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3 forces oil and gas companies can no longer ignore

For well over a century, oil and gas companies have fueled human progress, providing cheap, plentiful and reliable energy to generations of people. From healthcare to transportation to agriculture, nearly every sector of the modern global economy has been built on power supplied by fossil fuels. This reality is undeniable, but so is the need for a dramatic change for better experiences across the board.
3 Forces Oil and Gas Companies Can No Longer Ignore

AT A GLANCE

  • Anxiety related to climate change has added a new sense of urgency to exploring the possibilities of renewable energy such as solar and wind.
  • Evaluating companies based on ESG (environmental, social, and corporate governance) criteria has surged in popularity among investors. Oil and gas companies face challenges in all three areas.
  • Thanks to ongoing advancements in science, technology, and globalization, disruptive innovation is occurring faster than ever. Most industry leaders now know that change is inevitable.

For well over a century, oil and gas companies have fueled human progress, providing cheap, plentiful and reliable energy to generations of people. From healthcare to transportation to agriculture, nearly every sector of the modern global economy has been built on power supplied by fossil fuels. This reality is undeniable, but so is the need for a dramatic change for better experiences across the board.

Thanks to the confluence of powerful trends decades in the making, the industry is at a tipping point. Exogenous pressures are forcing leaders to rethink the business models that have made oil and gas companies some of the most profitable and influential organizations in the world. These pressures can largely be grouped into three categories, and the industry must address each if it hopes to fulfill its missions and play a role in our global future.

The rapid rise of ESG

The practice of evaluating companies based on environmental, social, and corporate governance criteria (in addition to business performance) has surged in popularity among retail and institutional investors alike. Oil and gas companies face challenges in all three areas.

The industry’s impact on the environment — as a result of both the exploration and production of hydrocarbons and the downstream consumption of oil and gas — is anathema to ESG investment philosophy. As climate change accelerates, the world’s collective tolerance for organizations that appear to perpetuate it will continue to shrink. From a social standpoint, oil and gas companies engage in activities that contribute to economic growth, help fund the development of schools and sports complexes, and create jobs. However, they also tend to disrupt local communities in the parts of the world in which they operate.

Finally, where there is great wealth to be had, people will go to great lengths to acquire it — and not all will be ethical. Oil and gas companies, then, are comparable to any other when it comes to governance. The industry is present in all parts of the world, and each country suffers the burden of corruption to some degree. How a company chooses to operate in these environments is a reflection of its governance maturity. In this matter, no two firms are alike.

As the financial industry increasingly considers these factors when deciding where to loan money for capital projects, industry leaders will eventually have no choice but to address them. Expensive financing could negate the economic viability of certain oil and gas discoveries and other important initiatives, which could, in turn, put the long-term prospects of some companies in doubt. Ultimately, if the money stops flowing, so will the oil, or we’ll face painfully high fuel prices.

The ongoing energy transition

The second major source of pressure on the industry is the phenomenon that’s generally labeled “the energy transition,” though it’s not a one-time event as the term might suggest, nor is it a historical first.

The reality is that humankind has undergone many energy transitions throughout its existence and will undergo many more. For the earliest humans, the food that powered them to hunt, gather and survive was the primary source of energy. Gradually, we discovered fire and began leveraging biomass as an energy source for cooking and warmth and, later, to aid in tasks like construction and metallurgy. We eventually shifted to coal before transitioning to oil and gas, which has ultimately allowed for the exploration of new energy sources, such as hydroelectric and nuclear power, among others. Now, anxiety related to climate change has added a new sense of urgency to exploring the possibilities of renewable energy, such as solar and wind.

Moreover, our collective anxiety has coincided with the rise of the identity economy, in which people (especially young professionals) view all choices in life as a reflection of their personal brands. This mindset is increasingly shaping the way individuals view and interact with organizations, whether as consumers or job seekers. Barring a dramatic shift in the prevailing narrative around the industry, associations with oil and gas companies will continue to lose appeal among young people eager to be viewed as part of the climate solution. This phenomenon has already hampered these companies’ abilities to compete for top talent, and as the best candidates gravitate elsewhere, the so-called energy transition will gain even greater momentum.

Accelerating innovation cycles

Thanks to ongoing advancements in science, technology, and globalization, disruptive innovation is occurring faster than ever. The process of “creative destruction,” as described by 20th-century economist Joseph Schumpeter, is the driving force of a capitalist economy and the catalyst behind the creation of the automobile, social media, and virtually every other tool we use. It’s also a process that clearly separates winners from losers.

Historically, it might take half a century or more for disruptive innovation to permeate the adopting masses and displace incumbent services or solutions. We’re now seeing innovation cycles that take less than 15 years to deliver breakthroughs — such as smartphones — that alter the business landscape and change human behavior. Companies must be able to adapt to this ongoing change or risk becoming obsolete.

As more money, influence, and political power is dedicated to reducing carbon emissions, demand for oil and gas products will continue to decline while the prospects of developing a truly viable alternative steadily increase. Most industry leaders know that change is inevitable and are currently thinking about how to adapt their businesses to address it, though few have uncovered ideal answers or made moves demonstrating a commitment beyond attempts to satiate near-term public opinion.

The harsh reality is that there is no defense against the coming disruption. Instead, now is the time to go on the offense. What should that offensive mindset look like? Read part two for more.

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Alan Henson Profile Picture
By Alan Henson
Vice President

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