5 Common Problems of Oil and Gas Companies in 2021
For instance, consumer preferences for personalization and direct contact with brands they shop with were rising before the pandemic, but with the explosion of online purchases, the trends became the new norm.
The oil and gas industry also saw changes and challenges that were not the result of the pandemic, rather they were magnified by it. For instance:
- The whole industry shifted focus from petroleum production to sustainability-based strategies within the electricity market.
Electricity consumption skyrocketed with more dispersed demand across residential homes (instead of concentrated corporate consumption).
- Less travel also meant a compression of other sectors of the market: less driving meant fewer cars purchased, less aluminum manufactured, etc.
- Though 2020 has been called the “great compression” of the gas production market, these market changes were the result of trends that had already started. Now, in 2021, these changes have come to a head.
The industry is facing the lasting effects of the pandemic and its massive disruption, as well as the acceleration of what many already saw coming. Keep reading to learn what key problems oil and gas companies face in 2021.
1. Market Shifts
The industry has snapped back considerably from the initial crash in March of 2020. Oil prices at the end of 2020 were only 25% lower than those at the end of 2019, despite the colossal 72% drop at the start of global lockdowns.
The snapback will continue, but the distribution of revenue has changed indefinitely. Many of the biggest firms are looking to a cleaner future (and away from petroleum production entirely).
BP, for example, is reducing its production of oil and gas by 40% before 2030, and later will eliminate it entirely.
Most of these changes have been a “long time coming.” The commercial price of natural gas, most notably, fell from $7.91 per thousand cubic feet in 2015 to $7.48 in 2020. The price of gas-based electric power fell from $3.38 to $2.48 at the same time.
These shifts have shaped the market landscape like so many earthquakes once shaped the continents. Oil and gas companies today will be forced to remap the terrain before they know how to move forward.
2. Fewer Infrastructure Investments
The oil and gas industry is capital intensive, partly because of how tech-driven it is and partly because of the massive infrastructure investments required to do what they do.
Infrastructure in oil and gas takes years to deliver an ROI. The average investment is paid back within five years. Some systems—like natural gas pipelines—can take between five and ten years to be paid back.
With the new wave of ESG (Environmental Social Governance), governments around the globe have given companies another reason to pause before making major infrastructure investments this year. These efforts aim to move the energy market to renewable energy sources.
In as little as five years, natural gas could see little to no demand at all.
Along with governmental pressures, large-scale events have shaped the 2021 panoramic, too. In mid-February, storm Uri hit Texas and other states in the Central South of the U.S. The electricity infrastructure failed residents in a big way.
The storm also meant there was increased demand for natural gas as a result (which was processed into electricity to support the community demand).
Before the market sees that demand as a rally to build more infrastructure, however, these large-scale events must be viewed through the lens of whether they’re likely to happen again. Otherwise, companies will invest in infrastructure that could stagnate entirely before the investment is returned.
3. Flaring Will End
Along with BP’s newsworthy departure from oil and gas production, the company has also said that it will end natural gas flaring entirely by 2025 through its own gas flaring alternatives.
When it comes to companies’ interest in ending flaring, the motives are more complex than simply saving the environment.
For smaller “mom and pop” oil companies, for instance, the reality is that they see the need to reconfigure their whole business model. Businesses of their size can’t survive another downturn like the one we saw last year.
Of the more than 9,000 oil and gas companies in the U.S., most of them fall into that group.
Subsequently, smaller gas fields look to the natural gas that was otherwise flared away. This is a commodity that now must be put to use through fracking alternatives if the companies are to survive.
Then, there are the large-scale producers. Their principal interest in eliminating gas flaring is to get ahead of the governmental requirements. Early compliance is in their best interest to avoid downtime later.
And now that the U.S. has re-entered the Paris Agreement, 2021 will have even more corporations looking to reduce or cut flaring entirely.
4. More Technology in the Industry
The oil and gas industry has always been a tech-focused one. There’s no way to produce energy without utilizing technology.
Finding new efficiencies is the main driver, too. For example, horizontal drilling introduced just a few years ago increased the output of natural gas and oil in an enormous way.
Technology is the tool individual companies use to maximize output ahead of the competition, and today that competition is fiercer than ever.
The name of the game in 2021 will be optimizing production with technology instead of infrastructure because the latter will stagnate before it pulls its weight.
Simply put, technology can deliver ROI like a direct injection to the muscles of the industry as long as companies know where to invest.
5. Finding New Revenue Streams
All 9,000+ oil companies in the country are looking to new revenue streams to replace falling prices and demand. The other changes to the industry discussed above will continue to drive this trend further, faster.
Oil and gas companies can future-proof their businesses through a reinvention of what they offer. Energy, not gas, is what most will ultimately produce. And even in production, sustainable energy sources will soon overtake the market.
Meanwhile, there are new and more instantaneous opportunities to diversify revenue streams as well, like mobile mining cryptocurrency. The installation of EZ Smart Box mobile data centers has demonstrated case after case of oil producers monetizing the natural gas they otherwise flared away.
Gas crypto mining centers are installed in days, then they convert natural gas on-site into electricity used to mine cryptocurrency. The natural gas that would have earned companies $2 per MCF instead earns them $30. This symbiosis has opened up opportunities that will carry many oil companies fast into the future.
Once a formidable giant, the oil and gas industry had a bit of an identity crisis in 2020
The transition from oil production to electricity has begun, and new, more reliable revenue streams are coursing into the market.
The enthusiastic adoption of change will position oil and gas producers a step ahead of the problems the industry faces in 2021. Because, fortunately, unanticipated opportunities have come along with these new challenges.
It’s up to each company to decide whether it will sink or swim against the coming tide.