Energy transition – Impact on oil & gas service businesses

Mar 5 2021

All companies that have historically provided services to the offshore oilfield sector should be considering the impact of the energy transition and the opportunities and threats this represents – and it requires more than just switching marketing and sales focus to renewables projects.

Many companies that historically serviced the offshore O&G sector will be eyeing up the potential of the offshore wind sector because there are likely to be similar technical engineering challenges to be faced and hence good reasons for a service company with offshore O&G experience to be engaged. However, it should be noted that the economic characteristics of the two sectors are fundamentally different – even if some of the engineering challenges are the same.

In the case of O&G, the overall principal is to extract and sell a finite resource from below the sea bed. The sooner that the hydrocarbons are recovered, the quicker they can be sold, and the more quickly revenue is received. In addition, the quicker that the resource is depleted, the less time that the assets need to be maintained in functional and safe state, and the shorter the exposure to regulatory change or other incidents – impacting on the overall lifecycle costs and risks of the project. O&G also has a degree of uncertainty that is built into the cost modelling – a particular development may yield more or less than originally expected. Some fields fail to deliver on the original predictions, while for others technology enhancement has significantly increased the expected production. Whatever the reason, the uncertainty is built into expected higher returns for more risky activity, and the business is generally predicated on higher margins.

With renewable technologies, the requirement is for the ongoing production of energy – which is generally contracted for over a period of many years and, until recently, has been reliant on government subsidy. It is not possible to accelerate and advance the contracted revenue although it may be possible to bring forward the initial production date. Revenues and costs are relatively well known –future pricing is frequently determined at the outset, and offshore wind turbines are produced to a standardised design. As a consequence of these factors, offshore wind generation has a different risk profile and smaller margins than hydrocarbons.

All this means that the business environment for offshore renewables is very different from that of offshore O&G, and any company that proposes servicing both sectors should consider what the implications are for its own business. While the two sectors have related engineering challenges, which supports the use of service companies with combined capability, the two markets have different expectations for their suppliers, and any company hoping to service both should consider whether this can be done from a single entity, or whether multiple entities are required, each aligned with meeting the needs and expectations of its target market. It cannot just be assumed that a company that has previously been successful in meeting the needs of the O&G industry will be able to seamlessly transfer its focus to the renewables sector.

If you need advice on the implications of the energy transition on your business, speak to us. We can help you chart the transition of your business to new markets.

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