The energy industry faced unprecedented volatility in 2020 and operators were forced to react and adapt to a low-price environment. At the start of 2021, many of those challenges remain as the pandemic continues, and the years-long push toward the energy transition is accelerating. Oil, gas and other energy companies will also need to closely follow policy changes under President Joe Biden’s new administration, which aims to prioritize the shift from fossil fuels to renewable energy.
Here are the top eight energy trends RSM US LLP has identified as we look ahead to the rest of 2021 and beyond.
1. Acceleration of the energy transition
The energy transition away from fossil fuels has been in motion for decades, but the events of the past year have accelerated the pace of change. While the pandemic was initially expected to hinder energy company investment in new technologies that underpin the energy transition, time has proven the opposite; companies have continued to invest in technologies or enhanced processes that drive the energy transition.
Such efforts include adhering to policy and prescribed emissions limits, diversifying portfolios into renewables, and investing in technologies such as carbon capture. Decarbonization commitments around the world soared to a record $501.3 billion in 2020, beating the previous year by 9% despite disruption from COVID-19, according to Bloomberg.
The Biden administration’s focus on clean energy, coupled with continued pressure from investors and lenders, will drive the energy transition further in 2021. Without the deep pockets of larger organizations and on the heels of a tumultuous 2020 for energy prices, middle market companies will need to balance protecting their core business with positioning themselves for success in the race to net zero.
2. Digital transformation
The growing importance of digital transformation goes hand in hand with the energy transition, as digitalization helps energy companies decarbonize and use resources more efficiently. Technologies such as artificial intelligence, robotics and enterprise cloud solutions will continue to be big contributors to significant advancements across the energy value chain. Oil companies are expected to spend $1.3 billion on advanced analytics alone in 2021, $2.1 billion in that area by 2025 and $3.2 billion by 2030, according to Bloomberg.
Beyond bolstering clean energy efforts, the use of digital technologies allows organizations to optimize operations, boost safety metrics through remote operations and even provide additional revenue streams by way of new service offerings. These benefits will drive energy companies to pull the trigger on digitalization initiatives.
3. Shifting workforce dynamics
On the heels of the massive layoffs and industry consolidations of 2020, many companies have been left with an ultra-lean workforce and must navigate how to do more with less. Employers also need to address the unique pandemic-related health and safety concerns of their employees as the crisis continues.
These challenges have also opened the door for opportunities that will push leaders to rethink the energy workforce and the way they do business more broadly. For example, oil field service providers are shifting from having drilling expertise at the well site to allowing engineers to work remotely; this makes it possible to hire people with different skill sets or to re-train current employees. Companies will need to reassess their training and recruiting strategies as the industry workforce and the use of advanced technologies in daily operations continues to evolve in 2021.
4. Increased focus on environmental, social and governance issues
Environmental, social and governance issues—known collectively as ESG—will remain a top priority for energy companies. By its nature, the energy industry is highly exposed to a range of ESG issues, and therefore ripe for such initiatives, especially in the environmental space.
ESG metrics have become a key factor for management teams and investors to consider when making business and investment decisions. Indeed, research links high ESG ratings with higher profitability, less volatility and higher valuations. Outside of the value that sustainability efforts can bring to organizations, rising external pressure from investors and lenders will also push organizations to commit to ESG-related initiatives in 2021. Additionally, the Biden administration is expected to push for increased requirements around ESG-related disclosures in public company financial statements.
U.S. oil and natural gas producers are struggling to cope with lower commodity prices, and some have found it difficult to service their debt or remain in compliance with debt covenants. Combining companies may help achieve economies of scale and reduce general and administrative expenses on the whole.
According to Bloomberg, M&A deal activity increased from approximately $4 billion in the first half of 2020 to $27 billion in the second half of 2020. Recent M&A deal activity consisted primarily of all-stock transactions resulting in little or no premium in value to the sellers. Five of the top ten producers in the Permian Basin are in the top ten because of merger and acquisition transactions occurring in 2020. Even if commodity prices improve, M&A activity is expected to continue through 2021.
6. Oil supply and demand shifts
U.S. oil production declined from its most recent peak in November 2019 of 12.9 million barrels per day to 10.4 million barrels per day in October 2020, according to the Energy Information Administration. As U.S. producers divert their focus from continuous growth to debt reduction and capital discipline, maintaining or increasing supply will be more difficult.
Crude oil demand suffered significant declines due to the COVID-19 outbreak in 2020 as demand for transportation fuel dropped. Road traffic is expected to recover in 2021, according to Bloomberg, but still remains approximately 8.5% lower than 2019 levels. Recovery is still at risk from any delays in vaccine rollouts. Any continued stagnation or declines in family road trips and other travel during the summer—peak driving season—could further jeopardize demand recovery. Air travel demand recovery is even more uncertain.
7. Natural gas
In 2020, global gas markets experienced the largest recorded drop in consumption with an estimated 2.5% decrease from 2019, according to the EIA. That drop was driven by the pandemic, yes, but also by mild temperatures, as natural gas is highly sensitive to weather.
Global natural gas demand is expected to increase 2.8% in 2021, which would mark a return to 2019 levels, according to the EIA. However, with so many variables at play, demand recovery remains uncertain.
Recovery is expected to play out differently in various parts of the world, with emerging markets such as Asia and India driving demand growth into the future. End-use sectors also play a large role in expectations for 2021 and beyond. Electric power generation, for example, was the largest consumer of natural gas in 2020 due to lower natural gas prices and abundant supply. Into the future, however, the EIA expects natural gas used for electric power generation in the U.S. to decline, largely due to growth in the renewables market and rising natural gas prices.
This decline will be offset by rising demand for liquefied natural gas (LNG) exports and an increase in domestic natural gas consumption outside of the electric power sector, according to the EIA. Demand for LNG in Asia is expected to increase but be offset by declines in Europe. Overall, the LNG export market is expected to show signs of recovery as prices rise, demand increases and export capacity in the United States grows.
8. Evolving policy impacts
The new administration has quickly proven that it plans to hold true to campaign promises of investment in clean energy and more aggressive regulation around drilling, infrastructure projects and emission limits to name a few. Executive orders issued by Biden in his first days in office included reversing the approval of the Keystone XL pipeline and a ban on new drilling permits and leases on federal land for 60 days.
Companies with mineral rights on federal lands will face the possibility that new drilling permits and fracking will not be allowed. Although Biden has stated that his plans do not include an outright ban on fracking, fracking could be limited or banned on federal lands, reducing the area available for oil and gas companies to explore and develop.
While the long-term effect of these orders is still unclear, it is evident that the industry will see major policy shifts over the next four years and will need to remain prepared and nimble to handle the changing regulatory environment.