Uncertainties in many areas remain a challenge to performance and investment in the oil and gas industry, says Deloitte in its 2020 Oil, Gas, and Chemical Industry Outlook. The firm advises companies that balancing coming disruptive forces associated with energy transition and sustainability with day-to-day positioning will be increasingly crucial next year.
The report identified three factors affecting the current business outlook.
• Weakening economic growth in the US, Europe, and China
• Trade disputes that have expanded beyond Asia to include Europe
• Political risk, including the US election, the outcome of the Brexit cycle in Europe, and ongoing tensions in Middle East, both between multiple states and non-state actors with different objectives
GDP growth in the US is expected to slow in 2020, with a 25% chance of recession and only a 10% chance that growth will match that of recent years. The global picture is similar.
On the positive side, Deloitte has seen some operators focus on capital discipline more in 2019 than in past years. Lower shale output and OPEC’s quotas could bring the market into balance and act as a cushion against weakening prices.
“If we … assume that a lower-demand growth outlook is quite possible in 2020, as a result of potentially weakening global economies, then we could conclude that supply security is reasonably robust, even in the face of security risks in some key producing countries,” the report said.
Investors Expect Increased Efficiencies
A Deloitte analysis of all listed firms worldwide revealed that the market capitalization share of the oil and gas industry fell to an all-time low of approximately 4.5% in October. Corporate policies of growth at any cost, lopsided relationships between operators and vendors, and shifting priorities in capital and cash flow balancing hampered investors’ confidence and the industry’s attractiveness. Prudent financial management strategies and a display of operational and technological leadership by oil and gas companies could retain or win back investors’ trust, but while many companies have made progress, financial markets are still holding back to see if the progress can be sustained. Investors are also likely in 2020 to pay attention to how the associated subsectors, particularly oilfield services and infrastructure providers, can help operators achieve greater efficiencies and save costs without compromising margins and sustainability.
Energy Transition Poses New Challenge
Deloitte expects the “energy transition” to gain momentum in 2020, which could prove disruptive to longstanding market structures, value chains, customer preferences, and the economic drivers for the oil and gas business. Today’s oil and gas companies—many of which aspire to be tomorrow’s broad-based energy companies—must figure out how to continually produce more oil and gas (and increasingly, power) while also being carbon-conscious and addressing stakeholders’ sustainability concerns. Decisions made now to anticipate and address disruptive change will differentiate the companies who succeed in the decades ahead from those who react to the change too late, the report said.