Executive Summary: ISG Provider Lens™ Oil and Gas Industry - Services and Solutions - North America 2022
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Balancing energy transition with production optimization
The oil and gas industry is going through a phase of long-standing uncertainties. An unpredictable economy, the Russia- Ukraine conflict, reduced investment in upstream assets, price volatility and energy transition initiatives have all created an imbalance in supply and demand. Despite the uncertainties, rising oil prices resulted in record revenues and profits for major oil and gas companies. Majors have posted profits much higher than their previous year’s numbers. For example, BP posted a profit of $8.15 billion in the third (July to September) quarter of 2022, which is approximately 1.5 times the previous year’s number.
Record profits translates to healthy balance sheets and an uptick in investments focused on energy transition for 2022 and beyond. The continuing rise in profits also puts the spotlight on whether the oil companies will increase their capital expenditures, although this may remain subdued given the focus on changing the production policy by Organization of the Petroleum Exporting Countries (OPEC).
ISG, as an advisor that has helped several of the world’s leading oil and gas companies navigate their digital transformations, believes that to build a successful, competitive and future-proof energy company requires a focus on strengthening the technical and digital foundation, transforming operations, continuously improving cybersecurity, digitally enabling the workforce and improving customer experience through digital channels.
ISG notes the following trends in the global oil and gas industry:
Optimal mix of decarbonized energy sources
Oil and gas firms, particularly the European majors, have made a gradual shift from traditional oil and gas companies to becoming diverse energy companies. These changes are in tandem with an increasing demand for renewable energy resources. Renewable energy is expected to generate 50 percent of global electricity by 2050. In addition, more than $3.4 trillion will be invested in renewable technologies over the next decade. The increasing dependence on renewables and the impact of climate change are necessitating substantial investments. Thus, governments and enterprises can work together to ease investments in the sector, while bringing in regulations to curb the overuse of traditional energy sources. According to BloombergNEF, in 2021, global investment was about $755 billion toward energy transition. However, this would need to triple in the near-term if governments and enterprises want to achieve their net-zero ambitions by 2050.
Growing need for investments around oil and gas infrastructure
Many oil and gas rigs, wells, refineries, and pipelines have been in operations for many years. The need to maintain and upgrade existing infrastructure is important as oil and gas companies face issues around mature wells, changing feedstock for refineries and aging oil and gas transportation assets. Companies are looking for solutions around dealing with low flow wells, decommissioning old wells, optimizing refineries and addressing logistics and transportation issues. In this environment, solutions around asset management, preventive maintenance, digital rigs, augmented reality/virtual reality (AR/VR), drone technologies and edge to cloud networking will gain prominence.
Selective M&A
Oil and gas companies continue to cautiously engage in mergers and acquisitions as uncertainties around oil and gas prices and the economy remains. Companies are engaging in selective acquisitions in areas such as the U.S. shale oil and gas (Devon Energy’s $1.8 billion acquisition of Validus Energy) and midstream assets (a $9.13 billion deal between Phillips 66 and DCP Midstream LP). However, with the prolonged Russia- Ukraine war, the focus may shift to deals around liquefied natural gas (LNG) and renewable energy assets as companies secure assets and continue their journey toward energy transition.
Aging workforce and need for digital skills
The global oil and gas industry, including in North America, faces the challenge of an aging workforce and the need to retain employees and attract new talent. The average age of workers in the petroleum industry is about 50 years, which is one of the highest in any industry. The challenges of attracting talent and competing against large tech firms can be overwhelming for the industry. It is also facing a major crunch in digital skills, where there is a shortage of qualified talent for jobs, which require competencies around AI, machine learning, robotics and advanced analytics. The aging workforce issues may also hamper energy transition efforts of many oil and gas companies, which rely on new-age technologies and skills to make the change.
Digital technologies enabling new business models
As oil and gas majors such as Shell, TotalEnergies and Equinor continue to buy assets around solar and wind energy and make entry into the residential electricity market, the need for digital solutions are imminent. Technology solutions around IoT, edge computing and the cloud will be needed to respond to the changes around new business models.
Move toward a more data-driven business
Oil and gas companies have yet to realize the full potential of data. To achieve this, they should address issues around access to data, data insights, data governance and quality, and cross-functional analytics. To this end, the industry needs to adopt cloud-based data and IoT platforms. This also requires a combination of platform as a service (PaaS), software as a service (SaaS) and proprietary solutions, apart from data, to generate business outcomes, and they should be supplemented with sophisticated IT and OT integration strategies. In this environment, technology service providers need to leverage forums such as the OSDU data platform to build applications for the energy industry. Forum members include oil and gas industry majors and national oil companies such as Shell, Saudi Aramco, BP, ExxonMobil, Total, Chevron, Gazprom Neft and Petrobras, and tech companies such as Accenture, AWS, Dell, Google, Hitachi Vantara, Huawei Technologies, IBM, Intel, Microsoft, Nvidia, Wipro, LTI and Oracle.
Transition to cloud
Many industries are moving toward cloud-based solutions for key workloads, which can enable high resiliency and rapid innovation. Cloud adoption has been slow in the oil and gas industry; however, the industry is fast catching up, with companies across the value chain increasingly willing to harness the benefits of the cloud. Oil and gas companies and cloud players are increasingly collaborating to drive cloud adoption in the industry. Cloud adoption, together with advanced technologies such as AI, analytics and IoT, will help drive efficiency and decision making among oil and gas companies. These companies are looking at hybrid cloud deployment strategies that combine the public cloud and private cloud to bring down IT costs and improve business management. Cloud adoption areas for upstream applications include field data management, geographic information system (GIS), reservoir modeling and drilling.
Focus on cybersecurity due to the inter-dependency of physical and cyber infrastructure
With oil and gas companies starting to embrace digital transformation programs, the need to address cybersecurity is one of the top industry priorities. Compared with many other industries, the energy industry continues to experience system breeches and outages triggered by cyberattacks. Some of the oil companies, especially national oil companies (NOCs) are reluctant to adopt public clouds as they see security as a key challenge. Cybersecurity is now being looked at as an independent and important issue to address when constructing managed service and IT/OT strategies.
Legislation and regulatory changes
As the oil and gas industry transitions to alternative sources, the business must continue to comply with changing global legislation and regulations around hydraulic fracturing, royalty or production tax regimes, deep-water and onshore drilling and permits, and the environment. In the U.S., the Joe Biden administration pushes for its clean energy plans while limiting access to traditional sources of energy. A key challenge facing the industry is to show the transition from transitional to renewable sources while still creating value for the stakeholders.
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