This picture emerges from Short-term agility, long-term resilience, DNV GL’s seventh annual benchmark study capturing industry priorities, concerns and confidence levels.
It indicates deep, strategic changes for sustainable growth beyond cyclical patterns. Amid a drawn-out recovery, nearly half (49%) of 723 senior professionals surveyed expect their organizations to diversify into or increase investment in opportunities beyond oil and gas this year, though investments are still planned in the sector.
In 2017, how likely are organizations to increase investment in, or diversify into, the following areas?
Every player in the industry is looking at diversification, suggests Eirik Wærness, senior vice president and chief economist, Statoil, an in-depth interview conducted for the report: “Whether it is to diversify across the value chain or into other energy sources, companies are trying to make future cash flow less dependent on variations in the oil and gas price.”
“The number of companies we now see pursuing opportunities beyond oil and gas signals a step change in the reshaping of the sector and demonstrates its ability to adapt and build a more robust, diverse and sustainable energy future,” adds Elisabeth Tørstad, CEO, DNV GL – Oil & Gas.
Companies target renewables for diversification
Energy sources with lower carbon footprints are a clear target, particularly as prices have fallen to the extent that, in most cases, subsidies are no longer necessary for renewable energy to be profitable. A quarter (26%) of respondents expect their business to invest or increase investments in renewables in 2017, and 59% regard this as a shift in long-term business strategy. In the research, 41% say their organizations have good understanding of how to assess renewable energy investments. Total, for example, has significantly increased focus on solar power and batteries.
“Companies across the spectrum are redesigning themselves as energy companies, not just as oil and gas companies,” says World Energy Council secretary general and CEO Christoph Frei for DNV GL’s research. “Many have started talking about their ‘energy blend’ – increasing the importance of renewables and electricity.”
Some are looking to leave the energy sector entirely. Malaysia’s export development agency MATRADE, for example, says companies in Malaysia are diversifying into aerospace because of reduced opportunities in oil and gas.1 The intention to invest outside of oil and gas is most common in the manufacturing sub-sector (61%).
A future for gas
Of respondents, 77% see gas becoming more important in the global energy mix by 2027: half view it as an increasingly attractive prospect for their business. This aligns with gas’s significant potential as a ‘cleaner’ fossil fuel than oil and coal.
“We view gas not only as a fuel that has an important role to play in the energy transition as the cleanest of all traditional fuels, but also as a fuel with a firm place in the destination energy mix,” says Maarten Wetselaar, integrated gas and new energies director for Shell in an interview for the research. The company completed the acquisition of BG Group in 2016 to form the world’s largest liquefied natural gas business.
“There will be all kinds of pockets of demand that simply need the energy density of a hydrocarbon, from heavy transport to producing steel, as well as chemical applications in glass, plastics, fertilizers and many others,” he added.
Liv Hovem, senior vice president, DNV GL – Oil & Gas, comments: “We are seeing divided strategies on gas. Some companies are clearly divesting, especially in upstream gas production, while others are investing and show strong optimism for the future of gas.”
Falling oil prices have made gas more attractive for 28% of respondents: 31% are scouting for new gas projects, with 27% seeking merger and acquisition (M&A) opportunities in gas.
Indeed, more companies look set to pursue M&As in general in 2017 to advance their strategies: 33% compared with 23% a year previously. In addition, 78% foresee increased industry consolidation this year. This should boost demand for due diligence expertise beyond the purely financial.
Ongoing cost control in a year of muted investment
DNV GL’s survey respondents forecast an average oil price around USD58 per barrel at the end of 2017, more than double the low of USD27 in January 2016, but little ahead of levels in early 2017.
Like oil prices, industry confidence has stabilized, but it remains dramatically lower than in 2014 and last year (32% versus 30% in January 2016). Rather than remaining ‘lower for longer’, oil prices could well be “lower forever”, warns Graham Bennett, vice president, DNV GL - Oil & Gas. “In the meantime, oil and gas companies need to start plans for developing new fields in 2018 and 2019 and beyond in order to retain shareholder value,” he adds.
Investments are still being planned across the oil and gas value chain, though at a lower level than last year. The percentage of industry leaders expecting to maintain or increase capital expenditure in the sector has dropped from 43% in 2016 to 39%. More than half (52%) say their organization will favour more agile projects that are more adaptable within shorter timeframes.