Oil and gas companies need to rethink their business

The oil and gas industry is in sad shape, and unless executives begin overhauling their business plans and expectations soon, investors will lose more money, and workers will lose more jobs.

Five years after OPEC allowed crude prices to tank, some U.S. executives and analysts are still promising that an oil shortage is around the corner. But the world is changing faster than these folks can comprehend, and energy executive stubbornness is holding the industry back.

The mantra among Texas oil executives is drill, baby drill, and they have saddled their companies with billions in debt to get steel in the ground. Now, these companies are falling like flies, with 26 exploration and production companies filing for bankruptcy so far this year, according to the Wall Street Journal. Twenty-eight filed in 2018.

S&P Global Ratings added 30 more oil and gas companies to its distressed borrowers’ list in August, a considerable number that indicates that a third of oil and gas companies are in danger of defaulting on their debts. Half of the industry’s debt will come due by 2024, leaving little time for prices to rise and save the day.

For the first time since 1925, Exxon Mobil is not one of the 10 most valuable companies in the S&P 500. The Texas-based corporation was once the most valuable company in the world, but today, oil companies are no longer as crucial to the global economy.

Both supply and demand are hurting oil and gas prices, and therefore the industry.

Innovative engineers have released more oil and gas from more corners of the planet than the world needs. The U.S. has gone from the largest importer of oil to the largest producer. The Organization of the Petroleum Exporting Countries keeps cutting production to boost prices.

Fat chance, though, since OPEC and its partners control less than half of the world’s production, and they cannot control private corporations. Every time the price rises a dollar, another well becomes profitable and starts producing. There are too many proven reserves that are accessible at a low cost to allow prices to increase very quickly.

If OPEC holds back enough oil, and enough independent producers go bankrupt, oil prices may step up a little. But rising prices hurt demand by encouraging consumers to embrace energy efficiency and alternatives to fossil fuels.

More importantly, energy demand growth is no longer correlated with global economic growth. New research shows that per-capita energy consumption is expected to begin falling after 2025, according to research by the World Energy Council, Accenture Strategy and the Paul Scherrer Institute. The world can get wealthier without consuming more energy.

“Disruptive innovation is driving change in the energy system at an unprecedented scale and pace,” explained Muqsit Ashraf, a senior managing director at Accenture.

Vehicles are becoming much more efficient, renewable energy sources are getting cheaper and consumers are demanding clean energy. All but three national governments, including the United States, are imposing stricter regulations on carbon dioxide emissions, permanently changing energy markets.

Energy executives who want their companies to survive the next decade need to shift strategies. Widespread adoption of electric vehicles and super-efficient internal combustion engines is critical to decreasing emissions. Both offer opportunities for energy companies.

Electric vehicles can only help mitigate climate change if the power that fuels them comes from emission-free sources. Clever energy companies are rebalancing portfolios toward cleaner-burning natural gas, better battery storage and carbon-capture technologies.

The world will always need liquid fuels, plastics and lubricants made from petroleum, so smart executives are helping engine makers boost efficiency and reduce emissions. How a company drills, ships and refines oil will also become incredibly important to the public and regulators.

The main message at the World Energy Congress this week in Abu Dhabi is that executives need to see their businesses as providing energy as a service, not wholesaling or retailing a commodity.

“Disruptive innovation is opening up significant new business opportunities for those energy leaders and organizations that are prepared to seek and create them,” the conference’s main report states.

Investors who are abandoning traditional oil and gas companies get it, which is why they are moving their dollars elsewhere. They know that low oil prices are not merely part of a commodity cycle that will eventually rise again.

The problem for Texas is that too many oil and gas executives will not heed the writing on the wall. Too many politicians think that government inaction on climate change will save the industry. But as is often the case, the markets know better.

Source: Houston Chronicle