Oil & Gas in 2022: A year of reckoning— and accelerated action

Last January around this time, I reflected on the ways in which 2020 and the disruptive effect of COVID-19 would most certainly serve as a wake-up call for the energy industry. I laid out what companies could do to build their resilience and profitability. And I was optimistic that 2021 would be a much better year.

Indeed, it was. And the first weeks of 2022 suggest the trend of record cash flows and returns will continue. For a deeper dive into what I think this might mean for the industry in 2022, I invite you to take a look here.

In retrospect, my optimism was well-founded. Just not for the reasons I thought. 

What the industry gained—and lost—in 2021

Last year was one like no other for the industry. Energy companies went from an energy crisis of abundance to an energy crisis of shortage. They saw hydrocarbon prices jump by 200% (or more). And they transitioned from being the worst performing sector in the stock market to one of the best. This was, of course, great news for an industry plagued with lackluster returns for years. But the industry’s over-performance in 2021 had little to do with changes oil and gas companies had made to their operating models, their capital allocations or even their purpose. It had more to do with the dynamics of supply and demand. The industry found itself in the right place at the right time.

But it certainly wasn’t all good news. Bankruptcies due to low prices (mostly in upstream businesses) gave way to bankruptcies due to high prices (mostly in energy retail). And despite the industry’s noteworthy performance, the energy system as a whole hasn’t progressed meaningfully toward its net zero goals—in fact, we went from record emissions reductions in 2020 to near record emissions growth in 2021. More bad news… the energy crises and events in energy markets around the world confirmed the industry still has a long way to go to secure our energy future. Accessibility and affordability continue to constitute major challenges. This is especially true for the billions of people who are still energy poor and heavily reliant on energy for prosperity and development. But it’s now also become an issue for energy rich countries like the United Kingdom.

What can be achieved in 2022

The volatility in the industry is profound. Times of exuberance have historically been followed by downturns, each one worse than the one before. There’s no reason to think that trend won’t continue. In fact, high commodity prices will likely speed up the world’s shift to new energy sources. It could very well be a case of the industry’s good fortune contributing to its accelerated decline.

All this is to say that while industry experts are predicting a multi-year period of high prices and high returns, energy companies cannot become complacent or slow their efforts for reinvention. If anything, the events of the last year signal the heightened urgency for oil and gas companies to transform into agile and resilient enterprises that can thrive in good times and in bad. At the same time, they must continue to push for energy security (availability + affordability) and energy sustainability. These objectives must be the top priorities for oil and gas companies this year.

The good news is that many in the industry, after windfall returns in 2021, now have more funds available to invest in the reinvention that’s now so much needed. So, what can they do? I see opportunities for leading oil and gas companies to outperform their peers in five key areas. There’s even opportunity for some industry laggards to leapfrog into positions of industry leadership.

1.      Compressed transformation

I believe the first area of action should involve accelerating the reinvention of their core businesses. Speed is everything, and a compressed transformation is essential. That compression will be driven largely by digital technologies—especially cloud, data and artificial intelligence (AI). Whereas past IT investments focused on improving operations, 2022’s focus must be on innovation. We now have evidence to support that claim. Two years ago, we found that the top 10% of companies in digital transformation generated twice the revenue growth of the laggards (bottom 25%). Since the pandemic, we’ve seen the gap widen from 2X to 5X outperformance of leaders over laggards. Moving into 2022, all energy companies should follow the digital leaders. That means connecting more processes across the enterprise to make faster, analytics-powered decisions. It means investing more in cloud, data and AI. And it means embracing technological advancements as both the catalyst for and enabler of innovation, agility and systemwide resilience.

2.      Smarter capital decision-making

Next, I would encourage industry leaders to rethink how they allocate capital. With technologies, energy sources and demand pathways all evolving so quickly, oil and gas companies no longer have the luxury of long-range capital planning. They need to compress their capital planning cycles from years (or even decades) to months (or even weeks). And they need to prioritize absolute asset values over volumes. That will require a granular understanding of the market-by-market demand dynamics across multiple energy sources. I’m excited by new research Accenture will be publishing this year to show the benefit of a new, patent-pending Accenture Energy System Model.

3.      ESG-focused collaboration

Third, I think 2022 will be the year that energy companies finally embrace the notion of sharing investment risks and rewards with others inside and outside the energy system. I anticipate seeing a jump in joint ventures and partnerships to tackle some of the industry’s most vexing issues, such as the eradication of methane emissions or the creation of a standardized set of credible environmental, social and governance (ESG) metrics and disclosure frameworks. In these and other areas, the time is right for oil and gas companies to shift away from selective collaborations to expansive partnerships with others, including customers and suppliers.

4.      Innovation unbound

The fourth set of actions for 2022 will involve building a future-ready workforce. The compressive transformation that is now occurring across the industry requires a similarly compressed approach to workforce development. In 2022, I think we’ll see less emphasis on equipping workforces with traditional oilfield technologies. Instead, companies will compete in the areas of sustainability and new energy solutions. That means they will need to develop entrepreneurial skills to enable them to move rapidly from experimentation to scaling innovations in areas such as carbon capture, usage and storage (CCUS), hydrogen, sustainable fuels, storage and more. 2022 may just be the year that previous years’ innovations become commercially viable.

5.      Safer and more secure operations

Finally, I think any efforts to boost business resilience must include an effort to strengthen cybersecurity. Oil and gas companies’ transformations will increasingly rely on scaling technologies such as Internet of Things (IoT). Unfortunately, their dependence on these new technologies will expose them to more cyber threats. That’s a chilling prospect for an industry that is already a top target for bad actors. The good news is that cyber resilience is top of mind for industry CEOs—and the top focus of their digital investments, ahead of even AI and analytics. We’ll see more and more companies move their data infrastructures to the cloud, integrate security of their operational technologies (OT) and information technologies (IT), and build in multiple layers of defense across their enterprises.

The year of living prosperously

As last year, I continue to be optimistic about the opportunities that lie ahead for energy companies. Industry players now have a solid understanding of the structural challenges they face. They recognize that their relevance in the future system will require them to build agility, resilience and security to make sustainable and affordable energy available universally. And, most importantly, they now have the tools, insights and even the cash flows to accelerate their reinventions. I firmly believe the five action areas described above will set the winners apart—not just in 2022, but for years to come.