In North America, for instance, bankruptcies rose starkly in 2020, with nearly 85 Chapter 11 filings by industry players through October. 6. Unleash their potential. Capital markets are already driving dramatic growth in the value of companies that are strongly aligned with the energy transition megatrend. Learn about The COVID-19 crisis has resulted in a material near-term drop in global energy demand, at one point leading to a 30 percent reduction. Andreas Franke, “France cranks up hydrogen plans with 6.5-GW, 2030 target, plays down new nuclear,” S&P Global, September 8, 2020, spglobal.com. Low-carbon pure plays are, in effect, taking this thinking one step further. They are offering investors high yield potential, if not top-line growth, and an investment proposition that is not complicated by new businesses to which their competencies may not naturally stretch. Leaders in oil and gas are transforming how they operate to anticipate innovative forms of upstream energy, government regulation, energy transition, and digital disruption. Company-level returns on invested capital varied across energy sectors (hydrocarbon versus low carbon) from 2010 to 2020 (Exhibit 3). And how can companies attract capital at competitive rates when the cost of capital to compete effectively for low-carbon opportunities needs to be 2.0 to 2.5 percent lower than for traditional core oil and gas investments? Press enter to select and open the results on a new page. Five big ideas for the oil and gas organization of the future. Despite the current economic challenges, many are sustaining efforts to decarbonize their operations and their value chains. 11 Upstream oil & gas. Our flagship business publication has been defining and informing the senior-management agenda since 1964. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. Their combined ability to overtake large incumbents in dominating growth sectors therefore seems counterintuitive. Financial resilience, and the potential for outperformance, have historically been judged by the position of oil and gas assets on the industry cost curve, particularly in upstream and refining. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. The best-performing low-carbon companies are now achieving comparable returns over their (lower) cost of capital versus their oil and gas peers. Article We also offer Local Content Training and development in partnership with The Nigerian Content Development and Monitoring Board. Andreas Franke, “France cranks up hydrogen plans with 6.5-GW, 2030 target, plays down new nuclear,” S&P Global, September 8, 2020, spglobal.com. Each oil and gas company will evolve their strategy in different ways based on their starting point and aspirations. Oil and gas titans have an abundance of capabilities that may be valuable for parts of a new low-carbon energy system. Companies in this class recognize that the mature phase of any industry’s development is often its most profitable for the strongest performers, typically enhanced by consolidation opportunities. Winning in new arenas requires building an agile, attacker mindset while also retaining the resilience and risk-avoiding mindset of the hydrocarbon resource specialist. And in an unprecedented global decision, Denmark has cancelled all upcoming North Sea licensing rounds in anticipation of ending oil and gas production in the North Sea by 2050. We use cookies essential for this site to function well. South Korean government launches plan for a green new deal,” International Institute for Sustainable Development, July 16, 2020, iisd.org. Those that elect to–or continue to–follow the resource specialist archetype primarily need to get better at what they already do. areas to adapt to new conditions and seize opportunities for growth. Demands for oil companies to standardize reporting of greenhouse gas emissions produced by operations as well as entire value chains are growing. In terms of those following the low-carbon pure play archetype, several medium-sized companies have opted for more accelerated transitions to new business focuses and corresponding organizations. We anticipate significant consolidation within the sector as many current players become major net sellers of assets and others go bankrupt, with their assets recycled to the remaining natural owners. McKinsey’s research shows that combined demand for fossil fuels will reach a peak in 2027 – the peak for coal has already been achieved with oil likely to be reached in 2029 and gas in 2037. There are three key questions we believe the leaders of oil and gas companies should consider: The following article provides some initial perspectives on these questions, in the hope of provoking further reflection around executive and board tables. Receive quarterly updates on recent reports and articles from McKinsey’s Oil & Gas Practice. This suggests the sector’s traditional business model has been under stress for some time now. How should oil and gas companies explore alternatives for profitable growth that also improve climate resilience? Collaboration is a particularly effective way to lower costs and … 19. The fuels created as a result of these processes account for another 33 per cent of GHG emissions globally. collaboration with select social media and trusted analytics partners Our flagship business publication has been defining and informing the senior-management agenda since 1964. Several medium-sized companies have recently made this shift, including Ørsted and Neste. 3. Each company needs to know exactly how much carbon it generates, how much is in its products, how to reduce its carbon intensity, and how to communicate this effectively with regulators, investors, and customers. Subscribed to {PRACTICE_NAME} email alerts. Market outlooks Report Global oil supply-and-demand outlook to 2040 February 26, 2021 – COVID-19 sent shocks through global oil markets, with oil demand and supply still struggling to return to pre-pandemic levels. Scope 3 emissions, which are associated with the use of the sector’s products, remain the dominant challenge, at more than three-quarters of the sector’s emissions footprint. and capturing value. With no carbon price, 90 percent of all defined oil-focused projects are projected to break even at or below $60 per barrel. Deloitte, PwC, Accenture, GE, Oil & Gas IQ, McKinsey, Boston Consulting Group, IBM, Siemens, Atos, EnergyIQ, Wipro, TCS. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more, Learn what it means for you, and meet the people who create it, Inspire, empower, and sustain action that leads to the economic development of Black communities across the globe. Leaders can frame their strategic choices around where to compete amid economic uncertainties, considering the relative, innate attractiveness of different low-carbon sectors (as defined by the expected capital return spread), against the relative competitive position of oil and gas players in low-carbon technologies (Exhibit 4). tab. A petroleum refinery is a processing plant that converts crude oil into a mix of different finished petroleum products.. China will double its conventional gas production from 2018 to 2035. Players are betting that they will emerge as the natural owners of some or more of these investment classes based on their capabilities, technologies, relationships, and other incumbent advantages. 17. Companies in this category are attempting to evolve their business mix, capital allocation, and organizational capabilities even as they defend their current dividend streams and market valuations that are built upon their hydrocarbon legacies. As companies evaluate their strategies in light of growth and return projections, they should increasingly focus not just on ROIC but on the spread between ROIC and the cost of capital, as the underlying risk profile looks different across these new businesses and value pools. In conventional onshore and shallow water, which together are projected to comprise almost two-thirds of global crude production in 2030, 25 to 35 percent are viable with a carbon price of $100/ton CO₂e. Many oil and gas companies are currently reevaluating their strategic responses to the energy transition. Please click "Accept" to help us improve its usefulness with additional cookies. One of the lessons of economic history is that successful incumbents can be swept away as a new era emerges. Our flagship business publication has been defining and informing the senior-management agenda since 1964. As the CEOs associated with the Oil and Gas Climate Initiative, put it in an open letter in May 2020, “the COVID-19 crisis is further crystallizing our focus on what is essential: health, safety, and protection of the environment while providing the energy and vital products that society needs to support economic recovery.” Digital upends old models. 14 10. can deliver returns that far outweigh the costs. Gas & LNG. 11. Such attackers typically succeed not because of their intrinsic strengths but because incumbents fail to respond adequately as circumstances change. People create and sustain change. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. The recent crisis has proved just how vulnerable the global economy remains to systemic risks, one of the most important of which is climate change. There are material risks to Ørsted’s all-in strategy, but so far the market response has been positive. Exploring the three foundational questions outlined above will hopefully put them on course. They are betting on a future that promises a material need for hydrocarbons for another 30 to 50 years, even on a declining trend. The report presents specific outlooks per fuel type such as natural gas, oil, coal and hydrogen. Flip the odds. Median forecasted project internal rates of return (IRRs) have declined from 30 percent during 2010–11 to 15 percent during 2019–20. While energy demand will stagnate during this recession, the report says, the world will need more coal, oil and gas once the global economy recovers. 3 Unleash their potential. Resource specialists are, in effect, sticking to their knitting. “The post-COVID recovery: An agenda for resilience, development and equality,” International Renewable Energy Agency, June 2020, irena.org. to build a plant that will capture and bury 500,000 metric tons of CO₂ each year. 4. Find McKinsey & Company Oil and gas specialist jobs on Glassdoor. With our strong ties with McKinsey’s oil and gas consulting practice and access to the expertise of the wider McKinsey network, our research and analysis yield knowledge available nowhere else. “Open letter from the CEOs of the Oil and Gas Climate Initiative,” May 26, 2020, prnewswire.com. The profitability of a refinery comes from the difference in value between the crude oil that it processes and the petroleum products that it produces. “Engineering of world’s largest Direct Air Capture plant begins,” Carbon Engineering, May 21, 2019, carbonengineering.com. Retiring the least productive and most carbon-intensive wells and associated assets can improve both emissions performance and profitability of existing oil and gas portfolios. How can we make our core hydrocarbon businesses more resilient? Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. 16 Learn more about cookies, Opens in new McKinsey is the oldest and largest of the "Big Three" management consultancies (MBB), the world's three largest strategy consulting firms by revenue. To deliver these dramatic rates of growth, enormous capital investment is needed. -. Others are pushing to test the robustness of investments against broader environmental, social, and governance (ESG) requirements. The Global Energy Perspective describes our view on how the energy transition can unfold, through four scenarios. They are betting heavily on building future-proof, low-carbon businesses while divesting themselves of legacy, high-carbon portfolios which could create management distractions and present investment propositions that are too mixed for both equity and debt investors. In the Permian, for example, the carbon-intensity difference is eightfold between the top and bottom deciles. The pattern of returns across different energy sources has shifted materially over the past ten years. For example, France announced plans to spend more than $8 billion on a decarbonized hydrogen economy through 2030, starting with a European hydrogen project in 2021. How can new entrepreneurial capabilities and cultures be built in the growth areas, while also maximizing the value of integration with existing parts of the businesses, such as midstream and trading? But today it remains unclear whether this can become a business that will deliver attractive returns, outside of specific, advantaged niches. tab, Engineering, Construction & Building Materials. In June 2020, China National Offshore Oil Corporation (CNOOC) signed an agreement with Shell to supply China’s first imports of carbon-neutral liquefied natural gas (LNG) cargoes—they would use carbon credits to offset the emissions involved in producing and consuming the two cargoes. Likewise, growth into hydrogen production and sales relies on several traditional oil and gas capabilities, such as access to capital, managing engineering complexity, and operating infrastructure safely and efficiently. To achieve a 1.5-degree pathway, all sectors of the global economy will require dramatic emissions reductions over the next ten years. The fuels created as a result of these processes account for another 33 per cent of GHG emissions globally. “North American oil and gas bankruptcy debt reached an all-time high in 2020 and is set to grow,” press release by Rystad Energy, October 22, 2020, rystadenergy.com. “CNOOC to receive Chinese mainland’s first carbon neutral LNG cargoes from Shell,” Shell, June 22, 2020, shell.com. 16 McKinsey & Company Oil and gas jobs, including salaries, reviews, and other job information posted anonymously by McKinsey & Company Oil and gas employees. In response to these disruptions, we see five big ideas for how organizations can adapt: 1. Please try again later. Our flagship business publication has been defining and informing the senior-management agenda since 1964. Katherine Blunt and Sarah McFarlane, “The new green energy giants challenging Exxon and BP,” Wall Street Journal, December 11, 2020, wsj.com. How will our operating model need to change to flourish in a low-carbon world? Investors are increasingly seeking out positions that reduce their exposure to climate change as well as the risk of stranded assets. If you would like information about this content we will be happy to work with you. A number of oil and gas companies have already set net-zero-emissions targets. Today’s top 11 Mckinsey Oil And Gas jobs in United States. But are they doing enough to change their operating models? Also known as: saturated gas plant, sat gas plant, cracked gas plant. hereLearn more about cookies, Opens in new regain investor confidence and attract the new talent that it needs. 18 15. There are two important steps leaders can take to strengthen their positions, beyond no-regrets decarbonization of their operations and supply chain. This article was a collaborative effort by Chantal Beck, Donatela Bellone, Stephen Hall, Jayanti Kar, and Dara Olufon, representing views from McKinsey’s Oil & Gas Practice. Ten principles can guide the way. Oil and gas companies are now working hard to update their strategies and shift capital in the context of the energy transition. We'll email you when new articles are published on this topic. Please use UP and DOWN arrow keys to review autocomplete results. Two overall questions can help to inform the choices among these three strategic archetypes. Gas for insights into the challenges and opportunities facing the industry in recent years mckinsey oil and gas... Their companies competitive breakevens companies have recently made this shift, including Ørsted and.. And bottom deciles gas peers trillion in sustainable investments over the next normal guides. 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