The 2030 vision of the Paris Agreement has forced businesses to focus on reducing their carbon emissions. Oil and gas producers are focusing on their environmental impact and redirecting capital expenditure (CapEx) towards renewables and low-carbon businesses and technologies. Considering the oil and gas sector’s approach, oilfield equipment and services (OFS) players have no choice but to follow the direction of the oil and gas producers and provide equipment and solutions that aid overall emissions reduction.
Following the advent of COVID-19 vaccines and the reopening of economies, the increase in drilling activities in 2021 and changing demand dynamics may not have a sufficiently positive impact on OFS players unless they reassess their strategies and come up with new offerings that help capitalize on low-carbon opportunities.
Evalueserve highlights key developments that will impact the way OFS companies function in the future.
New Energy Will Control CapEx and Revenues
- The new energy segment is expected to strip away 40–50% of oil and gas revenues, pulling OFS players towards them. Emissions reduction has gained momentum as a global focus following the pandemic, leading companies to target net-zero operations within the next three to four decades. The major oil and gas players are already diversifying into wind, solar, hydrogen, and carbon, capture usage, and storage (CCUS) projects. These developments will lead to a decline in the revenue share of fossil fuels, directly impacting OFS businesses’ revenues. Large OFS companies have already started shifting their attention to new energy segments.
- An increasing proportion of CapEx is being routed to low-energy segments, highlighting the need for OFS players to become more environment-focused. As investors are directing their dollars into low-emission areas, oil and gas producers are seeking OFS players that can focus on Scope 1 and 2, as well as assist in mitigating Scope 3 emissions. Moreover, the reduction in CapEx by major oil and gas producers in 2020 is not expected to be revived to pre-pandemic levels; oil and gas companies are likely to use the savings to achieve their net-zero targets by focusing on new energies over oil and gas. These likely developments make it clear that OFS players must continue accessing new energy segments, as oil and gas customers will be more inclined towards emissions-conscious OFS players.
Increased Equipment Efficiency Will Enable Short-Term Stability
- OFS players will have to focus on increasing efficiency to survive the impending transition. Most OFS companies are acclimating to the evolving market dynamics and may be operationally and financially incapable of fully diversifying to renewables or other low-carbon segments. A simple and easy route to sustainability would be to enhance the efficiency of equipment such as pumps, separators, heat exchangers, and artificial lifts used in oil and gas drilling and production. Additionally, OFS companies will need to focus on automating processes to reduce time and manpower to achieve cost efficiency. Taking timely steps will, to some extent, safeguard OFS players and help them buy time to expand in new segments.
- Electricity generated from clean sources for oil and gas production will aid OFS players’ low-carbon journey over the short term. Oil and gas drilling and production equipment and processes consume high levels of electricity. OFS players have already started focusing on equipment that uses renewable energy; they can highlight their new approach and pursue customers by showcasing their ability to manage Scope 1 and 2 emissions.
Partnerships, Acquisitions, and Innovative Offerings Will Drive
- We see OFS companies forming partnerships and undertaking acquisitions in the coming years. The bigger OFS players, accounting for about 40-50% of the global market share, have already started expanding into the new energies space by diversifying into hydrogen, CCUS, wind, solar, geothermal, and other renewable energy businesses. Traditional OFS companies’ limited expertise in new energies will lead to the creation of partnerships (for technology). OFS players who fail to take this route may not be able to sustain the transition and may become potential acquisition targets for medium and large OFS players.
- OFS players will gradually move away from their traditional oil and gas-focused approach for long-term growth. Some companies have already begun transitioning from oil and gas to broader energy businesses. For instance, in the last few months, the top OFS players have rebranded themselves as “technology” companies. A rapid search for adjacencies will be the target, where oil and gas OFS will replicate their existing experience. During the transition phase, the industry will see a higher reliance on the natural gas segment, which is considered a bridging fuel between crude oil and renewables. Many nations have set massive targets to increase the share of natural gas in the energy mix, shifting from oil and coal. Thus, OFS players will have opportunities in the natural gas space, from drilling to pipeline and even liquefaction and regasification units. Additionally, existing oil and gas expertise can be used in the chemicals segment, and offshore experience can be used in the offshore wind segment.
Stronger EPC Players and Increasing Bargaining Power of Customers Will Challenge OFS’ Prospects
- EPC players will continue to dominate the new energy space due to their existing experience and better risk appetite, thus posing a threat for OFS players. Unlike traditional OFS players, EPC players have been active in the oil and gas as well as new energies space for years. Additionally, instances of EPC players spinning off new energy divisions and developing strategies to generate revenue share from non-oil and gas segments clearly highlight their focus. EPCs cater to the entirety of the oil and gas sector, including upstream, midstream, and downstream, which makes them robust and reliable from an integrated solution perspective and the favored choice over OFS companies.
- Consolidation is giving customers higher bargaining power, forcing OFS players to offer low-cost solutions. The low-carbon focus and demand fluctuation of the recent past have pressurized oil and gas producers to actively focus on portfolio diversification. The majors have been divesting their non-core assets and focusing on integrated assets. The resulting consolidation is speeding up across the upstream segment globally, leading to the formation of a few large companies with high bargaining power and is forcing already hurting OFS companies to become cost-competitive.
All in all, the OFS segment is evolving rapidly and will need both short- and long-term strategies to win. It is imperative that each OFS player understands the changing customer landscape and evolving competitive dynamics.
Evalueserve’s OFS solutions support companies by customizing the best approach for the current times. Contact us to learn more about our offerings in this space.