Resilience and Evolution: A Summary of Deloitte’s 2023 Oil & Gas Industry Outlook

A shift is taking place in the oil and gas (O&G) industry as the world grapples with the urgency of transitioning to cleaner energy, macroeconomic uncertainties, and geopolitical tensions.

Deloitte’s 2023 Oil and Gas Industry Outlook provides an analysis of the industry’s performance and future trends according to insights from a survey of 100 U.S. industry executives and other senior leaders in five specific industry segments: exploration and production, oilfield services, midstream, petroleum refining and marketing, and integrated O&G and new energy companies.

The following is an Executive Summary of the Deloitte’s report presented by Manufacturing Outlook

The Oil & Gas Industry’s

Trilemma

The industry faces the challenge of having to achieve three simultaneous objectives:

1) Maintaining energy affordability for consumers while investing in new technology and compliance requirements;

2) Ensuring a reliable and uninterrupted supply of energy by continually exploring and extracting resources, maintaining robust infrastructure, and managing geopolitical risks;

3) The increasingly urgent need to transition to cleaner energy sources, which requires significant investment in renewable energy, carbon capture technologies, and other methods to reduce greenhouse gas emissions.

Maintaining Healthy Balance Sheets

The executives surveyed highlighted the industry’s fiscal prudence and strong balance sheets, which are the result of a disciplined approach to investments, an emphasis on shareholder returns, and the leveraging of operational efficiencies.

However, this cautious stance on investment, particularly in hydrocarbon-based resources, is creating supply-demand tension. The executives acknowledged this tension could lead to price spikes and supply shortages, underlining the industry’s ability to maintain energy supply stability in the transition to cleaner energy sources.

The Transition to Clean Energy

The oil and gas industry is respond- ing to global climate concerns by increasing clean energy investments by an average of 12% annually since 2020, making significant investments in clean energy technologies; carbon capture, utilization, and storage (CCUS); and renewables. But while Europe and the U.S. are spearheading this transition with policies incentivizing these investments, it is not yet mirrored in actual capital allocation.

According to Deloitte’s survey, the oil and gas industry has significantly changed its policies and investment trends. Now, they see natural gas as a clean energy option, but only if they can reduce emissions.

The Role of Natural Gas

These developments have been accompanied by a rise in the production and certification of low-carbon nat- ural gas and lower-carbon liquefied natural gas (LNG).

The Downstream Response to Shifting Energy Demands

In 2023, the industry will need to balance challenges against the urgency of energy security and climate goals.

Challenges include regulatory lag and current supply chain constraints that could hamper the deployment of necessary infrastructure and technologies. Furthermore, a massive grid expansion is required to handle the increase in electrification and renewable energy.

However, significant cash flows from record profits in 2022 provide some optimism.

High oil prices, robust demand, and low inventory levels drove petroleum product prices to record levels in the first half of 2022. Despite uncertainty in demand and volatile prices, refiners adjusted their strategies to include high-margin petroleum and chemical products and repurposed infrastructure for clean energy options such as renewable diesel.

Renewable diesel emerged as a prominent focus in the report, signaling the industry’s evolving priorities in the energy transition. Over half of the downstream executives (54%) identified renewable diesel as the low-carbon fuel with the most substantial growth prospects in the next three years.

Deloitte’s survey also indicated that the downstream sector maintains robust adaptability amid changing market dynamics. The ability to respond to price fluctuations is the primary concern for 42% of downstream executives. And over half of respondents (52%) predict healthier margins in the forthcoming year thanks to an anticipated demand resurgence for refined products and petrochemicals.

Industry executives are keenly aware of the urgency of the energy transition, with a significant majority (58%) of downstream executives committed to upscaling their investments in low-carbon fuels and circular economy solutions. This pivot aligns with stakeholder expectations for a reduced carbon footprint. However, 36% of executives name insufficient infrastructure as their primary challenge, while 29% highlight the lack of clear policy guidelines as a deterrent.

Recognizing these impediments, many in the industry are looking to foster collaboration, with 40% of downstream executives considering partnering with external entities to hasten the transition.

Mergers and Acquisitions

In 2022, the industry experienced robust M&A activity, valued at $256 billion, a 60% increase compared to the previous year. This surge was primarily driven by consolidation in the upstream and midstream sectors.

Industry leaders predict this trend will continue, with 40% of executives surveyed indicating plans for potential M&A activities in the next year. They also cited the pursuit of operational efficiency (42%) and geographical expansion (40%) as the leading drivers for these activities.

The Oil & Gas Industry’s Resilience

Despite uncertainties, the O&G industry posted record profits in 2022, providing substantial cash flow to fund strategies in 2023. However, regulatory lag, supply chain constraints, grid expansion, and macroeconomic headwinds could impede the industry’s energy transition.

On the positive side, significant federal funding has been allocated for hydrogen and Carbon Capture, Use, and Storage (CCUS) hubs. The development speed will depend on the permitting process and regulatory approvals.

Navigating the Path Forward

The Oil & Gas industry stands at a crucial juncture, grappling with competing demands of energy affordability, reliability, and sustainability.

Realizing these aspirations will require overcoming a range of hurdles, including infrastructure deficiencies, regulatory uncertainties, and supply chain constraints. The industry’s ability to navigate these challenges will be a defining factor in its ongoing evolution and role in the global energy future.