Energy Sector Outlook

ENERGY SERVICES HAVE OPTIONS IN A DECARBONIZED WORLD, BUT THEY HAVE TO CHOOSE THEIR PATH QUICKLY

By Reid Morrison, PwC

As governments, consumers and businesses make emissions reduction a front-and-center priority, companies across almost all sectors will face fundamental changes.

Investors and society have increased the focus on ESG. This has accelerated the move to lower the global carbon footprint. Many players are responding by diversifying their core hydrocarbon business to lower-emissions businesses or are announcing plans to do so.

This places pressure on the energy service sector to align its services to the changing needs of its traditional customers. In the least, this will mean finding more efficient ways to find and produce hydrocarbons.

For many, it could mean a pivot to new sources and forms of energy, such as entering the renewable and alternative energy space and other low-carbon plays, including services and technologies for reduction of methane emissions, carbon-capture utilization and storage (CCUS), biofuels, hydrogen fuels, geothermal energy, off-shore wind power, energy storage — or even electric-vehicle (EV) charging. Some will be able to adapt — and may even thrive.

For most energy services companies, the momentous push toward net zero emissions likely augers enormous transformation over the next decade. We’re already seeing the groundswell of that change.

The IEA’s roadmap to net zero by 2050 attempts to reconcile the changes to the global energy system needed to provide reliable, affordable energy and to meet emissions reduction ambitions. It calls for 90% of all power to come from renewables by 2050 and a ramp-up to $5 trillion in decarbonization investments by 2030. It also underscores the extent of disruption the scenario could signal to energy businesses.

This era of disruption, however, has been in the air for some time. Executives across industries grasp the importance posed by the growing net zero imperative, with 69% of CFOs agreeing that coordinating ESG data and information across their company is a priority, according to a recent PwC survey.

While we certainly see great change on the horizon for the hydrocarbon industry, it’s well documented that the need for hydrocarbons nationally and globally will persist, though to varying degrees in different regions.

According to the IEA’s projections of hydrocarbon demand and production, this will likely be the case, especially in regions where oil and gas demand is expected to increase over the next two decades — and even in those where diminished demand is expected. Just consider, for example, that India’s energy consumption alone is set to nearly double with oil demand lifting to 8.7 million barrels per day in 2040 from about 5 million in 2019, according to IEA forecasts.

THREE PATHS TOWARD A NET ZERO WORLD

For many energy services companies, the realignment will mean developing new business models. Looking into the future, we see three main paths: a pure-play oil and gas focus, gradually pivoting to low carbon, or making a complete transition to low carbon. Your choice will probably hinge on examining whether core capabilities could and should be used in other low-carbon adjacencies beyond the oil and gas sector. Articulating an investor proposition will also influence which path your energy services company should take. Let’s look at the choices.

Pure play oil and gas

It probably won’t be business-as-usual, even for energy services companies that plan to stick to traditional oil and gas services. They’ll need to lower their own emissions footprint in order to help lower their customers’ Scope 1, 2 and 3 footprints — and perhaps even to retain a license to operate. They’ll also need to invest more in efficiency-enabling technologies to improve margins. While new opportunities in rig construction, drilling and field development may decline (especially in North America and Europe), we expect that energy services companies will nevertheless experience increased demand for lower carbon footprint production services and equipment, such as more efficient pump and equipment technology. Services companies may see more demand for traditional products and services from IOCs, NOCs and independents in areas of the world forecasted to experience increased oil-and-gas demand and production through 2040.

Gradual pivot to net zero

Some energy services businesses might be able to have their cake and eat it, too. They’ll be able to retain an oil and gas focus while making a gradual pivot into low-carbon industries such as renewable and alternative energy, carbon capture, geothermal and even offshore wind. Their clients are also likely to be “gradual pivoters.” These businesses will be positioned to add new services to low-carbon energy companies as opportunities emerge, and they’re likely to use revenue from their core oil and gas services to fund entry into new low-carbon businesses.

Full low-carbon transformation

We expect other energy services companies to fully wind down their entire hydrocarbon businesses through divestitures and pivot to altogether new energy services, including helping oil and gas customers reduce GHG emissions. That kind of transition will involve substantial skills transfer, strategic acquisitions and partnerships (to gain scientific and engineering expertise) to enter these new energy spheres as both operators and equipment suppliers.

In some cases, they’ll be able to leverage existing skills in manufacturing, engineering and subsurface/geomechanics to make the pivot (e.g., when pursuing geothermal or off-shore or near-shore wind). Entering other areas could require partnerships and acquisitions. These energy services companies, then, would face decisions to “build, buy or partner.” As they gain a footing in these markets, they could expand into other sectors, such as industrials, offering decarbonization services. These companies will likely heavily invest in technologies that introduce efficiencies in decarbonization projects.

All energy services firms will need to decarbonize, no matter what the future brings.

No matter which path an energy services firm takes, all companies in the industry will need to accelerate decarbonization of their own businesses (i.e., lowering Scope 1, 2 and 3 GHG emissions) to stay competitive. Doing so will mean disclosing emissions to customers (and probably to the public as well) and those disclosures will need to be verified by accredited, independent parties with the same rigor auditors employ with financial statements. Up to this point, GHG data has been “nice-to-have.” It will likely become an industry standard.

Companies up and down the oil-and-gas supply chain likely will be expected to provide verified carbon disclosures to their customers; likewise, companies will be working with suppliers to ensure they are producing them as a new order of business. All this can be a time-consuming and exhaustive process, touching every item in a bill-of-materials. Indeed, the most rigorous and verifiable life-cycle assessment can take up to two years for an entire family of products and services. We expect those energy services companies that provide verified environmental product declarations for their products and services will secure more business from customers who value that as a requirement in their buying decisions. Offering a low-carbon alternative will provide further differentiation that commands a price premium, which will then be the next source of opportunity.

Emissions reporting will likely be carried out using the GHG protocol, and efforts are underway to create international emissions data standards and sources. If your energy business can be one of the first to provide verified GHG calculations for your products and services, it will attract customers who prioritize that in their supply chain due to their own net zero commitments.

RAPID CHANGE ON THE HORIZON

We expect most energy services businesses will be looking for value in often new and unlikely places over the next several years. This may well mean divestitures, technology-driven strategic acquisitions, in-house investments and a push to acquire the new talent they’ll need to distinguish themselves from their competitors.

Taken together, the energy services sector seems at the beginning of new directions, which for some could signal entirely new forms of growth.

Reid Morrison leads the Global Energy Advisory practice, and is a Principal in PwC’s Houston Office. He has 25+ years of experience in the resources industries across upstream, downstream, midstream, oilfield services, utilities, EPC, chemicals, mining, and bio-fuels both domestically and internationally.