Oil, Gas and Chemicals Industries - Drilling Down into Challenges and Opportunities

Oil, Gas and Chemicals Industries - Drilling Down into Challenges and Opportunities

13 Feb 2023

This informal CPD article 'Oil, Gas and Chemicals Industries - Drilling Down into Challenges and Opportunities' was provided by Cambashi, a global market research, industry analysis, consulting & training firm focused on engineering and industrial software markets.

How are oil and gas and chemicals companies dealing with complex energy transition and other challenges? And what role does up-to-date market intelligence and expertise play in helping them maximize opportunities?

There’s no doubt that oil and gas and chemicals companies are facing multiple challenges to their businesses. Before the COVID-19 crisis, there were several challenges they were responding to, some of which have accelerated post-pandemic, including fluctuating oil prices, increasing production costs, and a skilled worker shortage.

With this massive energy transition happening, it’s perhaps no surprise that people involved in business communications with oil and gas and chemical companies, from CEOs to sales and marketing managers, are finding it hard to keep up with trends and challenges impacting the sector. For that reason, access to the latest tactical industry intelligence, linked to the latest trends in these industries, is seen as fundamental to meeting these challenges – and maximizing opportunities.

Clean energy transition

So, what is the current position of the oil and gas market and the industries it serves? Energy prices soared towards the end of 2021, fueled by the rising prices of oil and natural gas. The problem was compounded a few months later with Russia’s invasion of Ukraine, casting doubt over energy security across Europe. To further fuel the rise, OPEC announced it would cut production by 2mbd, despite energy prices being at record highs for recent years.

There’s no doubt that 2022 was a challenging year. High energy prices have reduced consumer confidence and demand, and labour shortages are impacting the workforce. But, despite these challenges, the oil and gas sector has become synonymous with one word – profit.

The seven largest drilling companies were expected to generate over $170bn in profit in the first nine months of 2022, over $100bn more than the same period 12 months previously. Annual reports would suggest the implementation of digital initiatives, cost streamlining, and successful investments made during the pandemic were the key contributors to such impressive returns. However, the surge in the price of oil and gas has been a significantly larger contributor than any efficiency gains that may have been realized over the first nine months of 2022.

Switch to clean energy in the oil and gas sector

While oil and gas firms are reaping the benefits of high prices now, it may prove to be the same high prices that accelerate the speed of their demise, since high electricity prices shorten the payback time on renewable energy projects, accelerating the energy transition. ‘Energy transition’ is a term coined for the current movement society is going through, pivoting away from fossil fuels and towards renewables. Unlike in the past, this transition is not driven by demand or availability, but by the global acknowledgement of the detrimental impact fossil fuels are having on the planet.

Oil and gas companies have been aware of this trend for some time and are positioning themselves to survive long after the commodities they’ve traded on for so many years become obsolete. Increasingly, oil and gas companies are describing themselves as ‘energy’ players, as opposed to pure-play oil and gas companies, and this is reflected in the investments and commitments they are making.

Yet, there is still the risk that rising oil prices could end up doing the opposite of encouraging renewables. A higher oil price provides an even greater incentive to oil companies to spend money on exploration and production, and it may even make previously unviable wells profitable. For nations who greatly rely on oil exports, a higher oil price would provide more money for governments to spend on society, boosting their approval. There is a risk that any investment in exploration and production may come at the expense of renewables investment.

Not everyone is a winner

While inflated energy prices benefit energy producers, energy consumers are struggling, especially energy-intensive industries. Typically, high energy prices hurt the economy – they raise costs for producers since it costs more to heat and power their factories, which increases prices for consumers – as producers raise prices to protect their margins.

For chemicals firms the problem is particularly severe. The inputs to the chemicals manufacturing process are called feedstocks and are commonly created by refining and processing raw oil and gas. As the price of oil and gas increases, so do the production costs for chemicals manufacturers. The chemicals industry is very energy intensive, specifically gas intensive. It is the largest industrial consumer of gas in 14 European countries. In Germany, the chemicals industry consumes 8.4 mtoe of gas, nearly twice that of the second largest consuming nation, the Netherlands.

This is a problem chemicals’ executives should not take lightly. In the event of any rationing scenario, such as those proposed in some regions of Europe, industrial shutdowns are likely if an alternative substitute cannot be found.

Technology transformation

Part of an ongoing trend, but accelerated by soaring production costs, is the implementation of digital solutions as manufacturers seek to streamline their operations and maintain profits. Industry 4.0 solutions can automate significant proportions of manufacturing operations and deliver improved asset utilization, lower energy consumption, and more efficient maintenance.

The volume of data produced by manufacturing firms is growing quickly, driven by technological advances, the rapidly decreasing cost of sensors, and the widespread use of software. Both oil and gas and chemicals firms have a global reach, rigid regulatory structures, millions of end-users, and a diverse asset base, so digitalization is crucial to improving their operations.

Accurate analysis results in higher efficiency, lower costs, and lower business risk. Companies are therefore striving to maximize the value of data and adopt a more analytics-driven strategy. Emerging technologies are presenting new opportunities to the oil and gas industry, and companies who successfully implement these strategies will find themselves with more effective and sustainable operations.

Digitalization also provides more transparency throughout the chemicals supply chain, potentially allowing customers to see where their products are, and when they will be delivered – this is particularly important to manufacturers of specialty chemicals. Given the global nature of the chemicals industry, improving visibility throughout the supply chain will yield large gains in operational efficiency – a crucial addition during a time of record high production costs.

Implementation of digital solutions

Chemicals international markets

The global economy and supply chain network both rely heavily on the chemicals sector. Current growth patterns predict that there will be more emerging companies in the global competitive landscape as a result of increased sales and acquisition power. Asia's production will continue to soar as network value shifts further east.

The worldwide chemical industry was expected to generate nearly $5 trillion in revenue in 2021. China was mostly responsible for the growth of the market share in Asia, which makes up half of it. Rising tensions between the United States and China are causing many industrial sectors to seriously rethink their globalization strategies. Chemicals will continue to be a global sector, but since China is the largest single market, this may present difficulties for international businesses.

Consequently, plant footprint and supply chain strategy are anticipated to play a growing role in corporate performance in the years to come, and digitalization is seen as an essential pillar in most company’s strategies if they’re to successfully navigate this changing landscape.

Key Trends

Renewable and sustainable electricity production will eventually outperform oil in terms of economic viability. Oil and gas corporations are taking major steps to position themselves as "energy" players rather than pure oil and gas providers as a result of realizing this. The need for oil will decline as more people transition to electric vehicles and charging infrastructure is developed. The government's commitment to lowering emissions and the imposition of carbon fees that punish businesses for utilizing fossil fuels will also play a role in a reduction in oil usage.

In emerging markets, state-controlled corporations frequently have more sway. This can result in reduced pricing in markets that are oversupplied. The major objectives of state-controlled businesses are to maximize profits, which includes preserving jobs, expanding market share, and supporting domestic industry. The state-owned players give volume a little edge over pricing in oversupplied marketplaces.

Risk reduction, business continuity protection, replacement of product flow efficiency, just-in-time delivery, and exact inventory management will replace product flow efficiency as important strategy determinants due to rising health and geopolitical concerns.

As a result, chemical businesses will need to carefully monitor the potential effects of these changes on working capital management, product pricing, and supply chain efficiency. Chemical commodity production, distribution, and use include a wide range of intricate processes that pose a global problem. It is crucial that succinct and clear safety information is distributed across the supply chain in order to manage these operations and commodities safely.

The global harmonization of manufacturing business processes is the goal of the international ISO Standards. For chemicals produced, utilized, or transported within their jurisdiction, regional regulatory agencies create their own laws. These laws were created in response to consumer demand for reliable, safe products that cause the least amount of environmental damage during production.

The popularity of green and sustainable chemistry has increased due to environmental concerns, stronger legislation, and more ecologically concerned consumers. The method outlines the efforts made by producers to reduce or stop the use and manufacturing of dangerous materials and to create safer, more resource-effective materials, products, and methods.

One area of green chemistry that is experiencing a sharp increase in interest is bio-based compounds. The circular economy will rely heavily on the materials made from biomass, and more manufacturers are moving away from petrochemicals toward safer, greener substitutes.

We hope this article was helpful. For more information from Cambashi, please visit their CPD Member Directory page. Alternatively, you can go to the CPD Industry Hubs for more articles, courses and events relevant to your Continuing Professional Development requirements.

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