An industry known for its cyclical nature… celebrating the highest of highs, and surviving the lowest market lows… nothing has ever affected the energy industry on the same scale as COVID-19. In April 2020, as the pandemic ravaged the world, global oil demand fell by 25%. Crude oil prices collapsed from a combination of lack of demand due to the sharp decline of economic activity and an unexpected increase in supply caused by lockdowns across the globe. By the end of 2020, the oil and gas industry had laid off about 14% of its permanent workforce. Now that the economy is recovering, it’s to be expected that the energy sector would be recovering as well. But...instead, something really strange has been happening. The pandemic has effectively pressed the “fast-forward” button on many industry trends that have been slowly developing...and now instead of slow growth, these are trends are accelerating quickly. Some of the largest trends are:
Producing more energy with less emissions at a lower overall cost.
Focusing on an investment in infrastructure needed to meet and grow energy demands around the world. Including the implementation of IoT and technology innovation.
Companies demonstrating the ability to show they have capital discipline and can consistently provide returns to shareholders.
More Energy, Less Emissions, and Lower Costs
We’ve all seen the headlines, around the world people, governments, and businesses are focusing on becoming “greener” and minimizing their impact on the environment. In order for the energy industry to grow and survive, they know they need to do the same. The world is demanding cleaner energy, and the goal set in place for the industry is to achieve net-zero emissions by 2050...or SOONER. As if this wasn’t challenging enough, the global population is growing, putting even more stress on the demand. So, all companies within the industry are focusing on how they can produce more, but with less.
Investing in the Future - Infrastructure
Historically, the energy industry hasn’t been known for investing big in infrastructure...and it’s starting to show. Projections are stating that the industry will need to invest $500 billion each year to keep up with the growing industry demands. The second part of this is that like many industries, the energy industry has to continue to evolve with today’s technology - that includes implementing tech and IoT innovations. These technologies can help to improve safety, performance, and machine optimization - just to name a few benefits. If companies aren’t looking to add these features, it’s likely they’ll be left behind.
Capital Discipline and Benefit to Shareholders
With its extreme cyclical nature, it’s important that the energy industry can prove to investors that they have the ability to demonstrate durable cash flows, and the capital discipline to consistently provide shareholders with returns on their investment. With the improvement in confidence among investors, hopefully, the industry can earn back some of the investors that have jumped ship in the past.
So, why is business acumen essential in the energy industry?
Ok, so after all of this...you may be thinking, but why does this matter to me? And how does business acumen play a role in the energy industry? Well, for one, it’s essential for every person in the company to understand how your company makes money and the process that goes into decision-making at a leadership level. Then, it’s important for them to be able to tie their role into how they can affect the money-making process, and ensure they are making the best decisions for themselves and the organization. For example, in the energy industry, specifically oil and gas, investors are demanding better returns on their investments, however, the companies can’t control the price of their products. So, how can they provide their investors with a better return? The one thing they CAN control is their annual costs. So since 2015, the industry has made a strong push to lower its overall costs. By understanding the interworking of all of these things, every employee really understands the role that they play and how their decisions can affect the company as a whole.
What now?
Well, it’s essential to become a business acumen expert to not only better yourself professionally, but also so you can help your company.
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