How do you see Australia’s Oil & Gas industry at the moment? Is it flourishing or facing problems?
If we remove the historic commodity cycles and events, Oil & Gas (O&G) companies have generally been able to achieve profitability, capture investors’ interest and maintain a level of public trust. However, the industry has now been fundamentally disrupted, exacerbated recently by an abundance of supply, the growing decarbonisation momentum, and structural shifts in consumer behaviours. Many companies’ relevance – and even their social license to operate – are therefore being called into question.
Looking ahead, the Australian O&G industry will need to make two fundamental shifts: i) in how they balance capital allocation to deliver against investors’ expectations on returns as well as decarbonisation, and ii) how, in upstream, they are able to shift from a ‘supply mindset’ to a ‘customer mindset’, and grow returns in ‘low carbon’ business through distinctive customer propositions.
What are the three paths in front of Australia’s Oil & Gas industries?
We see three different overarching portfolio strategies emerging.
The first is for O&G companies to double down on what they know best, essentially galvanising themselves as ‘O&G specialists’ or better known now as ‘Energy Specialists’. This will involve setting the standard on cost and operational excellence, while reducing carbon intensity. Many Australian upstream companies are maintaining a focus on cost discipline as they emerge from the price crash or compression, while actively pursuing decarbonisation opportunities, prioritising immediate initiatives with negative MAC [Marginal Abatement Cost] (e.g. partial LNG facility electrification) while exploring CCUS for reservoir emissions with optionality in the long-term for blue hydrogen.
The second requires energy diversification, evolving the business into an ‘Energy Major’, that has a broader focus on both hydrocarbons and electrons, placing greater emphasis on end customer needs. Recent acquisitions by O&G companies of Utilities companies highlight the potential for such a model, but it is not without its challenges, as Utilities market share is dominated by tier one retailers, creating barriers to customer growth and economies of scale.
The third and final strategy requires the biggest shift of the three, in order to become a ‘low-carbon leader’. This strategy is a full pivot towards a carbon neutral future, providing new energy solutions that facilitate that journey. Whilst Australian O&G companies remain cautious given the current economics of ‘low carbon’ businesses and an often-unclear policy landscape, their hand may soon be forced. New competitors are emerging focused on renewables and green hydrogen, given the renewable energy intensity requirement, placing bigger bets and challenging the role of O&G incumbents as energy leaders.
How do you see things developing in the future both in Australia and the industry generally?
The O&G industry has gone through difficult times before. But the scale of challenges it now faces calls for urgent action. To remain relevant in a decarbonising world, O&G companies need to re-evaluate old paradigms and develop new strategies for reinvention.
The amount of change required will take years to achieve and can certainly feel overwhelming to industry executives and participants. This is particularly the case after a challenging 2020 where virtually all O&G companies had to make difficult choices.
With profit pools shifting downstream away from fossil fuels, incumbents must quickly decide what to offload, where to diversify, what to optimise and which new market opportunities to target. The prerogative is now on O&G companies and their supply chain partners, to define new future portfolio strategies driven by a commitment towards decarbonisation.
There is a clear shift toward renewables that is now unstoppable. Do you think Australia is keeping pace with other countries?
It’s a pivotal time for O&G companies, even before the impacts of COVID-19 are factored into the equation. What the pandemic has done however, is bring about an accelerated demand disruption that no one could have foreseen. It was a jolt to the energy system, and a strong indication that “business as usual” may no longer exist.
As such, the spotlight rests on Australia as the world’s home of abundant renewable energy resources. There have long been calls for a federal policy or government steer when it comes to energy in Australia, however now it’s the technology innovators operating within the industry that are shaping our future. For an industry that has historically been slow to evolve, these changes are now happening at pace, enabling Australia to deliver on the expectations that come with being the global home of renewable energy.
Do you think Australia is facing carbon reduction targets and the methods to achieve carbon zero, the same way as, say, Europe?
Pressure on countries to increase climate targets and make carbon-reduction commitments for 2030 are constantly rising, and governments have been approaching targets with a great deal of caution. Countries like the UK have been more ambitious with their targets, however, there are contradictions to be brought into line. Advancing from this position will require whole-of-government approaches, leaving a significant degree of fluidity around the specific areas of focus at this moment in time.
Australia, while lagging on clear policy direction has mobilised the private sector creativity into several recent actions. Investments in natural gas have been huge over the past decade so this has been a natural pivot for Australia to work from, however it does not negate the parallel focus on direct investment in renewable clean energy.
Do you think oil and gas will still have a role in the future? What will that role be?
Despite oil prices averaging above $70 per barrel over the last 10 years, globally, free cash flow from core operations has been insufficient to maintain shareholder returns above the cost of capital. The leverage ratio of total debt to total liquidity has more than doubled since the depths of the 2008 financial crisis, and the industry’s share of the S&P 500 has been cut by more than half over the last 10 years.
These warning signs appear damning, but O&G companies around the world still have a fundamental role to play in our energy future – particularly when it comes to enabling nearly a billion people to access secure, affordable and sustainable energy. From an Australian perspective, the role of gas will remain key, as the IEA NEZ [International Energy Agency Net Zero Emissions Scenario (by 2050)] assumes supply growth over the remaining decade. The key difference is that O&G will no longer be the undisputed energy leader, as other sources take the lead in reshaping energy profiles of the future.
How do you think the oil and gas sector can change public negativity toward the industry? Do you think the accusations of pollution or destroying nature are fair?
Once O&G companies determine what role they can play in the future energy ecosystem, they will have the opportunity to reposition themselves. Affirming their relevance will require new behaviours and mindset shifts across capital allocation, operations, customer offerings, industry collaboration and ways of working. These shifts will better align the industry with modern public opinion.
We’re living in a time of increasing social consciousness, which alongside rapidly accelerated tech advancement, offers all industries the opportunity to operate better. The O&G sector has clearly had moments of scrutiny from which to apply important lessons. These will factor into the path each company operating within the sector chooses moving forward.
Is there anything else you would like to add?
While we are seeing a ‘once in a few generations’ industry disruption for O&G companies, we should remain positive and keep in mind that the ‘O&G industry’, now ‘Energy industry,’ has navigated challenging times before. The collective thought leadership and innovation that is being seen in Australia’s O&G industry is bound to make breakthroughs over the medium and even short term to create a sustainable and prosperous global world. l