oil and gas market

Energy producers of the future

  • Michael McKerracher, Author |

With every cycle comes change. So, while rumours of the imminent death of the oil and gas industry have long been greatly exaggerated, it is undeniable that the situation under COVID-19 has been especially hard. This of course is true for almost all sectors of our economy, but if there’s a silver lining for oil and gas producers it’s that they’ve seen hard times before and have learned to adapt, to survive, and to thrive.

That’s why now is another ideal time to undertake a strategic pivot to future-proof oil and gas operations. Flexible business strategies and structures. A commitment to continuous operational improvement. And a sharper focus on environmental, social and governance (ESG) issues. Progress in these areas, and others, will be critical if the sector hopes to see the other side of this cycle stronger than it was, as they have so often before.

ESG issues in particular might be the linchpin, if the increasing attention and importance that investors, customers and the general public all give them are any indication—which I think they are. And that’s because I also think that public opinion probably won’t be swayed on this matter. Part of the challenge when it comes to perceptions of the industry is that we haven’t thought enough about the end user of our products, how our operations and processes are generally perceived and understood. We can do a better job of showing how the sector contributes to innovation and sustainability—and the economy overall.

As for investors, they are currently looking at free cash flow and real returns as the recovery takes hold. But they will eventually return to looking for growth. However, in the new post-pandemic reality, it will no longer be sufficient to gather compliance data and issue basic sustainability reports. We will have to go further, building ESG into the very structures of the business and using all manner of data not only to set clear targets but also to adapt operations and processes, to measure progress and to report on all of it. Oil and gas investors are taking an increasingly long-term perspective in which ESG performance is more important than ever. This trend is already taking hold globally, and Canadian operators need to take notice. Those that can maintain growth prospects through the downturn and tell a compelling story about sustainable future opportunities will be well-positioned to attract these new, long-term investors.

Bright side
The good news is we’ve already seen that the larger, integrated companies can raise capital even in tough times, so their prospects are good. The integrated model has stood the test of time. There will also always be room for specialty E&P companies in smaller profitable plays and basins. Unfortunately, we’re losing the smaller juniors. However, a number of basins around the world have yet to be commercialized. We have some of the best exploration and production technologies available anywhere and can take that expertise to other locales. Given all of this, I expect the junior of the future to have more production, specialized skills, and an international focus—especially because most long-term energy outlooks forecast a rise in hydrocarbon use in developing economies and increasing demand for non-combusted uses of oil and gas.

Ultimately, many of the attributes that have been key to success in the turbulent last five years will remain essential. These include leveraging innovation and new technologies to minimize costs, in addition to continuous improvement in existing technologies to cut fuel costs or improve water handling. And we must put more emphasis on data in order to access the next increments of value. Among other things, data can position operators to run scenarios and develop new ways of working that can carry forward and improve future performance, ensuring not only that savings put in place now are sustainable and not just cyclical but also that they provide a running start for recovery.

Of course, all of this is just the first step. But it’s a necessary one.