As oil and gas companies entered 2020, none could foresee the devastating effects that the combination of OPEC+ and Covid-19 would have on the industry. Peter Parry, who leads Bain's Global Oil & Gas practice, discusses why simply cutting costs and reducing activity may be a strategic misstep. Instead, companies should take three bold actions today to plan for the future of the industry.
Read the transcript below:
PETER PARRY: Hello. My name is Peter Parry. I'm talking to you today from my home office here in Milan. And I'd like to spend a few minutes discussing how the energy industry is really working through the Covid-19 crisis and reinventing itself for the energy transition as it goes. As we started 2020, most of the major international oil and gas companies were setting bold, ambitious targets, particularly in the area of decarbonization, thinking about a net-zero 2050 and the steps they, perhaps, need to take in order to try and get there.
As we entered 2020, those targets were being communicated to shareholders, who had given a lot of pressure through 2019. That pressure was increasing to say that incremental efforts and token investments were really not enough. We now needed a step change in activity. As that was beginning to take hold, the Covid crisis hit. And it hit the energy industry at a particularly difficult time -- one when we were seeing oversupply in both crude oil and natural gas.
And so the combination of what we call the OPEC Plus situation and Covid-19 created a perfect storm for the oil and gas industry. The response to that has been for major players to cut costs. Quite clearly, they've also had to cut activity levels. But on the cost side, we're seeing something like 25% to 30% reductions in operating capital costs.
The demand destruction for oil and gas products created by Covid-19 is unprecedented. Something of the order of 10% reduction in oil demand through the year so far is a level which has never been seen before. We also see dramatic fluctuations in oil prices. So the temptation for the playbook to be the practical one, the solid one—the one that goes to the cost-cutting and the activity reduction—may seem sensible.
But in this instance, that may be a strategic misstep. We may be missing the opportunity to drive the energy transition forward in an accelerated way. We're already seeing some actions, by the way, where companies are beginning to push forward programs in the areas of biofuels and hydrogen and in CCS—in carbon capture and sequestration programs.
These kinds of initiatives are the ones the world needs in order to decarbonize both the production and consumption of oil and gas activities. Thinking about that "act now" template and pulling it forward into a planning framework. What do we need to plan for the future? Well, there are three big steps.
The first of those is to pull together what happened in the two fragmented actions. A lot of the things the oil and gas companies have been doing are projects here and projects there. These need to be pulled together now into a much more transformational framework on an effort that can both scale and move forward quickly.
The second step is really to do with building a roadmap. What is that roadmap, not for 2040 and 2050 in the net-zero world—a net-zero carbon world, that is. But what is that roadmap for up to 2025? The Covid-19 crisis is only going to accelerate things in terms of change. And so building that short-term roadmap is essential.
The third step is around using the operating model. Here, oil and gas companies have a real strength to rely on. But making that operating model work for them so that responsibilities are clear, professionalization takes place in the area of sustainability, and we can move at scale and speed, as I mentioned.
So we're in a world of change. We're in a world of dramatic change. We're in a world of energy transition. And now is the time for major oil and gas companies to really push on forward. I hope that's been useful. I hope you stay safe and hope to see you soon. Thank you very much.
The global Covid-19 pandemic has extracted a terrible human toll and spurred sweeping changes in the world economy. Across industries, executives have begun reassessing their strategies and repositioning their companies to thrive now and in the world beyond coronavirus.