Innovation & Diversification

Increased environmental awareness from investors and the general public coincided with one of the worst shocks to the oil and gas industry in recent memory.

The oil and gas sector had just started to recover from the 2014-2016 downturn when the coronavirus-inflicted shock to oil and gas demand and prices had the companies strategise how to thrive in the energy transition in a world where oil demand may never recover to pre-pandemic levels and oil prices could never return to $100 a barrel.

The sector adapted to the near-term shock by slashing capital expenditure (capex), writing down billions of U.S. dollars of oil and gas asset values, and dismissing thousands of employees, including in the supply chain.

The near-term shock, however, prompted the oil and gas sector to accelerate strategies for the longer term, with two key pillars in mind: innovation and diversification.

From remote work during the pandemic, to the digital oil field and machine learning, energy companies are increasingly embracing innovation, especially in digitalisation, to gain competitive edge. Oil and gas companies are also investing in innovation in carbon capture and storage (CCS) solutions and in alternative fuels, such as hydrogen, as they look to diversify oil and gas operations and stay relevant to consumers and investors in the energy transition.

Many firms have committed to targets to reduce the carbon footprint of their operations and the products they sell, and some of them aim to become net zero energy companies within three decades. This means that major oil and gas companies will speed up their diversification into alternative fuels and renewable energy power generation in response to the growing public awareness that the world should try to curb the worst impacts of climate change.

Increased investments in renewables and pledges to become net zero energy businesses would give oil and gas majors the so-called ‘licence to operate’ as the world is going through the energy transition.

Since the pandemic hit the global economy, markets, and oil prices, UK-based major bp has become the poster child of pledges for diversification as it aims to innovate and reinvent itself as an integrated energy company. Other majors have also promised increased focus on reducing emissions as Europe’s biggest oil and gas companies have reiterated their recent climate action commitments since the pandemic struck.

In many cases, innovation and diversification go hand in hand—companies in the oil and gas industry pledged to pour increased investments in innovative energy sources and solutions in order to diversify their oil and gas portfolios and bring their currently carbon-intensive operations to net zero by 2050 or sooner.

Diversification

bp has just unveiled its new strategy to become an integrated energy company as it pivots from an international oil company focused on producing resources to an integrated energy company focused on delivering solutions for customers.

bp targets to boost its investment in low-carbon energy to around US$5 billion annually, which would be 10 times its current investment in low-carbon energy solutions. Within ten years, bp aims to have developed around 50 gigawatts (GW) of net renewable energy generating capacity, a 20-fold increase compared to the 2.5 GW it has developed so far.

The company aims to growing hydrogen to 10-percent share of core markets and producing more than 100,000 barrels a day of bioenergy, up from 22,000 today.

“We believe our new strategy provides a comprehensive and coherent approach to turn our net zero ambition into action. This coming decade is critical for the world in the fight against climate change, and to drive the necessary change in global energy systems will require action from everyone,” chief executive officer Bernard Looney said.

Shell, which also targets to become a net zero company on all the emissions from the manufacture of all its products by 2050 at the latest, is currently reshaping its downstream business and strategy towards a smaller, smarter refining portfolio focused on further integration with Shell Trading hubs, Chemicals, and Marketing.

As part of this strategy, Shell sold earlier this year the Martinez Refinery in California to PBF Holding Company for US$1.2 billion, and announced in August 2020 it would transform its Tabangao Refinery in the Philippines into a full import terminal to optimise its asset portfolio and enhance its cost and supply chain competitiveness, as it sees declining refining margins which may remain depressed in the medium term.

It’s not only the majors that are diversifying amid the near-term market challenges and the long-term challenge to remain relevant in the energy transition.

A recent report by the Energy Industries Council (EIC) found that many companies in UK oil and gas supply chain are diversifying into renewables and non-energy sectors amid the low commodity prices, market uncertainty, the COVID-19 pandemic, and fierce competition.

EIC’s Survive and Thrive Insight research showed that 49 percent of companies used diversification as their most used strategy, specifically de-risking their revenue sources to rely less on oil and gas going forward.

“This year’s research has underlined how much more resilient UK businesses are to market crises, compared to five years ago when companies had to survive the 2014 oil price crash and the new lower for longer market conditions. Companies have learnt to permanently stay leaner and more agile, accepting in most cases that their future survival depends on no longer being over reliant on the oil & gas sector, which continues to be highly volatile and under pressure from future energy transition,” EIC CEO Stuart Broadley commented on the research.

Innovation

Diversification is often linked with investment in innovations. Companies and industries are looking to reduce emissions with new technologies and to capture carbon dioxide. Oil majors have earmarked areas in which they believe they will excel in the future. BP and Eni will invest in significantly increased renewable energy power generation. Equinor aims to become an offshore wind major and develop carbon capture and storage projects. Shell invests in hydrogen, Total works in robotics and carbon capture and boosts its solar power portfolio in Europe.

The industry also looks at innovations to accelerate clean energy growth and reduce emissions. One of the largest oilfield services providers, Halliburton, has just announced the creation of Halliburton Labs to speed up clean energy development.

“We firmly believe that oil and gas will remain an affordable and reliable energy resource for decades to come. At the same time, we recognise the importance of developing alternative energy sources. We are excited to help advance solutions that have the potential for a long term, meaningful impact and that align well with our sustainability objectives,” said Jeff Miller, chairman, president and CEO of Halliburton.

In Canada, Emissions Reduction Alberta (ERA) is committing funding to support 20 projects that would use artificial intelligence and machine learning to better measure and locate methane emissions, and prototyping new approaches to convert natural gas to hydrogen.

Apart from funding to specific projects, the oil and gas industry as a whole is using more of the digitalisation arsenal to transform their businesses—and this journey started before the pandemic.

According to a PwC survey, oil and gas executives see the most potential for digitalisation in technologies combining data and analysis. The top five technologies executives identified include manufacturing execution systems (MES), cloud computing, energy analytics, connectivity and Internet of Things (IoT), and machine learning. MES facilitate coordination of operations, cloud computing helps improve data quality across value chains, energy analytics support optimisation of energy use and costs across operations, IoT supports remote performance, while machine learning could be used to improve efficiency in predictive maintenance, PwC’s analysis shows.

As every company in the oil and gas sector and supply chain has its own strategies how to cope with the changes and challenges of the market, innovation and diversification are and will be key drivers of the evolution of the energy industry.

Read the latest issue of the OGV Energy magazine HERE.