Asset/portfolio management

Guest Editorial: Balancing the Barrel and Beyond

Oil and gas companies play important roles in the global push for energy security and carbon reduction. Here’s how they can excel at both.

Manager balancing out fossil fuels and renewable energy resources in the palm of his hands.
Getty Images

Back in the early stages of the pandemic, a high-ranking executive at GALP told me the Portuguese company was positioning itself to become “the Amazon of Energy,” explaining that a fully digitalized operation and a diverse portfolio of products and services that extend well beyond GALP’s oil and gas roots would enable the company to thrive, even in the face of extreme disruption.

Now, more than 2 years later, the disruption in energy markets has indeed reached extreme levels due to the war in Ukraine, inflation, economic uncertainty, changing climate, the global push to decarbonize, and yes, even the remnants of the COVID-19 pandemic. All of which is testing the ability of oil, gas, and energy companies to respond to rapidly changing market signals and energy priorities.

Doing business in highly volatile market conditions has long been a strong suit for hydrocarbon-focused energy companies. Now, amid a unique confluence of factors, these companies are being asked to be more responsive, agile, and Amazon-like than they have ever been, with the ability to rapidly read the signals they’re getting from the market, from geopolitical forces and other sources, then respond, reprioritize, reallocate, and scale accordingly. That could mean producing and exporting more liquefied natural gas supplies for the European market to fill the void left by Russia, for example, or accelerating timelines for renewable energy production projects to reduce reliance on coal for electricity generation.

How can traditionally hydrocarbon-focused companies answer the call—and in doing so, take advantage of the opportunities that today’s unique market dynamics present? I see five keys to maintaining a high level of operational and supply chain readiness, without compromising near-term or long-term profitability.

1. Build a diverse portfolio of revenue streams that balances today’s realities with tomorrow’s priorities. Traditional hydrocarbon-focused energy companies lately have been diversifying into new energy products and services, and new lines of business, as a hedge against volatile oil and gas prices, and as a means to meet longer‑term carbon-reduction and ESG (environment, social, and governance) goals. At the same time, however, shifts in the short-term energy mix in Europe and elsewhere as a result of supply disruptions have returned the energy security issue to the front burner, providing a clear reminder of the vital role oil and gas will continue to play not just in the months ahead, but for the long term.

Strategically, the pursuit of lower-carbon revenue streams and the continued focus on hydrocarbon production aren’t mutually exclusive. Recent developments highlight how important it is for energy companies (and policymakers) to balance longer-term carbon-reduction goals with near-term energy market realities. At Shell, for example, near-term oil and natural gas production remains a top priority. Yet the company also is pressing forward with a plan to build a network of half a million electric vehicle charge points by 2025. Meanwhile, Occidental and its carbon-capture subsidiary 1PointFive plan to open what they tout as the world’s largest direct air capture plant in Texas by 2024, with the potential to build another 70 such plants worldwide by 2035. These are the types of markets energy companies could and should be exploring to increase their resilience, stability, and flexibility.

2. View all company activities and relationships through a carbon-reduction lens. There’s a growing consensus among regulators, investors, shareholders, and consumers that energy companies behave sustainably and emphasize ESG in all that they do. It’s therefore more important than ever for hydrocarbon-focused companies to embed emissions- and carbon-reduction KPIs in their management of the hydrocarbon molecule and in their decision-making processes companywide. To do so, they must have a clear line of sight into emissions and footprint from their own operations and more broadly, into the carbon molecule’s journey across the value chain.

3. Keep pushing for efficiencies across your hydrocarbon businesses. Technologies like machine learning and the Internet of Things give energy companies an opportunity to improve in an area where they are already adept: managing the hydrocarbon molecule. Digitizing and automating processes can help them capture new efficiencies across their operations. The use of robotic process automation, or RPA, to automate business processes like scheduling is one example. The use of predictive analytics for equipment maintenance is another. With insight into every step of the energy molecule’s journey, companies can identify operational areas where new efficiencies can be captured.

There’s also opportunity to capture new efficiencies by embracing market standard practices and the public cloud. Instead of trying to reinvent the wheel with proprietary software across the board, some of the biggest names in the energy industry are collaboratively developing shared market-standard digital business processes that reside in the cloud, an approach that can provide scalability and agility for all their pursuits.

4. Be ready to explore and embrace new types of partnerships and collaborations. Meeting the world’s energy needs while at the same time pursuing carbon-reduction goals requires energy companies to set aside the traditional "us vs. them" competitive mindset. As the World Economic Forum observed in a 2022 report on carbon-reduction efforts across industries, “Breakthrough solutions are seldom found within a single firm or even industry.” Orchestrating a successful energy transformation, the report said, will “require a new level of ambition in multistakeholder collaboration.”

Already we’re seeing energy companies adopt such an approach by building multicompany, multi-industry business ecosystems to bring value-added energy product and service bundles to customers. The aspiring “Amazon of Energy” GALP, for example, is joining partners across industries to create asustainability-focused ecosystem for electricity storage batteries in Europe. Meanwhile, Shell is creating a business ecosystem around electric vehicle charging to serve retail and fleet customers. Ecosystems like these are predicated on a high level of connectedness and collaboration among stakeholders, enabling them to share risk, reward, and critical data to maximize the efficiency and profitability of their collaborative efforts and better serve the end customer.

5. Be sure your digital infrastructure supports agility, flexibility, and diversity. International Data Corp. (IDC) noted in a recent report, “The energy transition can only be successful in organizations that have mastered the management of operational data.” A fully integrated digital infrastructure that enables information and insight to flow seamlessly, in real time, across an organization (powered by machine learning, automation, etc.) is critical to gaining that mastery, enabling companies to respond rapidly to shifts in market conditions, and to nimbly and efficiently develop, launch, and maintain new ventures, whether hydrocarbon-based or extending beyond the barrel. Because to thrive both today and over the long term, they will need to excel at both.