Diversification for Oil and Gas Companies
With growing concerns about the use of fossil fuels and petroleum, there is a global shift towards cleaner and more sustainable energy sources due to concerns about climate change and environmental sustainability. Companies in the oil and gas industry depend upon the revenue generated by crude oil and its constituent products. Considering the current events in the United Kingdom with the “Just Stop Oil” movement and many more since the 2010s it has become important for oil and gas companies to find ways to be socially acceptable. Consulting groups including BCG, EY, and KPMG have proposed multiple strategies to their clients in the oil and gas sector. Some of the largest commercial gas companies like Shell, Chevron, and ExxonMobil have started diversifying into renewable energy spaces and have pushed for the development of more advanced carbon capture technology.
Carbon capture technology makes use of petroleum and petrochemical products in more ecologically sustainable ways. It refers to the capture of CO2 at the source, which is then transported and can be stored underground through injection in oil mines for enhanced oil recovery. Investment in carbon capture technology has been promoted by consulting groups and experts in the Oil and gas industry for a long time. Companies like Lummus Chevron and ExxonMobil have boosted investment in this field and have achieved considerable results. However, the strong push by ESG and the increasing relevance of sustainability reports make diversification a more appealing method to keep growing. It ensures continuity of business in the long term without facing adverse responses from social pressure groups and regulatory authorities.
Diversification is a risk management strategy that involves spreading investments or activities across a range of different assets, sectors, or industries to reduce exposure to a single asset or risk. In the oil and gas industry, the exposure lies in crude oil and petroleum.
Figure 1 showcases NNR (the contribution of natural resources to the GDP) and the GDP growth rate behaviour of the UAEs economy from 2000 to 2010. After the publishing of “Natural Resources Curse,” by Sachs and Warner, the contingencies of an oil-dependent revenue were highlighted and the same had been mirrored by the Emirates economy. Recognizing this, the UAE went through a transition. The oil sector’s share in the total GDP of the UAE had declined from 46.9% in 1980, to as low as 16.75% in 2019. This drastic change can also be seen in Figure 1 as after 2010, the GDP growth rate has been less and less dependent on the revenue received from natural resources. Especially in 2015, when oil revenues dropped considerably, the GDP growth rate remained in its general positive trend. This change is part of the Vision 2021, launched in 2010 by the Ruler of Dubai. The plan “focuses on the UAE becoming the economic, touristic and commercial capital for more than two billion people by transitioning to a knowledge-based economy, promoting innovation and research and development, strengthening the regulatory framework for key sectors, and encouraging high value-adding sectors.” The biggest diversification project for an oil-based economy is seen in the UAE. The Emirates has realized the problem with oil dependency and has pushed Tourism and IT services to its population through the construction of the city of Dubai. While it may sound unorthodox on the face of it. Dubai is the UAE's way out of an oil-dependent economy. The UAE is seen as a successful model for economies to transition into a diversified economy from an oil-dependent nation.
In the private sector, Eneco, a Rotterdam-based energy company, recently announced an ambitious plan to become carbon neutral by 2035 with consulting services from Boston Consulting Group (BCG). Eneco plans to carry out sustainable conversion or phasing out of all large gas-fired power plants. The drastic changes in business models come with high regulatory measures taken by the EU and constant pressure from external stakeholders like climate activists along with concerns about the ecological impact of carbon-based fuels. On top of that, the popularization of renewable energy sources like Solar and Wind has also driven Eneco to pledge to double up on their renewable energy segment of the firm.
Increased investment into alternate fuels and renewable energy sources is a way for Oil and gas companies to still utilize their energy specialization while spreading their risk across more frontiers.
Management consulting groups play a huge role in the transition of oil and gas companies from a single source revenue firm to a diversified corporation. Top Consultants in the Oil and Gas industry include McKinsey, Deloitte and Accenture, these firms provide valuable expertise, strategies, and support to help the energy sector transition towards a more diverse and sustainable future. These groups provide insightful and essential services like risk assessment through risk mitigation strategies, financial modelling, and scenario planning.
As the specialization and area of business change, management consultants assist in talent management, workforce planning, and organizational development to ensure a smooth transition into a different skill set and organizational structure for a more diversified company. As management consultants boast expertise in mergers & acquisitions and possess immense knowledge about the oil and gas industry and other industries into which companies may seek to diversify, they become crucial for efficient decision-making for companies. With the support of management consulting groups including BCG, PWC and many others, companies have started both vertical integration as well as diversification. Here are some examples of the same: Shell PLC has a considerable stake in Sense Photonics which is a LIDAR and 3D sensor solutions company working towards vehicle autonomy. Along with Sense Photonics, Shell also has an investment in “Princeton NuEnergy”. A new company that focuses on the recycling of Lithium-ion batteries that are used in electric vehicles.
ExxonMobil has also diversified; its 2017 acquisition of Jurong Aromatics Corp. makes clear Exxon’s take on diversifying away from oil and gas. Jurong Aromatics, headquartered in Singapore and founded in 2005, is a manufacturer of aromatics. Aromatics are a class of chemical compounds, including benzene, toluene, and xylene, that are used in the production of many consumer products from clothing and computers to snowboards and tennis racquets.
Other well-known oil and gas companies include Totalenergy who have recently agreed to enter a 300 million USD joint venture with India-based “Adani Green Energy”. They already have a 20% stake in the publicly listed firm.
All in all, the transition of global energy needs has also accelerated the diversification in the oil and gas sector. The primary role of the consulting firms has been identifying the need for diversification and guiding specialized firms to diversify their revenues. Oil and gas companies like Shell, Chevron, and ExxonMobil are increasingly reliant on consultants to draw out business strategies for a more economically and ecologically sustainable business model. Consulting firms like BCG, McKinsey, and Deloitte have appointed dedicated personnel to investigate investment opportunities in renewable/clean energy. I believe a big factor in the diversification of oil and gas companies is Sachs and Warner publication of “Natural Resources Curse '' as it was one of the first widely accepted papers on the economic impact of Oil and fossil fuels.
The economic diversification of oil and gas companies is a transition in the long run. While the UN and the COP (Conference of Parties) push for the transition from oil and gas at the earliest, their immense dependence on the commodity acts as a shield for private oil companies and their operating margins in the short run. 55% of the world's energy is still based on oil and gas as of 2021. Management consulting is a crucial part of the survival of oil and gas companies though they may not belong to the industry much longer. The future of the oil and gas industry and the companies comprising it will be an interesting phenomenon, especially due to the political implications of trade and processing of crude oil around the world. The Russia-Ukraine conflict, the Iran invasion and the rise of the Emirates are all examples of external forces affecting the oil and gas industry. However, through efficient consulting, oil and gas companies can also mitigate risks and volatility brought about by politics and international affairs.
While oil and gas are still a big part of the world economy, it is clear where the future lies and the industry has started taking steps for long-term sustainability through diversification of their revenues as well as investment in carbon capture technology to utilize current resources efficiently.