Oil & Gas companies enter a watershed decade – here are 5 reasons why it will test their asset management strategy
The coming decade may play a role as important as the 1970s in the public perception of Oil & Gas companies. In a period fraught with risks, they have a unique opportunity to demonstrate their essential role as actors in the energy transition – but their asset management practices must be up to the challenge.
For Oil and Gas companies, 2022 is starting to look like a perfect storm.
As the war in Ukraine unfolds, public opinions worldwide realize how much our economies still rely on oil and gas. And it’s only the beginning: the coming winter will put this topic front and center, with energy prices expected to skyrocket and some countries facing possible shortages.
Meanwhile, this summer has witnessed several heatwaves, draughts, and other catastrophic events, making global warming a tangible reality for many.
While the Oil & Gas industry is used to being in the spotlight, this combination of factors could bring attention to new topics, from the industry's aging infrastructure to the reality of its Net zero efforts to how it reinvests its profits.
The situation presents significant risks, but it also provides leading companies with a unique chance to set themselves apart and prove that they are critical actors in the energy transition.
But their asset management practices need to be up to the task – and there are five ways in which they will be tested in the coming years.
Shortages and price hikes could draw attention to three of the industry's asset management weaknesses
Oil & Gas companies are acutely aware of the risks associated with incidents and downtimes - from lost revenue and additional costs to serious environmental and reputational damages. However, as countries experience shortages, these risks could be significantly amplified.
This winter, a refinery shutdown could make front-page news and draw widespread attention to the industry's asset management practices, just like the blockage of the Suez Canal by the Ever Given drew billions of eyes to maritime shipping.
And this scenario is compounded by three factors that are specific to the Oil & Gas industry:
● The number, disparity, and complexity of its assets
● The varying quality of data about these assets - particularly problems of “dirty”, unreliable or unstandardized data, exacerbated by outdated asset management platforms that do not allow mobile capture or digitization
● The lack of investments in some areas over the past decade, amid low oil and gas prices, with investments in data often being cut to save costs
Consequence: in the coming period, we expect that the performance and reputation of Oil & Gas companies will be significantly tied to how effective their asset management practices are.
And to reduce their risk profile, Oil & Gas companies need asset management strategies that go beyond tracking assets and fixing them once they fail. Instead, high-performing actors will have visibility and deep insights into the maturity and condition of their assets, which will let them predict why and when they will fail, and what to do about it.
Bert Verplancke, Account Manager at Hexagon's Asset Lifecycle Intelligence Division, gives a particularly common example: “ When an equipment fails, companies often have to figure out on their own if it is better to fix it or replace it. Their asset management system should help them make the right decision, by assessing the risk of repeated failure along with other factors, such as warranties and the additional CAPEX”.
Bringing that level of analysis will require robust asset investment planning (AIP), asset performance management (APM) and digital work, enabled by technologies such as machine learning and digital operational twin.
Such technologies will also play a crucial role for Oil & Gas companies to prove the reality of their sustainability efforts.
Public opinions will increasingly realize that the energy transition is still in its early stage: in fact, McKinsey estimates that, under the current trajectory, global demand will not peak until 2027 for oil and 2040 for gas.
This could lead to a change in the framing of the policy debate. Investors are now focusing on the criteria that could make Oil & Gas companies suitable for ESG investments. The public discussion could follow the same path and increasingly focus on regulations, taxes on carbon emissions as well as profits, and the need for auditable Net Zero commitments.
This will mean that companies that can deliver on their Net Zero commitments will turn environmental stewardship into a competitive advantage.
From an asset management perspective, this presents multiple challenges: companies need to be able to track emissions at every level, identify waste in real-time and demonstrate that they can reliably prove that their production is green:
Industry expert Dan Morrison takes the example of flaring: "Practices like flaring of natural gas used to be allowed. But today, natural gas is increasingly seen as a transitional green energy source to achieve a carbon-negative or carbon-neutral footprint, and the fact that not all natural gas is produced equally becomes a key concern. For example, if a lot of flaring occurs within a year, those methane molecules can be orders of magnitude worse than CO2. So we're seeing purchasers of LNG that require exporters, in the midstream and all the way to the wellhead, to certify gas production practices. "
As asset management platform, HxGN EAM is ideally suited to support sustainability efforts. However, Morrison warns against seeing the change as purely technological: "Acting on alerts to reduce waste or factoring sustainability when deciding to replace or decommission are management decisions. It does not happen just by switching a button".
Assets change hands as large actors reshape their profiles
This need for traceability and visibility into assets has substantial implications at a time when the Oil & Gas landscape is evolving.
Many large companies are currently using mergers and acquisitions (M&A) to reshape their portfolio and improve their ESG profile. In 2021, management consultancy Bain reports that ESG drove 20% of the deals of one billion dollars. Several major actors are acquiring companies in fields like natural gas infrastructure, solar power, or carbon capture while divesting themselves of high-carbon assets.
In these transactions, robust asset management practices play a role for both the acquirer and the seller. " Sellers want to know exactly what they buy: the assets' history, status, and performance. It accelerates and simplifies the due diligence process, " notes Bert Verplancke. " For the seller, providing this transparency increases sellability and raises the asking price ."
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These five trends paint a consistent picture of the Oil & Gas companies that will come out on top in the next few years - and one key feature will be their expert knowledge of their assets.
By avoiding disruptions and outages, such knowledge will help them dodge crises and prove reliable suppliers in times of shortage. Robust asset management processes will also let them reshape their asset portfolio on better terms and demonstrate their net-zero credentials - two critical steps to attract ESG investors and convince public opinions that they are indispensable actors of the energy transition.