Oil and gas industry Oil is one of the most important commodities in the world. When transformed into petroleum, it is a key energy source used in vehicles, planes, heating, asphalt, and electricity. Outside of being a crucial energy source, petroleum is used in plastics, paints, chemicals, tape, and so much more. It’s hard to imagine a world without oil.
Oil and natural gas are major industries in the energy market and play an influential role in the global economy as the world’s primary fuel source. The processes and systems involved in producing and distributing oil and gas are highly complex, capital-intensive, and require state-of-the-art technology. Historically, natural gas has been linked to oil, mainly because of the production process or upstream side of the business. For much of the history of the industry, natural gas was viewed as a nuisance and even today is flared in large quantities in some parts of the world, including the United States. Natural gas has taken on a more prominent role in the world’s energy supply as a consequence of shale gas development in the United States, as mentioned above, and it’s lower greenhouse gas emissions when combusted when compared to oil and coal.
Oil and natural gas are formed from decaying plant and animal remains that became buried within layers of the earth and subjected to heat and pressure over millions of years. These two types of fossil fuels have been the world’s primary sources of energy for decades. They have enabled advances in the quality of life and all sectors of the economy, from residential lighting, cooking, and heating to transportation and industrial manufacturing. However, the low carbon transition has put the oil and gas industry under pressure as these fuels are two of the main sources of greenhouse gases. The industry is associated with environmental disasters such as oil spills, and the prices of the two fuels – especially oil – are highly volatile with fluctuations directly impacted by political and socio-economic events. Nevertheless, more than 100 countries currently produce oil and/or natural gas, and the two fuels are expected to maintain their importance across the energy sector for many decades to come.
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There are many ways to look at the oil and gas industry.
From a personal perspective, oil and gas provide the world’s 7.7 billion people with 57 percent of their daily energy needs.
As fuels, they keep us warm in cold weather and cool in hot weather; they cook our food and heat our water; they generate our electricity and power our appliances, and they take us by car, bus, train, ship, or plane to places near and distant. We all feel the economic pinch when the prices of gasoline, home heating fuel, or electricity increase sharply, even though in many developed countries, they still cost less than some brands of bottled water.
From a business perspective, oil and gas represent global commerce on a massive scale. World energy markets are continually expanding, and companies spend billions of dollars annually to maintain and increase their oil and gas production. Over 200 countries have invited companies to negotiate for the right to explore their lands or territorial waters, hoping that they will find and produce oil and gas, create local jobs, and provide billions of dollars in national revenues.
From a geopolitical perspective, large quantities of oil and gas flow daily from “exporting” regions such as the Middle East, Africa and Latin America to “importing” regions such as North America, Europe, and the Far East. This creates political, trade, economic, and even national security concerns on both sides. Oil and gas exporters want to maximize their revenues and improve their trade balances while maintaining control and sovereignty over their natural resources. At the same time, importing nations want to minimize trade deficits and ensure a steady, reliable oil supply.
We will look at the business of oil and gas with a specific emphasis on the United States. It covers a brief history of the oil and gas industry, an overview of companies and organizations, statistics and pricing resources, and regulations. The industry is often divided into three segments:
Upstream, the business of oil and gas exploration and production;
Midstream, transportation and storage; and
Downstream, which includes refining and marketing.
History of oil and gas: First discoveries
Oil and gas had already been used d for waterproofing, construction, and lighting purposes, for thousands of years before the modern era, with the earliest known oil wells being drilled in China in 347 AD.
The modern history of the oil and gas industry started in 1847, with a discovery made by Scottish chemist James Young. He observed natural petroleum seepage in the Riddings coal mine, and from this seepage distilled both a light thin oil suitable for lamps and a thicker oil suitable for lubrication.
Following these successful distillations, Young experimented further with coal and was able to distill several liquids including an early form of petroleum. He patented these oils and paraffin wax, also distilled from coal, in 1850, and later that year formed a partnership with geologist Edward William Binney.
The partners formed the first truly commercial oil refinery and oil works in the world, manufacturing oil and paraffin wax from locally mined coal.
Young wasn’t the only scientist making discoveries about coal in the 19th century. In 1846, Canadian geologist Abraham Pineo Gesner refined a liquid from coal, oil shale, and bitumen that was cheaper and burned more cleanly than other oils. He dubbed this liquid ‘kerosene’ and founded the Kerosene Gaslight Company in 1850, using the oil to light the streets of Halifax and later the US.
The first modern wells
From these initial discoveries, new businesses were created, with the coal industry now also seeking to create the oils developed by Young and Gesner.
Polish engineer Ignacy Łukasiewicz improved Gesner’s method to more easily distill kerosene and petroleum in 1852, opening the first ‘rock oil’ mine in Bóbrka, Poland in 1854. The first oil well drilled was in the town of La Brea, Trinidad in 1857. It was drilled to a depth of 280ft by the American Merrimac Company.
The first modern oil well in America was drilled by Edwin Drake in Titusville, Pennsylvania in 1859. The discovery of petroleum in Titusville led to Pennsylvania’s oil rush’, making oil one of the most valuable commodities in America.
The late 18th century and the early 19th century marked the creation of major oil companies that still dominate the oil and gas industry today.
John D. Rockefeller founded the Standard Oil Company in 1865, becoming the world’s first oil baron. Standard Oil quickly became the most profitable in Ohio, controlling about 90% of America’s refining capacity and a number of its gathering systems and pipelines. ExxonMobil, one of Standard’s successors after it dissolved in 1911, is the world’s ninth-largest company by revenue today.
In Russia, the Rothschild family commissioned oil tankers from British trader Marcus Samuel to expand their oil operations and reach more overseas customers. Samuel’s first vessel, the Murex – named after a sea snail – became the first oil tanker to pass through the Suez Canal connecting the Mediterranean Sea to the Red Sea.
The Murex became the flagship vessel of Shell Transport and Trading, which eventually merged with Royal Dutch Petroleum to become Royal Dutch Shell. Today, Royal Dutch Shell is the fifth-largest company in the world and one of six oil and gas supermajors.
The discovery of oil in Masjed Soleyman, Iran by William Knox D’Arcy led to the incorporation of the Anglo-Persian Oil Company (APOC) in 1907. The British Government purchased 51% of the company to provide the Navy with oil during World War I in 1914. In 1954, APOC became British Petroleum, known today as BP, which is currently the sixth-largest oil and gas company in the world.
As oil-exporting countries became more protective of their resources and interested in benefiting from the wealth of the oil industry, the major companies had to negotiate deals to continue to extract oil. A fifty-fifty profit-sharing arrangement was put in place after World War II, but soon oil-exporting countries began nationalizing companies to have more control over revenue. Oil supply and prices were in a tenuous balance for both the oil exporting and oil importing counties, often upset by politics and wars which resulted in several oil crises and panics in the latter half of the 20th century.
The Modern Era
In the late 20th century, changes in the oil market moved influence from generally oil-consuming areas such as the US and Europe to oil-producing countries.
Iran, Iraq, Kuwait, Venezuela, and Saudi Arabia formed the Organization of the Petroleum Exporting Countries (OPEC) in 1960 in response to multinationals in the ‘Seven Sisters’ including ExxonMobil – at the time split into Esso and Mobil – Shell and BP, which operated from oil-consuming countries.
Today, OPEC has 15 member countries, accounting for approximately 44% of global oil production and 81.5% of the world’s oil reserves.
The 1980s saw a significant glut in oil following the 1970 energy crisis. Petroleum production peaked in the 1970s, which caused a sharp rise in oil price and a subsequent decrease in demand.
Oil-producing countries suffered during this glut, with OPEC struggling to maintain high oil prices through decreasing oil production. The dissolution of the Soviet Union can also be attributed in part to a loss of influence as an oil producer.
The glut lasted six years, with oil prices gradually recovering in 1986, but a similar surplus in oil started in 2014 and continues to have effects on global oil prices.
The oil and gas industry is still thriving today despite competition from renewable sources of energy, albeit in a more volatile state than ever due to world events.
Oil and Gas Supply Chain
The oil and gas global supply chain includes activities such as domestic and international transportation, ordering and inventory visibility and control, materials handling, import/export facilitation, and information technology.
The Oil and Gas Supply Chain can be analyzed through three different industry sectors:
Upstream: Production and Exploration
“The Upstream sector is the part of the oil and natural gas industry that is responsible for finding crude oil and natural gas deposits, along with producing them. It is also known as the exploration and production or E&P sector. This part of the petroleum industry includes all activities that happen out in the field including drilling wells, trucking supplies, and mining oil sands, as well as activities that involve different environmental studies and research analysis.
The upstream segment of the oil and gas industry contains exploration activities, which include creating geological surveys and obtaining land rights, and production activities, which include onshore and offshore drilling.
Crude oil is categorized using two qualities: Density and sulfur content.
Density is measured by API gravity and ranges from light (high API gravity/low density) to heavy (low API gravity/high density).
Sulfur content ranges from sweet (low sulfur content) to sour (high sulfur content).
Light and sweet crude oil is usually priced higher, and therefore more sought-after because it is easier to refine to make gasoline than heavy and sour crude oil. Oil volume is measured in barrels (bbl), which equals 42 gallons.
Natural gas is found in both associated formations, meaning it is formed and produced with the oil, and non-associated reservoirs. Gas can either be dry (pure methane) or wet (exists with other hydrocarbons like butane). Although wet gas must be treated to remove the other hydrocarbons and other condensates before they can be transported, it can increase producers’ revenues because they can sell those removed products.
The advent of shale gas in the United States is one of the biggest breakthroughs in the history of the energy industry. Before its development, the United States was viewed as a growing natural gas importer. But, production from shale gas has catapulted the United States into being the world’s largest producer of natural gas and a fast-growing exporter. The two primary technological advances that made production from shale and other tight formations economically possible were horizontal drilling and hydraulic fracturing.
Oil and gas exploration encompasses the processes and methods involved in locating potential sites for oil and gas drilling and extraction. Early oil and gas explorers relied upon surface signs like natural oil seeps, but developments in science and technology have made oil and gas exploration more efficient. Geological surveys are conducted using various means from testing subsoil for onshore exploration to using seismic imaging for offshore exploration. Energy companies compete for access to mineral rights granted by governments by either entering a concession agreement, meaning any discovered oil and gas are the property of the producers, or a production-sharing agreement, where the government retains ownership and participation rights. Exploration is high risk and expensive, involving primarily corporate funds. The cost of unsuccessful exploration, such as one that consisted of seismic studies and drilling a dry well, can cost $5 million to $20 million per exploration site, and in some cases, much more. However, when an exploration site is successful and oil and gas extraction is productive, exploration costs are recovered and are significantly less in comparison to other production costs.
Proven reserves measure the extent to which a company thinks it can produce economically recoverable oil and gas in place, at a certain point in time, using existing technology. The estimates for proven reserves are updated over the life of a lease, based on regular reassessments. Technology can impact the estimates: For example, the advances in hydraulic fracturing and horizontal drilling caused the U.S. Geological Survey to increase its proven reserves estimate for the Marcellus Shale by 40 times the original value. In addition to technology, prices, and existing infrastructure influence reserves estimates.
Oil and gas production is one of the most capital-intensive industries: It requires expensive equipment and highly skilled labor. Once a company identifies where oil or gas is located, plans begin for drilling. Many oil and gas companies contract with specialized drilling firms and pay for the labor crew and rig day rates. Drilling depths, rock hardness, weather conditions, and the distance of the site can all affect the drilling duration. Tracking data using smart technologies can help with drilling efficiency and well performance by providing real-time information and trends. While every drilling rig has the same essential components, the drilling methods vary depending on the type of oil or gas and the geology of the location.
In onshore drilling facilities, the wells are grouped in a field, ranging from a half-acre per well for heavy crude oil to 80 acres per well for natural gas. The group of wells is connected by carbon steel tubes which send the oil and gas to a production and processing facility where the oil and gas are treated through a chemical and heating process. Onshore production companies can turn on and off rigs more easily than offshore rigs to respond to market conditions.
Offshore drilling uses a single platform that is either fixed (bottom supported) or mobile (floating secured with anchors). Offshore drilling is more expensive than onshore drilling, and fixed rigs are more expensive than mobile rigs. Most production facilities are located on coastal shores near offshore rigs.
Fracking, or hydraulic fracturing, is a technique using a high-pressure liquid to extract oil or gas from geologic formations. While the technology has existed since the 1940s, it became more economical in the late 1990s when George Mitchell’s Mitchell Energy & Development Corporation patented slickwater fracturing. The use of fracking has led to recovering gas, followed by oil, from previously inaccessible parts of drilled wells in addition to extractions from coalbed wells, tight sand formations, and shale formations. Fracking is now used in 90% of new U.S. oil wells, especially as the number of conventional reservoirs has decreased.
The Midstream segment in the oil and gas supply chain includes operations that connect the upstream and downstream participants and companies.
The midstream sector covers the transportation, storage, and trading of crude oil, natural gas, and refined products. In its unrefined state, crude oil is transported by two primary modes: tankers, which travel interregional water routes, and pipelines, which most of the oil moves through for at least part of the route. Once the oil has been extracted and separated from natural gas, pipelines transport the products to another carrier or directly to a refinery. Petroleum products then travel from the refinery to market by tanker, truck, railroad car, or more pipelines. Tankers deliver petroleum by transporting oil and refined products from other countries to the U.S. to make up the difference between domestic products and demand. Tankers also transport oil along the Gulf coast. The Merchant Marine Act of 1920, also known as the Jones Act, heavily impacts the transportation industry, as it requires vessels that transport cargo from one U.S. port to another U.S. port must be built in the United States, and majority-owned and operated by the United States citizens or permanent residents.
The midstream segment is known for its low capital risk, and it can be highly regulated, especially when it comes to pipeline components. Another important thing to know is that midstream asset investments are dependent on the health of the upstream, and oil and gas prices affect the demand from the downstream participants.
The high regulation mostly refers to interstate pipeline transmission and cross-border transportation. In the United States, this is regulated by the Federal Energy Regulatory Commission.
Downstream: Refining and Marketing
The downstream sector is the last one in the oil and gas supply chain and encapsulates the operations that take place after the production phase right to the point of sale to the end consumers. Here are included the processes of refining crude oil and distributing its byproducts (gasoline, NGLs, diesel, jet fuel, heating oil, etc.) up to the retail level and selling to end consumers.
While refining is a complex process, the goal is straightforward: to take crude oil, which is virtually unusable in its natural state, and transform it into petroleum products used for a variety of purposes such as heating homes, fueling vehicles, and making petrochemical plastics.
Several processes are involved in refining depending on the wanted end product. Hydrotreating is used to remove unwanted elements, such as sulfur and nitrogen from hydrocarbons; cracking breaks molecules into smaller fragments to produce gasoline and other lighter hydrocarbons. The gasses produced by cracking are used to create other products like synthetic rubber and plastics. When making gasoline, refiners need high octane numbers to prevent engine knocking. Despite knowing the dangers of lead, tetraethyl lead was added to gasoline in the United States in the 1920s to increase the octane. Since the U.S. government banned lead in vehicle gasoline in 1996 as part of the U.S. Clean Air Act, refineries use alkylation and reforming to develop high-octane gasoline.
Refineries are usually located near population centers to facilitate the marketing and distribution of final products.
Marketing is the wholesale and retail distribution of refined petroleum products to business, industry, government, and public consumers. Generally, crude oil and petroleum products flow to the markets that provide the highest value to the supplier, which usually means the nearest market first because of lower transportation costs and higher net revenue for the supplier. In practice, however, the trade flow may not follow this pattern due to other factors, such as refining configurations, product demand mix, and product quality specifications.
Gasoline service stations handle the bulk of public consumer sales and oil companies sell their petroleum products directly to factories, power plants, and transportation-related industries. Natural gas sales are almost evenly divided between industrial consumers, electrical providers, and residential and commercial heating.
Because gasoline is a commodity that is more or less the same, competition for customers required creative marketing tactics. Retail gasoline stations offered free services like maps, car washing, and dinnerware. Oil company brands offered credit cards starting in the 1950s to ensure customer loyalty. Radio, billboard, and television ads promoted catchy slogans, additives, and adjectives like “premium” and “high performance” to attract drivers. Advertorials, or sponsored op-eds, were used by Mobil in the New York Times to publish pro-oil industry commentary. Today, social media gives companies a platform to promote various energy initiatives and mitigate negative news.
Oil and Gas Business Boom
An oil boom is a period of large inflow of income as a result of high global oil prices or large oil production in an economy. Generally, this short period initially brings economic benefits, in terms of increased GDP growth, but might later lead to a resource curse.
Price volatility has been a hallmark of the oil industry essentially since the first oil well was successfully drilled in the United States.
George Bissell and Edwin L. Drake made the first successful use of a drilling rig on a well drilled specifically to produce oil on August 27, 1859, near Titusville, Pennsylvania. This led to an “oil rush,” with a great wave of investment in drilling and refining oil from the western Appalachian mountains.
Some important oil booms around the world include:
Mexican oil boom (Mexico, 1977–1981)
Pennsylvanian oil rush (the United States, 1859)
Texas oil boom (the United States, the early 1900s–1940s)
Calgary oil boom (Canada, 1947)
North Dakota oil boom (the United States, 2008–2015)
Oil prices have risen to US$90 per barrel for the first time since 2014, more than four times where they were when prices bottomed out at the start of the COVID-19 pandemic.
On April 20, 2020, during the depths of the COVID-19 pandemic, the price for a barrel of West Texas Intermediate crude oil fell by 306% in a single trading day to close at a negative $37.63. On Monday, October 18, 2021, WTI opened above $83 per barrel, a rise of more than $120. The whole energy world changed in 18 months, and it will no doubt continue to change.
Most major economies have bounced back from pandemic-induced contractions and recessions. The resurgent economic growth is driving global demand for oil, which is, in turn, driving rising prices.
The domestic oil and gas boom of 2021 continues, which is driven by strong crude oil prices that most analysts think will get stronger, recovering global demand, and fiscal discipline being practiced by the big shale producers. This combination of factors holds the promise of a big, record-setting year for the U.S. oil and gas sector.
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High prices mean more profit, which, they claim, will lead to more investment.
As the old saying goes, everyone has a price. As prices for oil and natural gas continue their inexorable rise with almost every passing day, the question now becomes whether even those corporate producers in the U.S. will arrive at a price point at which they will summon the courage to inform their ESG investors that the time to drill in earnest has come. The world is demanding more oil and more natural gas, and the U.S. industry can play a big role in providing it.
Given the current discipline of the OPEC+ group continues to hold together for the coming two-year time frame, the domestic oil and gas business is likely headed for another boom time. It will probably be more modest than the last boom, given the more disciplined outlook of the corporate players, but a boom it will most likely be.
Top 10 highest-earning oil and gas companies
The world’s dependence on oil and gas is increasing as global economies and infrastructure continue to rely heavily on petroleum-based products. Discussions of when world oil and gas production will peak seem to be on the periphery, even amid a weakened global economy and the shrinking availability of oil. Indeed, the oil and gas industry continues to wield incredible influence in international economics and politics – especially in consideration of employment levels in the sector, with the U.S. oil and gas industry supporting at least 10 million jobs.
There are over 200 oil and gas companies in the world. In recent years the traditional supermajors have seen stiff competition from the growing number of National Oil Companies – state-owned entities that are increasingly seizing sole rights to major oil reserves. Who are the key players in the oil sector industry and what companies can have the biggest effect on international markets?
In this list, we count down the biggest oil and gas companies in the world ranked by annual revenue.
1. Sinopec, also known as China Petroleum and Chemical Corp
Established in 1998 from the former China Petrochemical Corporation, the super-large petroleum, and petrochemical enterprise group is primarily focused on exploration and production, refining, marketing, and distribution.
The largest company on this list with annual revenue of $377 billion, Sinopec, is a state-owned Chinese oil company based in Beijing. The company significantly expanded its assets by exploring and drilling in African territories, providing China with a major foothold in the continent. Chinese oil and gas organizations now operate in more than 20 African countries, with Sinopec regularly beating off major western oil and gas competitors to secure lucrative offshore deepwater prospecting blocks.
In line with China’s upcoming Five Year Plan, the company has moved toward developing hydrogen production. It has installed hydrogen refueling stations in at least four provinces and started developing infrastructure and technology for all colors of hydrogen.
2. Saudi Aramco
Saudi Aramco is Saudi Arabia’s national oil company. Operating in both upstream and downstream segments, the company has extensive operations in production, exploration, petrochemicals, refining, marketing, and international shipping.
Not only is Saudi Aramco the most profitable oil company in the world, but it is also the most profitable company in the world by a large margin. In 2018, the company generated $111.1 billion in net income – far exceeding the second most profitable company in 2018. In April 2020, Saudi Aramco achieved its highest-ever single-day crude oil production rate, at 12.1 million barrels per day. In August, it pumped a record 10.7 billion cubic feet of gas in a single day. At the same time, worldwide lockdowns forced Saudi Aramco to pump 6% fewer hydrocarbons than in 2019.
Aramco’s history goes back to 1933 when an oil concession agreement was signed between Saudi Arabia and the Standard Oil Company. Over the years the Saudi government gained increasing shareholding stakes until 1988 when it took full control of the company and rebranded from Aramco (Arabian American Oil Company) to Saudi Aramco (Saudi Arabian Oil Company). From its first export of crude oil in 1939, Saudi Aramco says it now produces one out of every eight barrels of oil in the world, or about 12% of global production.
Despite its obvious successes, investors remain concerned about Saudi Aramco’s innate ties to the KSA economy. Unlike other companies, its revenue streams are virtually tied to a single country, as the KSA can substantially influence Saudi Aramco through taxation, setting production levels and dividends, as well as indirect geopolitical developments.
3. China National Petroleum Corp
Established in 1988 and the predecessor of the Ministry of Petroleum Industry of the People’s Republic of China, the China National Petroleum Corporation is a state-owned oil and gas company with governmental administrative functions.
With the liberalization of trade in China and the resulting economic boom, CNPC first started to export oil and engage in the development of overseas oil fields in 1993. It has come a very long way since then, with much of its operations organized under its subsidiary, PetroChina, and it is now the world’s 4th largest publically listed company and currently accounts for around two-thirds of China’s oil and gas output.
The company’s revenue fell by 23.2% in 2020, with PetroChina’s annual report stating that its financial position “remained stable”. Still, the company increased its full-year dividend by more than 20%. In 2021, PetroChina has achieved new record levels of gross profit, lifted by economic recovery and rising oil prices.
The company discovered hydrocarbon reserves in the Sichuan, Ordos, and Tarim basins, which it will now develop. Abroad, the company made discoveries in Chad and Kazakhstan. PetroChina aims to start reducing its emissions from 2025, reaching “near-zero” emissions by 2050.
4. Royal Dutch Shell
The supermajor more commonly known as Shell was founded in 1907 following the merger of the Royal Dutch Petroleum Company and the “Shell” Transport and Trading Company Ltd of the United Kingdom.
Thanks to its distinctive logo and subsidiary Shell Oil Company’s many service stations, Shell is one of the most well-known oil and gas companies in the world. The Shell name and logo are tied to the “Shell” Transport and Trading Company – its founder’s father had created a business selling seashells to collectors.
An Anglo-Dutch company, Royal Dutch Shell’s revenue is equivalent to 84% of the Netherlands’s GDP at the time. In 2012 Shell took the top spot as the biggest company on the FTSE, with a 140.9 billion market capitalization. In 2017 the company took the number seven spot in Fortune 500’s Global 500 – their annual ranking of the world’s largest corporations.
In 2021, the company sold many of its Canadian assets to Crescent Point Energy for approximately $707m. It also entered an agreement with Cairn Energy and Cheiron Petroleum Corp for onshore extraction in Egypt.
Alongside this, Shell continued its push into renewable ventures, with wind investments in the Netherlands and the US.
The Anglo-Persian Oil Company was formed in 1909, itself an offshoot of the Burmah Oil Company. It later rebranded to the Anglo-Iranian Oil Company and then finally to BP. 11 years later the company became the first to strike oil in the North Sea. Thanks to its 20,000-plus service stations, BP is one of the most recognizable oil and gas companies.
Other notable mergers and acquisitions following its privatization in 1979 / 1987 include Amoco in 1998 and ARCO and Burmah Castrol in 2000, becoming one of the largest petroleum companies in the world
The company rebranded in 2001, dropping its green shield logo in favor of the “Helios” symbol – designed to represent the event in all its forms. The company also adopted the slogan “Beyond Petroleum” – highlighting its focus on all types of energy and stressing its commitment to a lower-carbon future.
In recent times, most revenue generated by the petroleum giant is through the downstream segment. This segment includes refinery processing, oil products, and chemicals.
The company’s upstream segment recorded a net loss of $21bn across the 2020/21 financial year. Despite this, it maintained a cost per barrel of oil equivalent of approximately $6.30. The revised value of BP’s non-operating assets led to the loss of $16bn of value, though this would change with the value of oil rising.
In June, BP sold its petrochemicals business to Ineos for $4bn. In early 2020, the company started operations in the Alligin field, UK, and the Ghazeer field in Oman. Engineers achieved the first gas output from Egypt’s Qattameya field in October 2020, while the ultra-deepwater R Cluster project in India produced its first gas in December 2020.
Meanwhile, the company continued its diversification efforts. It announced investment in US wind farms and a UK carbon capture project, as well as a green hydrogen project in Germany. Its Lightsource division developed several solar farms in the US, while its Chargemaster division installed electric vehicle charging stations throughout the UK.
Formed in 1999 after the merger of Exxon and Mobil, the US multinational oil and gas company is one of the largest refiners in the world. The world’s seventh-largest company by revenue, ExxonMobil holds an industry-leading inventory of resources and is one of the largest integrated refiners, marketers of petroleum products, and chemical manufacturers in the world.
A descendant of Standard Oil, established by John D. Rockefeller in 1870, ExxonMobil has evolved over the last 140 years from a regional marketer of kerosene in the U.S. to the largest publicly traded oil and gas company in the world.
Their public profile took a hit in 1989 with the Valdez oil spill when 10.8 million US gallons of crude oil were spilled over the next few days. It is considered to be one of the most devastating human-caused environmental disasters and the second-largest in US waters, after the 2010 Deepwater Horizon oil spill.
In 2020, ExxonMobil made its first quarterly loss since Exxon and Mobil merged in 1999. The company lost $22.4bn in the fourth quarter of 2020, compared to a $14.3bn profit one year before. Most of this came from the devaluation of its previously discovered reserves. Since then, the rising price of oil has boosted the company’s assets.
The company’s upstream division went from earning $14bn in 2019, to losing $20bn in 2020. Revenue fell by approximately $77bn, though most analysts expect this to reverse again across 2021.
The company made three major oil discoveries in Guyana while continuing to develop its leases in the country’s waters. In the US, a new processing and export facility opened, while construction on new chemical projects continued
7. TotalEnergies, formerly known as Total
Founded in1924, Total’s activities cover the entire oil and gas chain. The total has a very diverse portfolio across different resource themes with a strong presence in LNG, particularly due to exposure to Australian LNG. The total has produced oil and gas for almost a century and has also branched into renewable energies and electric power.
Recently, Xavier Pfeuty, LNG Manager of Total’s Marine Fuel Global Solutions group, the oil giant is committed to promoting LNG as a viable marine fuel. The total has been pursuing major LNG contracts – and in December 2017, won its first supply contract with CMA CGM for 300,000 tonnes of LNG per year for ten years.
Demonstrating attractive growth potential, Total grew its production by 8% in 2018. In the last year, Total became TotalEnergies to emphasize the company’s move to broader energy investments. As with BP, its small renewables division fared reasonably well, but the company’s oil losses made 2020 a tough year.
Income from sales fell by $60bn compared to the year before. Overall net income went from $11.4bn in 2019 to a loss of $7.3bn in 2020. In May 2020, TotalEnergies formally adopted a target of net-zero by 2050. As part of this, Total bought 50% of a 2GW solar portfolio from Adani Green Energy, acquiring 20% of the company itself in 2021. Via a subsidiary, Total will itself develop a 2GW solar portfolio in Spain. In the UK, France, and South Korea, the company partnered to launch trial floating wind schemes.
Total also announced intentions to move into the vehicle charger market. The company acquired a contract to install 20,000 chargers in Amsterdam and later acquired a charging network in London.
Chevron’s big moment in 2020 came with its acquisition of US shale oil and gas producer Noble Energy in October. Because of the heightened cost of production, the US shale sector felt the effects of a falling oil price more keenly than most. When Noble’s profit margins shrank and debts remained high, Chevron took the opportunity to acquire its reserves in a $4.2bn deal.
Meanwhile, Chevron had its finances to think of. Losses peaked in the second quarter of 2020 when the company saw a net loss of $8.3bn. Across the whole year, the company made a net loss of $5.5bn, though net production remained mainly the same.
When several major companies paused or decreased their payments to shareholders in 2020, Chevron increased its dividend by 8%. In 2021, the company’s profits recovered, though had still not returned to pre-pandemic levels.
The company has also increased its production of biofuels by converting existing refineries. The company has also joined the Hydrogen Council, later buying into a hydrogen joint venture and announcing plans to scale up its hydrogen production. A collaboration with Algonquin Renewable Energy also saw construction begin on 500MW of renewable generation by Chevron.
With a global share of gas reserves of 17%, Gazprom owns the world’s largest network of gas trunklines (171.2 thousand kilometers long), most of which are tied together in the Unified Gas Supply System (UGSS) of Russia. Although a private company, the majority shares of the company are owned by the Russian government. At present, Gazprom is responsible for around 14% of global gas output and 74% of Russian gas output.
Following major reforms initiated by President Vladimir Putin, the company saw a shift in management personnel and policy, and later sales by its major subsidiaries resulted in the Russian government gaining the controlling share in the company.
In recent times, Gazprom has been focusing on large-scale projects to exploit gas resources in the Yamal Peninsula, Arctic Shelf, Eastern Siberia, and the Far East, Developing Russia’s Arctic shelf resources and developing a gas line to China.
Throughout 2020, Gazprom continued construction of the politically controversial Nord Stream 2 pipeline. The pipeline, completed in September 2021, is intended to transport massive quantities of gas from Russia to Germany. This will allow Gazprom easier access to the central European market, which has caused concern for eastern European countries that rely on Gazprom pipelines for income.
In June, construction began on an ice-resistant platform for the Astrakhan field, while drilling began on the Kharavskoye field. Gazprom continues negotiations with OMV overselling a stake in the Urengoyskoye field. In August, Gazprom discussed the possibility of a gas pipeline between Russia and China, crossing Mongolia.
Marathon almost halved its capital spending to deal with the pandemic, with further cuts in 2021. The company still had a tough year, broken up by a massive sale in August 2020.
Marathon’s sale of Speedway, its chain of vehicle filling stations, included a 15-year supply deal with buyer 7-Eleven. Marathon CEO Michael Hennigan said that the $21bn cash transaction allowed the company to “deliver on [its] commitment to unlocking the value of assets”.
Including income from Speedway, Marathon’s adjusted raw earnings fell to $4.4bn in 2020, down from $11.1bn the year before. Most of this fall came from the company’s refining and marketing segment, where raw earnings went from $2.8bn to a loss of $5.1bn across the year.
In April 2020, Marathon set a goal of reducing emissions per barrel of oil by 30% by 2030. Since then, it has also started converting more refineries to make “renewable diesel” from plant products and use more energy-efficient equipment.
Risk vs Return in Oil and Gas Investments
A key aspect of today’s oil and gas planning and decision-making is accounting for the varying amounts of risk inherent in the wide range of asset investment options available to companies.
The higher the risk, the higher the potential return on successful projects. However, with this elevated risk comes a higher possibility of large financial loss.
Managing Risk in Oil and Gas Projects
There are three types of risk in all oil and gas industry projects: economic risk, political risk, and environmental risk.
These risks apply to all large, long lead-time industry capital projects, such as:
Onshore drilling rigs
Offshore drilling drillships or semi-submersibles
Engineered equipment manufacturing facilities
Oil and gas production platforms
Additionally, Exploration & Production (E&P) development projects have another large item, geological risk.
Economic risk on international projects includes:
Oil prices collapse
Capital cost overruns
High operating costs
Loss of demand from the facility
Some overlap occurs with political risk in assessing the factors that also can affect the economics of a project:
Stability in the tax system (regime)
Ability to repatriate earnings
Currency exchange rate stability
Political risk is a detailed evaluation of all the risks of doing business inside a particular country.
A change in country management or political philosophy can often result in a new evaluation of a host country’s oil, gas, and commodity reserves. Some examples of possible changes are as follows:
Renegotiation of economic terms
Change in royalty payment and tax rate structure
Revisions to production shares
Ability to repatriate interest, profit, and dividends
History has shown that there is a direct correlation between the value of the commodity or resource and the host country’s relationship with the oil and gas companies.
As the resource value increases, the host countries take a stronger position in controlling their commodity assets.
The best deals for the international oil and gas companies seem to be made when the price of a resource is low; however, the agreements are often re-negotiated when resource prices increase.
The ultimate political risk is the possibility of expropriation of assets, where the host government takes over the investment, with or without compensation.
There have been multiple examples of major oil asset expropriation in the past. Venezuela has a long history of expropriating oil assets under former President Hugo Chavez (but continuing in the new regime).
More recently, Russia and Ecuador have also used this technique to gain control of energy resources.
Environmental and Safety Risk
The other major factor is environmental risk. Environmental impact statements are a pivotal part of new projects, including detailed attention to the project’s carbon footprint.
In addition to what is normally considered an environmental risk, such as pollution or inattention to the ecological surroundings, other items, such as personnel safety, damage to equipment, fire, flood, and disaster, are also important.
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All environmental risks that can affect project economics need to be considered and quantified.
Another substantial environmental impact item in the upstream today is what the host governments are calling a “zero-flare tolerance.”
The operator cannot produce the oil unless an outlet is found for the associated gas which is often flared, or burnt off, at the well.
The environmental policy of zero-flare has become a significant capital and expense item in developing new production prospects.
However, this policy is also driving research on uses for this wasted resource. Currently, diesel generators often provide the electric power needed to run pumps and other equipment at the well site.
Using the available natural gas to power this equipment could save significant amounts of money while reducing emissions.
Many companies now have applied environmental risk assessment technology and resultant economic measurements to every international business decision.
In evaluating geological risk, it is important to remember that there is a very high degree of uncertainty in E&P, that is, the lack of true visibility of the oil or gas reservoir.
What can only be estimated by maps and seismic data is actually of great importance to the success of the future project.
Even with all of today’s seismic and evaluation technologies and very sophisticated computer modeling, the prospect could still contain:
Poor source rock
No reservoir rock
No cap rock
Faulted or poorly consolidated reservoir
All these factors affect the well’s ultimate productivity economics. However, none of these factors are well known until the money is spent to drill exploratory and development wells, each of which can cost in the tens of millions of dollars.
The risk-return profiles for an oil and gas company vary greatly by the type of assets in their existing and planned portfolio. These are some general assumptions:
An asset with a regional business driver and regulated rates, such as a pipeline, has a low-risk profile and gathers a lower, but stable, return.
Assets impacted by global events like refineries, GTL plants, and liquefied natural gas (LNG) facilities, which are affected by supply-demand and commodity price fluctuations, have a higher risk profile.
E&P projects are considered one of the highest risk options in the industry and can provide high returns, if successful.
Commodity trading is unusual. Because it depends on knowledge assets, it is considered very high risk. It is difficult to forecast or depend on the ability of individuals and groups to correctly forecast and act on future market direction.
Risk Management and Decision Making
Today, corporate planners use asset portfolio optimization principles and sophisticated mathematical models to assess various risk-return relationships. Corporate metrics and quantitative tools are common and available.
Data indicate that planners and decision-makers who evaluate risk with a probability profile rather than a single-point estimate make better investment decisions.
Oil and Gas Pricing
As the world became more dependent on oil, oil prices became a matter of political and global economic importance. Major oil companies set crude oil prices until control shifted in the 1960s to oil-exporting countries. Price forecasting became important in the early 1960s after a series of oil price hikes turned into oil crises. In 1983, crude oil futures joined the New York Mercantile Exchange (NYMEX) and was traded like other commodities. Natural gas futures became available on NYMEX in 1990. NYMEX is currently owned and operated by the Chicago Mercantile Exchange (CME). For the first time in oil price history, in April 2020 the price of oil dropped below zero to -$37 per barrel. At that time, oil demand dropped due to the coronavirus pandemic, and supply increased due to the inability of countries such as Saudi Arabia, Russia, and OPEC countries to agree on oil production reduction, which drove up demand for oil storage.
Price benchmarks are used in the oil and gas industry to give buyers a way to value the commodity based on quality and location. The main benchmarks used in this industry are:
Brent Blend is the most common, internationally used oil benchmark. It is based in London, traded on the InterContinental Exchange (ICE), and consists of light, sweet crude oil from offshore drilling in the North Sea.
West Texas Intermediate (WTI) is used for light and sweet oil in the United States, specifically, crude oil that comes from land-locked wells in Oklahoma.
Dubai/Oman is used for heavier oil with a higher sulfur content from the Persian Gulf to the Asian market.
Henry Hub is the benchmark for North American natural gas and global liquefied natural gas (LNG), based on the Henry Hub natural gas pipeline in Louisiana. Markets with no natural gas pipelines use crude oil as a price proxy, but that is changing.
The oil that trades on the U.S. futures market is priced at an oil contract delivered to Cushing, Oklahoma, a critical storage hub where many oil pipelines converge.l
Countries and international organizations like the United Nations influence the price of oil and natural gas both domestically and abroad through the use of tariffs, embargoes, and subsidies.
Tariffs are additional taxes on imported goods. Embargoes or sanctions ban trade with a commodity or whole country. Subsidies are money from the government to the industry to keep prices on commodities low.
Some major controversies of this industry include:
Cyberattacks on infrastructure
Drilling and pipelines on Indigenous nations’ lands
Drilling and pipelines near national parks
Environmental impacts, such as water, natural habitats, and air quality
Financial power of integrated oil companies
Impact on climate change
Consolidated power of oil companies
Oil spills and leaks
Overuse and over-reliance on fossil fuels
Local, state, and national government agencies, along with non-governmental organizations, have responded to these issues through various initiatives and campaigns, which sometimes include oil and gas companies themselves as partners. Some groups and individuals have led public protests surrounding specific events, such as the Dakota Access Pipeline protest to protect the waters and ground near Standing Rock and Fort Berthold Indian Reservations. Sample resources and select organizations reporting on these topics are included in this guide as examples and/or overviews. Information on oil spills and gas leaks is on a separate page within this guide.
Rising oil prices
Oil prices are currently at nearly $100 a barrel. What has caused this price rise and why are oil prices so volatile? Change and volatility seem to be the only constant in the oil market. However, it is probably safe to say that there are three key underlying reasons:
1. Booming economic growth driving demand for oil
Two years ago when COVID-19 started, there was a plunge in economic activity and oil demand. Producers were adjusting production levels, but there is only so much one can do without destroying reservoirs of capital. Storage capacity is also limited. Moreover, there was uncertainty about how severe the economic crisis would be and how long it would last. These compounded factors pushed oil prices to very low levels not seen in decades. There was even a short period when oil prices went down to minus $40.
This difficult period lasted several months. It was followed by a surprising economic rebound, driving demand for oil and oil products. It’s estimated that oil demand at this point is back, or has already surpassed, pre-pandemic levels. In other words, it has never been higher.
2. Limited oil supply due to long investment cycles and cautious capital allocations
Supply has not been able to fully respond to increased demand. OPEC has been scaling up oil production slowly, but it also has limited spare capacity and is probably cautious not to oversupply the market again. Beyond spare capacity, oil production has very long investment cycles. It can take up to a decade to reach the first production from the moment the resources are confirmed. Some unconventional sources can deliver production much faster, but these are limited in scale.
Moreover, all producers are cautious in allocating capital. First, they learned their lessons from an oversupplied market when oil prices dropped to minus $40. Second, perhaps more importantly, there is strong pressure on the industry not to develop new fields, to hold or decrease investment in maintaining and growing production, and to divert the capital to green investments.
3. Geopolitical tensions
Geopolitical tensions between Russia and Ukraine and increased instability in the Middle East add to oil market nervousness.
Cost of inflation
How do oil price increases affect inflation and what does that mean for the global economy?
Oil is 3% of global GDP. So, if 3% of global GDP is twice as expensive tomorrow this will have some impact on inflation. But I don’t think it’s a major driver when it comes to inflation. I think that inflation is driven by loose monetary policies.
In that context, oil prices will not be the biggest factor when it comes to inflation but it is still important. Why? Because oil is basically in everything, so it’s not a volumetric impact, but it impacts the price of almost everything. An increase in oil price will not only be seen at the gas station but it will be felt in virtually all the goods and services we use. Because oil is a feedstock, a source of energy, and is used in the transportation of many things.
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The true cost for consumers
People tend to think in inflation terms about the price of, say, the cost of filling up their car but what might people not understand about oil prices? i.e. what are the costs beyond the petrol pump?
When it comes to oil as a source of energy, depending on where you are, 50-60% of what consumers pay at the pump is tax. We tend to focus on the fluctuation in the crude oil price, which is important, but the really big thing that people don’t know is that for every €1.50 spent on a liter of gasoline, they pay 70-80 cents to the government. Importing countries like the EU make more money from taxing oil than producing countries from exporting it!
The Future of Oil and Gas
The enormous economic contribution of the oil and gas industry to many national economies makes its future of critical importance to the global community. Do you think the current surge in oil prices is temporary or marks a more permanent shift? If so how would that affect the global economy?
Although oil and gas are likely to be major sources of energy for decades to come, policy-makers and the public worldwide are re-evaluating the central role they play in modern life. With rising concerns for future demand, climate change, the cost of project development, governance, and deteriorating community-level relationships, the industry finds itself in a delicate situation. Only by recognizing the true scope of these ongoing challenges and addressing their implications by offering leadership on solutions can the industry continue to prosper in an increasingly complex world.
I would expect that oil prices will fluctuate in long term. It is very difficult to predict the level of prices or even the direction of change.
In any case, I think the oil prices may stay at $100 or more, however not for long and certainly not forever. Because in the medium-term supply should catch up with demand growth while hopefully geopolitical tensions ease. In the long-term, I imagine the demand will plateau and maybe start decreasing at a certain point. And then, it’s difficult to see higher oil prices. The key uncertainty is when that will happen – experts differ strongly. Some say that such a peak is just a few years from now, others say more like a few decades.
But having said that, I think there is a risk of big spikes, temporary spikes, to even higher levels than we see now to perhaps $150-200. If the energy transition is not a concerted effort between the demand-side changes followed by supply-side adjustments, temporary oil price spikes are very likely. Forcing supply curtailment without adjusting demand will create structural imbalances that will be difficult to address due to the very long investment cycles to produce oil.
There is this pressure to stop investing in oil production as we transition but there is a need for an understanding that we also need this supply. So we need to find this balance with the energy transition between now and 2050. The point is not to undermine the transition, but the transition needs to be led on the demand side by consumers, individuals, and industries. It is a task for every one of us, not just for “Big Oil”. Otherwise, the risk is that it could be quite an erratic future.
Future Demand Trends
Since the Industrial Revolution, oil and natural gas have played an instrumental role in economic transformation and mobility in everyday life for the majority of the world’s population. Oil was so fundamental to the development of modern society in the industrialized world that the 20th century is often referred to as the Age of Oil. Today, oil and natural gas play a pivotal role in the current global energy system. Approximately 31% of primary energy used globally is met by oil-based fuels while natural gas represents a further 21% of the total world energy supply.
Since the 1980s, many oil-producing countries and oil companies operated from the assumption that the industrialized world would progressively use up its easy to access oil resources and become increasingly dependent on oil controlled by OPEC (the Organization of Petroleum Exporting Countries), and in particular the vast reserves of the Middle East. Under this long-prevailing world view, which lasted from the 1980s until recently, OPEC’s petrol power would increase over time and therefore all the oil cartel needed to do was wait it out for that day to come. Through the 2000s and up until last year, OPEC took a revenues-oriented strategy, believing that this oil-constrained world had arrived and its oil was more valuable under the ground than on the market. Oil companies, too, responded to this worldview by pursuing a business model that maximized adding as many reserves as possible to balance sheets and warehousing expensive assets.
The shale boom in the United States and the Paris climate accords, however, have changed the industry’s outlook for the future of oil and gas. With the prospect that major economies like the US, China, and Europe will actively try to shift away from oil at a time when the costs for producing oil from shale and other kinds of source rock as well as from conventional sources are declining through technological innovation, producers are coming to realize that oil under the ground might someday be less valuable than oil produced and sold in the coming years. In effect, perceptions have changed from believing a peak in supplies was possible to believe a peak in demand for oil is possible over the next several decades. Some investors have also become concerned that oil and gas company shares may be overvalued if warehoused high-cost oil and gas assets become stranded.
This dramatic shift in expectations is changing the operating environment for the future of oil and gas. Moreover, policymakers, investors, and scientists gathering in Paris last
The World Economic Forum’s Global Agenda Council on the Future of Oil & Gas considers strategies that can be deemed to be robust for the oil and gas industry in a future 2°C world towards 2040 as well as most alternative futures.
The council is not advocating or opining on the “realism” or likelihood of any given scenario but considers what would be a robust strategy either in a business-as-usual outcome or if a low-demand growth circumstance indeed emerges.
According to the central New Policies Scenario of the International Energy Agency (IEA), the need for oil and gas to fuel global economic well-being for an expanding middle class in the developing world will increase oil and gas demand significantly over the next three decades, despite significant improvements in energy efficiency. Given the natural decline that comes with operating the world’s current inventory of producing oil and gas fields, the industry believes it can sustain its current business models. In its New Policies
Scenario, the IEA projects that oil demand will rise by 14% from the 2014 demand of 90.6 million b/d to 103.5 million b/d by 2040. Overall, the global system will still be dependent on oil and natural gas for the majority of the energy required to fuel economic activity, with fossil fuels generally representing roughly 75% of total primary energy use in 2040. But this forecast is looking more questionable in light of changing global economic conditions, technological innovation, and shifting demographic trends. Under a scenario where fossil fuel use is rest
If industry and markets become more confident in a peaking, or at least a flattening, of oil demand growth, a change in investment and production strategies is likely to emerge, both among private companies and within OPEC itself. That means even if oil markets tighten in the next year or two, players will have to think twice about delaying the development and production of reserves, lest they disadvantage themselves over the longer term. Only parties that have no choice (lack of finance, geopolitical barriers, inability to organize investment due to bureaucratic failures, etc.) will be left out of the calculation of whether to consider the remaining “carbon budget” for global oil production in deciding how much, and when, to invest to monetize existing reserve holdings. Companies will also have to consider when it no longer makes sense to continue exploration for new resources in high-cost, long lead-time environments as countries with large, low-cost reserves more aggressively pursue a market share-oriented strategy for their remaining oil and gas assets. In this possible environment, to continue to attract investors and capital, the oil and gas industry as a whole must develop a value proposition that is consistent with its core production not growing as overall production growth may not be possible for all players. To deliver bottom-line value growth with stable top-line production, standardization, repetition, low-cost solutions, and manufacturing processes will probably play a key role in reducing costs and increasing margins. This will partly be driven by consolidation in the industry and partly by competitive pressures and cooperation between the industry and its suppliers. This is a fundamental change for an industry geared towards tailor-made solutions to seek a competitive advantage.
To balance cost challenges against the possible need for new reserves, a leaner and more efficient industry is required both in execution and operation. Companies will need to be prepared to deliver significant volumes of oil and gas at competitive returns, even if prices remain low and carbon externalities are priced more accurately. The industry will undergo a new technical revolution, with significantly higher levels of artificial intelligence and automation and remote operation and management. The new leaner environment will impact the supplier industry, including local content in host nations, and adversely affect national revenues achievable from the oil sector.
To demonstrate that it can maintain the value creation proposition for investors in the face of growing uncertainties, the oil and gas industry will need to embrace strategies that can create value in any scenario, including shortening project cycle times, minimizing product losses (including methane leakage), and increasing recycling and reuse of inputs such as water, heat, and steel. Such strategies align industràmore closely with technical solutions that will be attractive to society as a whole. But fundamentally, for the oil and gas industry to be seen as a partner in energy solutions and economic prosperity – rather than a source of environmental damage and driver of sectarian conflict – the industry will need to address the serious trust challenges created by the failures of its worst ranks. A 2013 Gallop poll, for example, ranked the oil and gas industry as the least trusted industry, tied for last place with the tobacco industry, despite the pivotal importance of energy in daily life. This loss of trust has been amplified by the industry’s linkages to controversial lobbying and lawsuits against climate change policies and other environmental and safety regulations. The industry tends to see the solution as better communication of technical issues. However, the public is seeking both measurable improvement in performance and greater transparency and disclosure.
The more challenging environment for oil and gas
investment increases the stakes for addressing above-ground risks that prevent or delay resource development. Even with more stringent climate policies, the oil will remain the dominant fuel for transport for the next two to three decades. And yet, oil and gas industries often meet sharp resistance around the world in many communities that have experienced negative environmental, social, and geopolitical consequences from oil and gas exploration and development. Oil and gas companies have set expectations among their stakeholders that they can operate without
negative environmental impacts, but, in many cases, actual performance has fallen short of these expectations. Many operators work to high standards and go beyond reasonable efforts to clean up spills and restore the environment to its previous condition. However, highly visible lapses in environmental performance have undermined the confidence of an influential segment of society in the willingness of oil and gas companies to deliver fuel without undue costs to society that exceed the social benefits received.
The oil and gas industry is also plagued by incidents and accusations of corrupt practices. The idea of a corrupt oil and gas industry is deeply ingrained in public perceptions in many parts of the world and remains in the news with major events like the Petrobras and Nigerian government scandals. This lack of public trust in the industry complicates project development and jeopardizes government approval for major infrastructure projects.
However, corruption matters beyond public trust. It is an enormously costly problem that creates operational and supply chain inefficiencies, can result in huge fines and compliance costs in the aftermath of a scandal, and hurts the distribution of wealth in certain societies, linking economic damage and political instability to the oil industry itself. Mistrust, strained relations, and conflicts with local communities remain a problem in many locations. A private Goldman Sachs study indicated that nearly half of the risks facing projects were non-technical, with stakeholder-related risks being the single biggest issue.
The negative image of the oil and gas industry makes it challenging for the industry to recruit the most talented candidates in some locations as well as its ability to raise capital from institutional investors who can often find the business highly speculative and risky. Consumers are also questioning whether oil and gas will remain a reliable fuel source and desire a transition to cleaner sources of energy. Companies that ignore these challenges run the risk that it will be their balance sheet assets, and not competing for oil reserve assets, that are stranded in the long run. By addressing these risks systematically, the industry would be able to ensure that markets value and finance oil and gas in an orderly transition to reflect changing demand outlooks.
Signs to look out for as the oil and gas industry adapts to the changing landscape
The oil and gas industry has rebounded strongly throughout the year, with oil prices reaching their highest levels in six years. While the industry’s recovery is better than expected, there remains uncertainty over market dynamics in the coming year. The following signposts could help O&G companies determine their strategy and direction in 2022:
Recovery and changes in end-use consumption: With the majority of the world’s population expected to be vaccinated by early 2022, demand recovery and new trends in the demand mix, such as passenger versus commercial road fleet and business versus leisure travel, will be critical to watch.
OPEC’s strategy for rebalancing the O&G market: Achieving stability in the oil markets requires continued cooperation and compliance between OPEC and other producers, who would seek to leverage oil production for balancing supply and demand.
Progress on net-zero goals and ESG disclosures: While bold commitments to net-zero goals were made in 2020 and 2021, the initial impact of actions taken will be assessed in 2022. According to Deloitte’s recent survey of financial executives in the energy and manufacturing industries, about 59% of respondents highlighted the development of ESG benchmarks, guidelines, and new metrics for reporting, along with quantifying climate-related costs and risks, as their key challenges.
Regulatory and policy support: The recently approved Infrastructure Investment and Jobs Act that allocates $7.5 billion for electric vehicles and charging infrastructure and $3.5 billion for large-scale carbon capture projects could provide the impetus for many green solutions.
Bridge to a cleaner energy future: While there are multiple pathways for lowering emissions, investments in bridge technologies between hydrocarbons and renewable energy solutions (e.g., hydrogen, CCUS) will be important to watch. The choices O&G companies make and the trends they prioritize will decide the path forward and reverberate in their decision-making through the coming decade.