Strategies for addressing oil & gas industry challenges
Remedies range from carbon capture to gas hydrates
The oil & gas industry lies amidst a watershed moment. The industry has suffered a decade of less-than-stellar stock performance and increasing costs related to drilling and production, forcing many to incur more debt than profit. During the pandemic, the situation began to look even bleaker, exposing many underlying business problems such as issues with storage when demand ran low, forcing prices for oil down below the minimum the industry needs to stay solvent.
On top of this, many countries are now calling for zero-emission standards for all vehicles by 2050, which will also further effect demand when these policies are implemented. If nothing changes, the oil & gas sector could be facing an existential threat. With this outlook, the industry’s best hope of survival can be found in innovation.
Issues threatening the industry
During the last decade a host of issues beset the oil & gas industry even without including the pandemic. Four of the largest oil & gas firms have had stock values sink to half their value since 2010, though prices have rebounded a bit since the height of the pandemic in 2020. Also in 2020, the industry had ranked last among all sectors of the S&P 500. It had done so for five of the last seven years at the time. 2020 also saw $145 billion in write-downs of oil reserves and related assets. Nearly 800 exploration, oilfield services and midstream oil and gas companies have gone bankrupt since 2015. In May 2021, a climate-change activist hedge fund infiltrated Exxon’s Board of Directors.
The pandemic exacerbated many of these underlying causes of concern. Problems with overabundance and storage were weaknesses that were exposed during this turbulent period for the industry. Demand for refined products was down at least 20% in 2020. The liquid natural gas (LNG) industry faced similar challenges in 2020 with oversupply and a 5-10%percent drop in demand versus projected. The future of jet fuel is projected as being particularly weak, as travel continues to be restricted between countries.
On top of all these threats, however, is the adoption of zero-emission standards around the world. In the U.S., U.K., E.U., and several other countries, plans are being made to achieve net zero emissions by 2050. More than 14 countries and 20 cities around the world have proposed banning passenger vehicle sales (primarily cars and buses) powered by any fossil fuels, including petrol, liquefied petroleum gas, and diesel. Norway intends to be the first to implement such a ban, with a target date of 2025. Several cities, such as London, are creating Zero Emission Zones, while around 250 Low Emission Zones already exist around the world. Automakers, such as GM, are phasing out combustible engines by 2035.
These types of changes affect the portfolios of investors, who have become increasingly sensitive about climate change. Stock portfolios of renewables companies have continued to rise, increasing almost four times over since 2014. Of course, the oil & gas industry isn’t going away anytime soon, but there are a lot of challenges ahead.
Strategies required to transition
There are several promising solutions to meet these shifting market needs. Coal gasification, fuel-switching and supporting electrification are among the options being discussed to meet short-term need. Other solutions involve decarbonization of oil and gas by several different methods, such as increasing methane emissions efficiencies or using zero emissions upstream to generate Liquefied Natural Gas (LNG) or oil and gas to help offset carbon costs and meet Scope I goals for emissions.
Carbon capture technology is one promising path for innovation. With carbon capture utilization and storage devices (CCUS), carbon could be captured and later recycled as fuel. This can work alongside zero-emission strategies by capturing the carbon upstream while producing effectively clean energy downstream.
Hydrogen also offers a promising pathway for innovation. Hydrogen has long been known as a powerful fuel source with no greenhouse emissions resulting from use. There are two possibilities being developed: blue and green hydrogen. Either process results in a zero-emissions liquid fuel with greater energy density and greater ability to power heavy transportation than batteries. Blue hydrogen combines naphtha, or natural gas steam reforming and carbon capture storage. Green hydrogen is created by electrolyzing water using renewable sources like solar or hydro-electric power.
One of these strategies are ready to be deployed immediately. Some are closer than others, but all will require capital and time to develop. And the deadlines continue to mount.
The U.S. has long been the leading exporter of shale oil, but for other countries, it could serve to bridge the gap until even cleaner fuel options can be developed. The industry has had its share of negative press for early efforts with fracking, so helping to educate will be an important component. Natural gas is a much cleaner fuel to burn than crude oil, and the benefit is that this technology exists now and can help facilitate the transition to even cleaner fuel options. This is especially important for developing nations; they will need access to clean, abundant energy to continue to grow. Such countries can benefit from any mistakes made in the past by the fracking industry and make sure that any concerns about environmental risks are addressed.
Another potential technology that exists and can be harvested involves the use of gas hydrates. Gas hydrates are natural gas and methane trapped within clathrates of water molecules like ice. They occur naturally below the seabed or in arctic conditions, places where there is intense cold and pressure. Gas hydrates resemble ice and can be set alight, and many scientists and engineers are working hard to develop this largely untapped fuel source. Further innovation will be needed to develop it as a fuel source. One potential benefit of developing gas hydrates is that companies could retrofit their existing infrastructure to collect gas hydrates found in the shallow seabed. Gas hydrates are a fossil fuel, but there are enough hydrates to power the planet for the next several centuries or more. Each unit of gas hydrate is equal to 164 units of natural gas, so gas hydrates pack more power for their size.
The one downside is that gas hydrates need further innovation before they can be rendered financially rewarding. The main challenge is finding a way to capture the hydrates with the water molecules intact, and it also needs to be able to be produced on a mass scale.
Gas hydrates have been known by the industry for some time, but the technology needed to bring it to the surface to be used has yet be developed. Many companies have allotted significant investments to developing gas hydrates as a fuel source, but so far, an efficient means of extraction have been elusive. The first country to successfully extract methane hydrate was China in 2017, so some of the technology involved is still relatively new. With further invention it will be a viable contender for as an interim fuel source before something even cleaner can be developed.
Significant future challenges
Unfortunately, these challenges can only be met with even further financial risk, risk that is harder to resolve when coupled with the weakness of the market in recent years. Larger companies with more diverse portfolios will be better positioned to weather any upcoming storms. Smaller companies will most likely feel the effects of the failure to innovate first. Failure to innovate, to meet the upcoming challenges, would be disastrous. In the past, companies like the steel and auto industries have faced near extinction for failing to innovate. Those companies who were able to pivot and innovate found themselves able to stage astounding comeback stories, such as GM, which managed to bounce back and embrace innovation after suffering through bankruptcy in 2009.
The oil & gas industry needs to embrace innovation in a similar way if it wants to thrive in the low-carbon fuel source market of tomorrow. The status quo may not always continue to serve; it is not hard to imagine financial institutions becoming increasingly unwilling to lend money to what are seen as risky investments in fossil fuels. It is also possible to imagine that successful energy companies in the next decade will see portfolios with oil & gas comprising less than 50%. When one of these innovative ways of meeting the lower carbon targets can be produced on a mass scale, it will likely be a sea change moment for the industry.
The future for engineers
The future could be a hostile place for engineers who don’t try to make themselves as valuable as possible in as many fields of knowledge as possible. The more roles an engineer can fill at a company, the better. In this way, they will be well positioned for the changes the industry needs to face in the years ahead.
It is also worth considering the increased automation that will exist in the future, fueling a need for engineers who can service such automation. Data science is a skill that is becoming increasingly common in the industry and learning these data science tools will help with meeting these automation goals. Those who can innovate, who can bring more than one skill to the table, will thrive in the brave new world of the future.
The oil & gas industry has an opportunity to reinvent what their industry means and how it can be sustained. Change can happen in one of two ways, and there is a right way to initiate these needed changes in the industry. If embracing carbon capture technology is the price to pay for ensuring the industry remains strong now and into the future, it seems a small enough price.
The signs certainly seem to point to a period of great upheaval and change in the future for the oil and gas industry. Though this change will take decades to realize, it is coming, and those companies that are best positioned to innovate and take advantage of known technologies will continue to be profitable and reap benefits for their shareholders. The alternatives are bankruptcy and further debt-loading. Many in the industry have been ignoring the winds of change for far too long, but there are solutions that can be developed and can reinvigorate and redefine what this industry means, both to themselves and to the world at large.