Introduction
As the world experiences the adverse impacts of climate change, countries have accelerated their efforts in transitioning from fossil fuels to low-carbon energy. The changeover poses a significant threat to the companies operating in the oil and gas (O&G) industry, as the prospective demands for nonrenewable energy sources are expected to decline substantially. The transition encompasses the implementation of sustainable future-oriented technologies and strategies, including the development of electrification infrastructure, storage capacities, and carbon capture. Consequently, the O&G sector is strained to maintain economic and reputational resilience as a result of transitioning risk occasioned by the shift towards low-carbon energy. In light of these disruptions, it is imperative for firms in the O&G sector to strategically adapt to ensure their future viability in a new energy dispensation. For instance, these companies can diversify their portfolios and start providing such alternative sources of energy as natural gas and biofuels, integrate operations, form joint ventures, and execute mergers and acquisitions. This paper explores potential strategies through which companies operating in the O&G industry can maintain and enhance their economic and reputational resilience as the world transitions to low-carbon energy sources.
Transitioning to Low-Carbon Energy Sources
The energy transition is an elaborate pathway towards modifying the global energy sector and subsequent transformation from fossil-based to low-carbon energy sources. These changes aim to minimize energy-related emissions and mitigate any further adverse impacts of climate change. The globally detrimental nature of these ramifications has been the subject of many international debates for decades, leading to the development and adoption of such initiatives as the Paris Agreement. The Agreement is a legally binding global response delineating such issues as setting the targets for mitigation, financing, adaptation, and creating mechanisms for achieving those aspirations (Raiser et al., 2020). Notably, a significant proportion of these mitigation measures targeted the O&G industry since two-thirds of the global greenhouse emissions are attributed to the sector (Grasso, 2019). Li, Trencher, and Asuka (2022) corroborate this view and posit that the human activity of burning fossil fuels, including oil and gas, ranks among the leading causes of global warming. Therefore, the decarbonization of the global economies and transition to low-carbon energy cannot be realized without the deliberate transformation of the fossil fuel-based business models.
In the light of these occurrences, companies operating in the O&G sector are increasingly discussing climate change and embracing the concept of clean energy. The emerging trend threatens these firms’ economic and reputational resilience, necessitating business remodeling through such strategies as portfolio expansion, investment in alternative energies, integrated operations, and forming joint ventures. For instance, ExxonMobil, Shell, Chevron, and British Petroleum (BP) have invested substantially in carbon capture and storage and are continually exploring divestment opportunities in new energies such as biofuels and hydrogen fuels for mobility (Li, Trencher, and Asuka, 2022). This implies that the transition to low-carbon energy is a significant disruption to compel firms to initiate adaptations that would enable them to operate in the new energy dispensation.
Ways in Which O&G Companies Can Maintain Financial and Reputational Resilience
Portfolio Transformation
As the transition to low-carbon energy gathers pace, organizations operating in the O&G sector face volatility, uncertainty, and other transition-related risks. As a result, these companies are reassessing their current business strategy, particularly their existing products and services, and identifying how they can transform their portfolios to ensure long-term sustainability. Pickl (2019) contends that major O&G firms are reorganizing their offerings and integrating non-traditional business components in their packages. The leading firms view the growing electrification of energy as an opportunity to optimize their financial and reputational resilience by expanding their business strategy. For instance, most O&G companies are reorganizing and optimizing their portfolio by transitioning into full-energy entities offering a wide range of energy solutions. According to Pickl (2019) and Uddin et al. (2022), the strategic rationales of portfolio optimization are to diversify firm revenues, risk management, and exploit emerging opportunities. Therefore, as O&G profitability faces an uncertain future, portfolio transformation can enhance the ability of these firms to generate strong economic returns and foster their reputation and financial sustainability.
A prominent portfolio transformation strategy is the exponential interest and investment in the fast-growing electric vehicle (EV) charging solutions. To remain relevant in the changing energy landscape, O&G firms are acquiring charging infrastructures, which allows them to own, take control of, and operate the existing charging points, thereby adding a new and expanding consumer base. For instance, in 2017, Shell acquired NewMotion, the largest EV charging company in Europe, which effectively gave the energy retailer control of over 30,000 charging stations in Europe (Pickl, 2019). In the same year, the company ventured into the lucrative consumer power markets by acquiring First Utility, an electricity and gas supplier (Pickl, 2019). Early this year, the company completed the acquisition of Ubitricity, expanding the firm’s investment portfolio in low-carbon transport.
The strategic decision of investing in EV charging systems is replicated by BP, Total Energies, and Chevron through the buyoffs of Chargemaster, G2mobility, and ChargePoint, respectively. These decisions are driven by the changing energy landscape, which necessitates the rebranding of firms to mirror the redesigned business models. For instance, Statoil, a leading Norwegian oil company, rebranded to Equinor to reflect the firm’s strategic evolution from an oil-focused enterprise to a broad energy solutions provider (Nissen, 2021). Integrating EV charging systems is a strategic decision allowing O&G firms to remain economically resilient in a low-carbon energy future. According to Uddin et al. (2022), portfolio optimization is also informed by the ability of these firms to leverage their expertise in managing complex supply chains and market development. As a result, these firms embrace the opportunities presented by the energy transition, enabling them to secure their profitability and sustainability in a low-carbon energy future.
Additionally, leading firms in the O&G sector are investing in such future-oriented energy storage technologies as battery manufacture. The approach is a deliberate redesign of the current business model and seeks to exploit the emerging demand for energy storage generated from renewable sources. Ma et al. (2021) posit that the rising investment in sustainable energy sources will inherently result in the rising demand for efficient storage systems. The exponential acceptance of hybrid and electric vehicles will boost the growth of battery industry, and the positive prospects have attracted the investment of major O&G firms. For instance, Total, Statoil, and Shell acquired Saft, Batwind, and Aquion, and Savion, respectively, which are leading energy storage solution providers (Pickl, 2019). This realignment of the existing business portfolio is inspired by the realization that battery energy storage is a critical technology in the transition to sustainable low-carbon energy systems. Shaqsi, Sopian, and Al-Hinai (2020) and Asef et al. (2021) note that the demand for energy storage technologies has been rising year-on-year. This implies that O&G operators are enhancing their economic and reputational resilience by investing in this economically viable option.
Moreover, electricity is poised to be a leading contributor in the transition to greener transportation and is projected to increase twofold between 2015 and 2040. With the uncertainties in oil supplies and price oscillations, the future of the transportation industry is in such alternative sources of energy as natural gas, biofuels, and electricity. This implies that O&G companies can exploit the emerging opportunities occasioned by the transitioning to low-carbon energy and the growing acceptance of transportation powered by other forms of energy. For instance, numerous leading car manufacturers, including Volvo, Nissan, BMW, Volkswagen, Toyota, and Hyundai, have, in recent years, launched electric vehicles whose global sales have been rising steadily. In this regard, O&G companies venturing into energy storage solutions can enhance their profitability by venturing into the transportation sector through the manufacture of batteries for electric vehicles.
Operational Integration
The O&G sector is characterized by numerous operational complexities that adversely affect the stability and relationships among companies operating in the industry. A significant proportion of these dichotomies are disproportionately represented in the operational relationships between upstream and downstream operators. Notably, these challenges impede the progressive enhancement of functional and technical effectiveness of firms, hampering their ability to operate and compete sustainably (Ebrahimi et al., 2018). In this regard, firms in the O&G sector that fail to integrate their operations and instead specialize in one segment experience challenges in implementing their full strategic potential. For instance, ExxonMobil and Chevron have realized success after integrating their upstream and downstream operations. According to Bento (2018), operational integration encompasses the blending and unification of activities, tasks, and technologies to facilitate seamless decision-making and optimization of processes. This implies that operationally integrated organizations can make smarter decisions and achieve better execution due to the interdisciplinary expertise, real-time information, and other strategic advantages.
Operational integration in the O&G sector is an indispensable component in business realignment as companies operating in the industry prepare for the transition into low-carbon energy. For instance, a firm with vertically integrated operations derives such strategic benefits as market intelligence due to its direct contact with the energy end market. In an industry characterized by changes originating from outside, the concept of operational integration ensures that an organization remains abreast and informed of the events occurring in the energy ecosystem (Elijah et al., 2021). For instance, ExxonMobil, Shell, and Chevron adjust their upstream and downstream operations depending on the insights obtained from the market. More specifically, these firms can swiftly respond to such intricate occurrences as structural imbalances in product demand. Conversely, businesses concentrating on any one segment of the supply chain cannot execute speedy responses to such eventualities, which is a major impediment in an industry characterized by cyclical risks. In this regard, operationally integrating an organization will enhance a firm’s profitability and economic sustainability by making and implementing strategic intelligence-driven decisions.
Further, operational integration enables organizations to configure their assets to the current market needs, enhance risk management, and promote the realization of better relations between national and international oil companies. Tasmin et al. (2019) argue that the seamless blending of operations equips businesses with the strategic potential of achieving operational excellence. This concept is widely implemented in globally reputable firms where it is referred to in diverse titles. For instance, Shell, Chevron, Halliburton, and Schlumberger refer to integrated operation as smart fields, I-fields, real-time operation, and smart wells, respectively (Tasmin et al., 2019). Therefore, the generation and subsequent utilization of enterprise-wide information through integrated operations fosters efficient configuration of organizational assets to the prevailing market needs, reducing production costs and improving operational flexibility.
Moreover, the usage of comprehensive company-wide practices and information promotes the proactive integration of risk activities across the entire organization. Notably, the O&G industry is inherently associated with numerous unique risks, including volatile market prices, exorbitant production costs, environmental performance, and health and safety issues. Operationally integrated businesses aggregate insights and crucial information from these diverse segments and develop company-wide risk visibility and tolerance assessments. For instance, the Malaysian O&G firm, PETRONAS, enhanced its risk management abilities by determining the composition of its portfolio against the firm’s risk appetite thresholds (Tasmin et al., 2020). From this perspective, embracing and implementing operational integration in O&G firms will improve their ability to reduce risks, particularly those associated with the eventualities occasioned by the transition to low-carbon energy. This is enabled by the effective generation and utilization of enterprise-wide information, which facilitates effective risk assessment, monitoring, and initiation of response mechanisms. Therefore, companies with operational integration will maintain their economic and reputational resilience through effective risk management that reduces their vulnerabilities to losses.
Mergers and Acquisitions
As the sector adjusts to the reality of expanding renewable energy and growing pressure for low-carbon sources of energy, O&G companies are realigning and reorganizing their businesses through mergers and acquisitions. Ozgur and Wirl (2020) note that between 2000 and 2018, there were numerous cross-border mergers and acquisitions across the globe. These transactions reorganize the assets and liabilities of the involved companies, with the acquiring party seeking to achieve a defined strategic objective, including the provision of new products and services line and enhanced manufacturing and distribution capacities. Notably, a significant proportion of mergers and acquisitions occurring within the O&G sector are primarily driven by the need for companies to progressively transition into the low-carbon energy dispensation. In this regard, these firms are seeking investment avenues of enhancing their financial and economic viability in the face of an impending decline in the demand for fossil fuels. For instance, Seto and DeLucia (2020) contend that solar generation and biofuels have seen the most transactions in mergers and acquisitions from O&G firms since 2010. Such activities have also been witnessed in the mobility, offshore wind generation, and low-carbon segments led by Shell and Total.
Among the prominent horizontal mergers in the O&G sector is the 1998’s combination of Exxon and Mobil that led to the creation of the current ExxonMobil. Although this merger was not intended to achieve any low-carbon initiatives, it availed sufficient financial resources for the newly formed company to invest in renewable energy. In 2018, BP acquired Chargemaster, the United Kingdom’s leading provider of EV charging points. Similarly, Shell acquired a substantial stake in First Utility, a UK-based gas, and electricity provider (Murray, 2020). In 2018, the company purchased a shareholding in Silicon Ranch, an American solar power firm, and Husk Power Systems, an Indian business involved in renewable power generation. In 2016, Total purchased Saft, a French battery manufacturer, and Lampiris, a Belgian green power utility firm (Murray, 2020). The transactions are designed to reinforce the economic performance and reputational resilience and cushion the firm’s financial sustainability in the face of changing business landscape. In this regard, despite the imminent decline in the demand for fossil fuels, these companies will continue performing impressively due to the strategic acquisitions and mergers.
Joint Ventures
Joint ventures are common business arrangements for businesses operating in the O&G industry, particularly those engaged in exploration, development, and production activities. The popularity of this business model is prevalent in upstream projects, a scenario influenced by such reasons as diversification and strengthening of company portfolios in an increasingly volatile market. Notably, since many upstream undertakings are capital and resource-intensive, joint ventures enhance the firms’ ability to access funding, manage expenditures, distribute risks, and allow participation in high-value, large-scale operations. Additionally, joint ventures facilitate the easy transfer of knowledge, skills, technology, and best practices, which provide a significant risk protective measure. For instance, Chevron partnered with MAANA, an information communication technology company involved in the development of an analytics platform. Notably, this joint venture was designed to enhance Chevron’s application and utilization of such technological innovations as advanced robotics and data mining to improve plant operations. Since these technologies were not typically developed for the O&G industry, the partnership allows energy organizations to adapt their operations and gain access to emerging technologies successfully.
Additionally, with the challenging market conditions, the increasing complexity of projects, and rising competition, companies in the O&G sector are seeking ways of delivering projects in the most cost-effective way. In this regard, these organizations actively share risks on major capital projects, with joint ventures providing the most appropriate avenue for spreading the cost, minimizing risk, and enhancing sustainability (Okeke, 2021). For instance, the partnership between Chevron and MAANA enabled the firm to build strength and accelerate the firm’s growth across the renewable energy value chain and freed cash flows that would be invested in other projects. In this regard, joint ventures will foster the economic and reputational sustainability of organizations operating in the O&G sector by enhancing better managing of capital expenditure, risk distribution, and participation in attractive high-value projects.
Further, the pooling of resources, skills, technology, best practices, and diversification of the firm’s portfolio in an increasingly volatile market protect multiple aspects of business performance. Also, international joint ventures are intended to overcome regional regulatory requirements and facilitate easier entry into new markets, effectively improving the economic and reputational projections of a firm. For instance, Shell, Chevron, Agip, Texaco, and Mobil operate upstream operations in Nigeria through joint ventures with the Nigerian government (Egharevba and Ovenseri-Ogbomo, 2019). The type of these partnerships includes operational, risk, and capability sharing and are intended to leverage the abilities of participating entities. For instance, Shell participated in the Nigerian partnerships since the company had engineering and technical knowledge while the government brought political influence and resources to facilitate the exploration and extraction of oil.
Conclusion
As the transition to low-carbon energy draws near, companies operating in the O&G sector face economic and reputational risks. However, these organizations adapt their businesses to ensure sustainability and profitability in the new energy dispensation. To achieve this, these companies are merging and acquiring other businesses, transforming their portfolios, operationally integrating their processes, and forming joint ventures. The implementation of these strategies will enhance the ability of these firms to transition into the low-carbon energy era profitably and sustainably and cushion them against the declining demand for fossil fuels.
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