L.E.K. Consulting Identifies Six Trends That Will Drive Industry Outlook and Growth
BOSTON, MA (April 5, 2023) — Several trends that have been gaining traction in the oil and gas industry, including AI and decarbonization as a service, are poised to see growth during 2023 – creating an opportunity for players in the space to turn high-level concepts into material actions, according to research and analysis from global strategy consultancy L.E.K. Consulting.
Also poised to experience growth are the diversification, exploration and expansion of sustainable energy sources as well as tech-driven infrastructure upgrades.
“Given continuing energy security challenges, coupled with momentum in the energy transition and environmental, social and governance spaces, we are seeing a more balanced outlook for oil and gas in 2023 as compared to the past couple of years,” said Franco Ciulla, L.E.K. Managing Director and co-author of 6 Trends To Watch in the Oil and Gas Industry in 2023. “Many industry leaders that we surveyed in our Energy Transition Study said continued oil and gas operations is a top investment priority, but they also plan to deliver on announced energy transition commitments and expand to areas such as carbon capture and storage and hydrogen technology.”
L.E.K. Consulting has underlined six key themes and focus areas that will drive the U.S. oil and gas industry in 2023:
Continued turmoil in the world of energy (in)security. The loss of Russian oil supply due to the Russia-Ukraine conflict has placed significant pressure on the global oil and gas supply chain that was already strained by limited OPEC spare capacity and recent production cuts. In 2023, commodity prices are expected to recede in the first half of the year because of slowing public demand, while the second half of the year is expected to bring price growth driven by the easing of COVID-19 restrictions in China, a continued risk premium on Russian oil and a less aggressive approach on interest rates by central banks. As a result of these dynamics in the global market, the U.S. is strongly positioned to fill the unmet global demand for oil and gas.
More gas on the energy horizon. The transition to renewable energy in the EU is expected to continue at a rapid pace, though natural gas demand will remain high as full fossil-fuel replacement will take several years. The U.S. is poised to become the emerging reliable supplier of liquified natural gas (LNG) as the global market seeks alternative sources to Russian gas. Bolstering supply chain replacement needs is the continued increase in global investments in new LNG infrastructure, which is expected to raise the global total LNG supply from approximately 380 million tons per year in 2021 to approximately 545 million tons in 2023 and approximately 570 million tons in 2024.
Bits to bytes: The AI era begins. Emerging technologies in the industrial Internet of Things (IoT) will present innovative solutions to optimize operations, minimize risk and reduce greenhouse gas emissions in 2023. Key players in the digitization trend include digital twins, manufacturing execution systems, digital asset management, artificial intelligence (AI) and blockchain. These solutions come at a time when the industry is facing challenges in the form of a critical skills shortage and tight labor supply, aging infrastructure that is increasingly vulnerable to forced outages and heightened pressure from investors and regulators to prioritize sustainability.
Decarbonization as a service: The new frontier. The push for carbon capture, utilization and storage (CCUS) should continue robustly in 2023, as the market trends toward sustainability. Recent public policies, such as the 2022 Inflation Reduction Act and 2021 Infrastructure Investment and Jobs Act, are pushing CCUS through tax credits, rebates and other incentives to reduce emissions. Oil and gas operators are well positioned to develop “decarbonization as a service” (DaaS) given their sub-utilized infrastructure and experience dealing with the transportation, storage and trade of similar molecules. The growth of private equity and venture capital investments in carbon accounting and offset companies is fueling the monetization of DaaS in areas like selling carbon credits, transporting and disposing of captured carbon dioxide molecules and performing CCUS for carbon offsetting purposes.
Fueling a greener future. There is an increasing transformation of energy systems away from fossil fuels to renewable and clean energy, with growth primarily seen in sources such as renewable green diesel (RGD), sustainable aviation fuel (SAF) and renewable natural gas (RNG). Government incentives for cleaner fuels like the Environmental Protection Agency’s renewable fuel standard and California’s low-carbon fuel standard are driving the conversion, along with corporate sustainability goals set by companies attuned to customer awareness. Investments in refinery capacity for renewable fuels is seeing rapid growth, rising from approximately $1 billion in 2019 to approximately $12 billion in 2022, as is renewable diesel production, having surged 90% in 2022 with expectations that it will continue to increase throughout 2023.
Rethinking portfolios with decarbonizing investments. Legacy oil and gas companies need to prioritize the efficient deployment of capital to remain competitive as the market shifts away from hydrocarbon energy over the long-term. High current oil prices have created financial opportunity for portfolio optimization, and the drive toward green energy and sustainability initiatives correlates with the plateauing of oil demand by 2030, creating an attractive financial window. With cost reductions and operational improvements driven by better capital efficiency, the application of new technologies and digital innovation, companies will be able to explore scalable, high-growth investments in decarbonization and opportunities for mergers and acquisitions (M&A) and acquisitions and divestitures (A&D) activity.
“By providing reliable hydrocarbons in a time of energy insecurity while also looking ahead to alternative and renewable fuel sources, oil and gas companies will see a time of opportunity in 2023 for exploration and expansion as they prepare for continued shifts in the industry,” said Nilesh Dayal, L.E.K. Managing Director and report co-author.
About L.E.K. Consulting
We’re L.E.K. Consulting, a global strategy consultancy working with business leaders to seize competitive advantage and amplify growth. Our insights are catalysts that reshape the trajectory of our clients’ businesses, uncovering opportunities and empowering them to master their moments of truth. Since 1983, our worldwide practice — spanning the Americas, Asia-Pacific and Europe — has guided leaders across all industries, from global corporations to emerging entrepreneurial businesses and private equity investors. Looking for more? Visit www.lek.com.