6 Trends To Watch in the Oil and Gas Industry in 2023
two industrial workers reading tablet
What’s driving the outlook for oil and gas this year? Here are six trends to watch.
Volume XXV, Issue 54 |

After seeing a rapid increase in deal activity over the past three years, the energy sector in 2023 offers tremendous opportunity for even more.

Starting in 2020, at a high level, energy security, decarbonization and value-based growth dynamics began powering the energy deals space. And from corporate M&A to private equity investments to initial public offerings, deal activity remained resilient through 2022, even in the face of macro uncertainty and the higher cost of debt. Notably, the number of power-focused deals in 2022 rose over 2021, while those in oil and gas (O&G) and renewables were flat.

But now, in 2023, all three of those subsectors along with two others — emerging energy technology and energy management and mobility — are poised to see significant deal activity. And as with 2020-22, each sector’s deal activity will be driven by a unique set of circumstances.

Oil and gas

In O&G, deals over the past three years were driven by corporate-level activity aimed at consolidation that would allow individual segments to remain competitive via cost savings so they could stave off market headwinds. Energy security needs in light of Russia’s invasion of Ukraine was another significant factor (see Figure 1).

O&G operators’ pursuit of production efficiency and emission reduction through digitization, electrification, and decarbonization means investment opportunities exist across the O&G value chain. As oil continues to be a resilient source of fuel, one strategy involves supporting upstream production efficiency through investment in upstream equipment/service technology — especially as limited labor drives the adoption of technology that reduces maintenance costs and equipment failure risk, such as digital twins and internet of things (IoT)-enabled solutions. Another strategy is to invest end-to-end in gas infrastructure, as the demand for gas is increasing and additional natural gas capacity is needed to meet global demand for a “clean alternative” fuel that can bridge the transition to renewables. 

Recent legislation (e.g., the Inflation Reduction Act, or IRA) incentivizes the reduction of emissions, by requiring technology and service providers to measure and reduce emissions; this makes providing specialized services across the value chain (e.g., decarbonization, asset integrity) the final opportunity in this subsector. Specific areas of investment opportunity range from construction and maintenance that support the integrity of infrastructure to environmental/decarbonization services to technology/equipment and services focused on reducing emissions.

Renewables 

In renewables, there was a mix of solar and energy storage deals as well as deals in source-agnostic renewables and wind over the past three years. Solar in particular garnered a lot of private equity activity across the board, from both installation and equipment companies to projects both large (utility-based) and small (residential-based) (see Figure 2). 

Renewables deal growth is set to accelerate in 2023 in the wake of the passage of the IRA and the continued momentum of the transition to renewables. Indeed, as geopolitical instability powers the push for energy independence, and with it the transition to renewable energy — and as the IRA (which includes tax incentives through 2033) provides long-term investment visibility — supporting utility-scale solar and the storage build cycle is one investment strategy. This approach offers opportunities in solar engineering, procurement and construction (EPC) and battery integrators as well as software and management providers. Another strategy includes supporting the wind installment ecosystem, both on- and offshore; large-scale EPC/installation services are one area of opportunity here, as are operation and maintenance services.

Meanwhile, as the renewables market matures, its rapid development and its increasing scale and scope of operations are driving demand for technology and services that can manage renewable sources. Software and management services as well as operations and management services are the core investment opportunities with this strategy. 

Power

Services designed to both maintain the resiliency of the grid and mitigate congestion have been one area of deals in the power sector; easing supply chain constraints has been another (see Figure 3).

In 2023, power, utilities, and grid infrastructure and services will continue to attract investment to meet the needs of modernization, improved resilience and clean energy deployment, all of which will be fueled by legislative tailwinds. For example, both the IRA and the Infrastructure Investment and Jobs Act (IIJA) include multibillion-dollar investments supporting grid modernization and renewables integration, which translate into investment opportunities in construction/maintenance services and specialized electrical services.

And as the need for greater resiliency continues to increase adoption of grid monitoring devices and services, which requires tech-enabled solutions for grid management, investment opportunities include equipment manufacturing as well as installation and maintenance. In the meantime, existing infrastructure needs to be supported, so equipment refurbishing and after-market services, parts and platforms are also areas of opportunity.

Emerging energy tech 

Decarbonization has been the focus of deals in emerging energy technology, including those in natural gas, geothermal, renewable diesel and sustainable aviation fuel, especially over the past one to two years (see Figure 4). 

As high subsidies for hydrogen lead to increased cost competitiveness, supporting the hydrogen build-out leads to investment opportunities in emerging production technology for blue hydrogen. Elsewhere, demand for emissions monitoring services is growing as carbon-intensive industries seek to reduce emissions, which yields opportunities in emissions monitoring equipment and certification as well as environmental consulting services.

Another area of opportunity in the emerging energy subsector is decarbonization solutions, which are expected to remain in demand as the long-term transition to renewable energy continues to progress. Trading and offset schemes, greenhouse gas emissions strategies, carbon capture infrastructure services, and carbon transport and takeaway services are among the specific areas worth looking into here.

Energy management and mobility

High energy prices, emission reduction commitments, increased device connectivity (i.e., IoT) and policy tailwinds aimed at reducing costs have been making energy management and mobility an attractive area for deals (see Figure 5).

As electrification and IoT trends continue, hardware/software providers are expected to drive growth in 2023 and beyond. Enterprises with emission reduction commitments need technologies to monitor and ultimately reduce their energy consumption, so energy service companies that develop, install and arrange financing for energy management projects are one area of investment opportunity. Enabling the demand-side management that renewable energy sources require to mitigate intermittent production makes construction/maintenance firms that install and monitor systems and equipment another opportunity, along with similarly focused professional services firms.

A diverse collection of energy opportunities 

For the past three years, deal activity was strong across the energy sector, but the factors underlying those deals varied significantly depending on the specific subsector.

That remains the case in 2023, as myriad factors impact each of the five core energy subsectors. What is consistent across all of them is the tremendous opportunity they present.  

For more information, please contact industrials@lek.com

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2023 L.E.K. Consulting LLC

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