critical, but some businesses are not doing as much about it as they should be,” says Ireland.
“Of course, whilst executing change it is important that the overall risk environment is well managed in this sector. But equally embracing technology and innovation, and thinking about how things could be done differently and more deftly, can help companies on their journey to creating a more sustainable and financially-viable business for the future,” she says.