mai 11, 2022
15-minutes de lecture
RESEARCH REPORT
In brief
- Russia's invasion of Ukraine has had rippling humanitarian and economic impacts across the globe. The energy industry is particularly vulnerable.
- The imperative for oil and gas companies, working in concert with governments, is to mitigate the potential disruption of supplies from Russia.
- Over the longer term, the industry needs to strengthen its resilience and relevance in a fast-changing energy world.
- We believe six priority actions will help oil and gas companies become stronger, more agile, and more responsive to global circumstances.
Russia’s invasion has made a tenuous situation much worse for energy markets, particularly in Europe. The imperative for oil and gas companies, working in concert with governments, is to mitigate the potential disruption of oil and gas supplies from Russia. Over the longer term, the industry needs to strengthen its resilience and relevance in a fast-changing energy world. We believe six priority actions will help oil and gas companies—and, by extension, the governments and industries they serve—become stronger, more agile, and more responsive to global circumstances.
An industry's vulnerability exposed
For the oil and gas industry, pre-war does not mean pre-crisis. Before the invasion, global energy demand was starting to outstrip supply. With the recovery of demand following the COVID-19 pandemic, the imbalance between supply and demand was expected to grow to 2% in 2022.
The supply shortfall the world is now experiencing is historic. And it can't be quickly remedied.
Together, oil and gas will make up more than 50% of the total energy supply in 2022.1
There are several reasons for the lack of immediate practical solutions to close the gap. This includes the time it will take to increase the capacity of alternative energy sources, such as renewables, nuclear energy and natural gas; and particularly liquified natural gas OPEC's spare oil capacity is already stretched thin; and while coal could be used to meet some energy needs, it would jeopardize the industry's—and the world's—commitment to decarbonization.
The reliance on oil and gas
The transportation sector is particularly dependent on liquid fossil fuels. Per our analysis, these fuels make-up 94% of the sector's energy demand. Heavy industry, residential and commercial buildings and electric power providers are other end users with significant demand for liquid fuels.
From a geographic perspective, developing economies are expected to be the main drivers of global oil demand moving forward. Their growing populations and transportation sectors, coupled with lower investment in clean energy, means that there are few alternatives to oil.
Since 2021, daily oil demand has exceeded supply by more than one million barrels. By 4Q21, the excess demand peaked at 2 million barrels/day. That deficit was expected to close by 2Q22 mainly driven by non-OPEC+ producers.2
However, several factors have made those assumptions obsolete. Russia's invasion of Ukraine raises concerns that Russian supplies may be curtailed. The recent unplanned supply disruption in Libya (resulting in almost 550,000 barrel of oil equivalent (boe)/day being taken out of the supply mix3 ) adds to the concern. As does the steady depletion of existing inventory (a 19% decline for OECD countries between August 2020 and March 20224 ). Together, these factors will ensure that oil prices remain high and markets tight—despite the recent 260,000 boe/day drop in estimated oil demand in 2022, especially from China.5
Liquids demand vs. supply (as of mid-Feb 2022)
Note: Forecasted estimates. More recent updates include the unplanned supply disruption in Libya (resulting in approximately 400,000 barrels of oil equivalent (boe)/d).
Sources: Accenture analysis with data from IEA; IEA Oil Market Report Feb2022 Outlook for 2022 reported in "Russian supply blow shakes global oil output picture – IEA," Reuters, March 16, 2022, factiva.com and "Tighter oil market confirmed by IEA demand revision", Reuters, February 15, 2022, factiva.com.
A similarly complex story has unfolded in the gas sector, particularly for liquefied natural gas (LNG) in importing countries in Europe and the Asia-Pacific region.
Global demand for natural gas—which is widely seen as a cleaner and cheaper option to hydrocarbon-sourced energy—was growing steadily to meet the needs of power generators and other sectors. The COVID-19 pandemic dampened demand growth in Europe. Gas inventories in Europe reached 10-year lows.6
But demand for LNG continued climbing in Asia, with forecast demand growth of 10% expected in 2022. In the resulting tight market, regional supply deficits became more common and competition for LNG to fulfill supply gaps grew even more fierce.
Natural gas production-consumption gaps (as of Jan 2022)
Source: IEA Gas Market Report Q1-2022 (2022), All Rights Reserved, as modified by Accenture
LNG net imports for Asia and Europe (as of Jan 2022)
Given all these factors, supply tightness was expected to persist through 2022, even before the invasion. That meant the upward pressure on energy prices (e.g. TTF ~ 30 $/MMbtu in late 2021) was also expected to persist.
The reliance on Russian oil and gas
As the world's third-largest oil producer (and second largest exporter of crude oil) and second-largest natural gas producer (and largest exporter), Russia supplies nearly a sixth of the global oil and gas supply. Russia's dominance is particularly evident in Europe, where it supplies more than 20% of the continent's oil and more than 30% of its gas. Several countries in Europe, including Austria, Finland, Poland, Slovakia and Hungary are dependent on Russia for 50% to 100% of their oil and gas imports.
Russia is a major supplier of Europe's oil and gas
Sources: Accenture analysis based on data from IEA Oil Market and Russian Supply 2022; IEA Oil Market Report Feb 2022, IEA Gas Market Report Q2-2022 (Russia share in global oil/gas market); Rystad (Russia gas supply to Europe) and Eurostat.
mtoe = Million tons of oil equivalent | bcm = Billion cubic meters | mt = Million tons
VIEW ENLARGED IMAGE
With the recent invasion of Ukraine, Europe's dependence on Russian oil and gas presents a potential existential crisis. Sanctions to limit oil and gas imports have not yet been enacted.7 But there are myriad other threats. We’ve already seen Russia take actions to halt gas supplies to Poland and Bulgaria.8 Additionally, Russian pipelines to the EU may be at risk of supply disruption—either through unilateral decisions to limit gas imports or infrastructure damage. Given that Ukraine's transit pipelines can carry more than a third of Russian exports to Europe,9 the latter risk is concerning.
In the face of a sudden shortfall of gas supply, Europe would be hard pressed to find alternatives. LNG imports may be considered as part of a longer-term solution. But Europe's liquefaction and terminal capacities are quite limited. The earliest they could be ramped up is estimated to be at the end of 2023.10
Some refineries—especially in Germany and central and eastern Europe—are dependent on Russian crude oil. Historically, refinery capacity has been outstripping demand. This means facilities have been underutilized and refiners have faced increasing margin pressures. A persistent high oil price environment coupled with inflation may continue to erode fuels demand. If crude oil supplies from Russia are curtailed, the margin impact could be more significant as some refiners are not able to easily replace Russian crude oil.
Pre-invasion oil product demand forecasts of 83 million barrels (mmb)/day may fall to 79 mmb/d or lower this year. However, demand is expected to grow over the next several years. And if oil (crude and product) supplies from Russia are disrupted, refiners will likely be challenged to secure feedstocks to replace them.
Securing an affordable energy supply
Any supply shocks caused by the invasion in Ukraine will likely affect Europe significantly and, to a lesser extent, the rest of the world. Commodity prices could be pushed to all-time highs. A curtailment of Russian oil and (especially) gas to Europe would likely require policy responses and could lead to the rationing of energy across energy-dependent sectors.
Countries are already preparing for possible supply disruptions. The European Union has announced a plan to transition away from Russian oil and gas.11 Germany has made plans to end Russian oil imports by the end of 2022.12 The United Kingdom and United States have implemented embargoes.13 And global seaborne markets are currently hesitant to absorb Russian cargoes. In early March, 70% of Russia's seaborne oil exports were in an indeterminate state, struggling to find buyers.14
Russia's invasion of Ukraine has demonstrated just how vulnerable energy markets are. Reducing reliance on Russian oil and gas could be a key step to shoring up energy security. But downscaling dependence won't be easy. Countries will be required to find or develop alternative sources, which requires technical, financial and geopolitical expertise, investment and collaboration. Nations will also need to work with oil and gas companies to reimagine the energy system of the future and how consumers and industries use energy.
Possible implications of the war in Ukraine
The impact the Russian invasion of Ukraine will have on Europe and its consumers, the oil and gas industry and other energy-intensive industries will depend on several factors, including the war's duration, the severity of Russian supply shocks, and the level of oil and gas shortfalls in Europe. At present, these factors are unknowable. Our analyses of European countries' economic conditions and their reliance on different energy sources provide a view into the potential near-term impact of the war. We also look at actions energy companies might consider to help mitigate the negative effects.
Potential energy scenarios
Note: Rest of the world potential debt defaults focused on emerging economies. | TTF: Title transfer facility | Source: Accenture analysis on data from Factiva.com15
- CURRENT SCENARIO
- EXPANDED SCENARIO
- EXTENDED SCENARIO
We have moved into the third month of the invasion. A quarter of Russian energy has been disrupted largely due to self-sanctioning by European buyers or government-enforced sanctions in North America. There has been some redirection of Russian supplies but it’s been limited so far. In this current scenario, energy shortfalls in Europe should be manageable, although the chemicals, basic materials and manufacturing sectors might experience disruptions. Commodity prices would remain elevated—up to $150 per barrel for oil and up to $50 per million British thermal units (MMBtu) for gas.
An expanded scenario based on an escalation of the war in Ukraine, a 50% reduction of Russian gas flows into Europe and potential for embargoes to pull large volumes of Russian crude oil products from the European market by the end of 2022. In this scenario, oil prices could rise to $150-$200 per barrel. Gas prices could approach $100 per MMBtu. All industries in Europe would likely be affected and some industrial sites may be forced to temporarily cease / stall operations.
An extended scenario based on a complete embargo on Russian energy supplies. In this scenario, oil prices could exceed $200 per barrel over a sustained period of time and gas prices climb to $100 (or more) per MMBtu over several months. Rationing of oil and gas in Europe would be more likely. All industries in Europe would be affected.
Based on our analysis, oil and gas prices in the expanded and extended scenarios would likely peak in mid-2022 and remain elevated for at least a year. Over the longer term, oil prices in both scenarios could converge as the supply/demand gap closes.
In any scenario, energy price increases—already driven higher by increased demand as post-pandemic economies re-opened and now exacerbated by the crisis in Ukraine—will impact consumer prices. Based on our analysis of OECD data (below), the dual shocks brought about by the pandemic and the war are expected to drive the largest consumer price increases in 20 years.
The current high energy prices and inflationary pressures are already having a significant impact on European economies in terms of an expected decline in GDP growth.16 The war and its impact on energy supplies are expected to exacerbate and accelerate European countries' inflation growth and GDP shrinkage through the end of 2022.17
When it comes to potential shortfalls in gas supplies across Europe, we have simulated potential outcomes of our "expanded" and "extended" scenarios, analyzing the impact potential by-country gas supply disruptions considering the current restrictions of the local gas infrastructure.18 Each case assumes European LNG regasification, European pipeline flow and other technical limitations. The impact of either scenario could possibly lead to gas rationing.
Up to 50% reduction in Russian gas imports over the next 12 months would likely result in supply shortfalls in 18 countries (relative to those countries' energy demands). The greatest impact would occur in Central and Southeastern Europe: Germany (~ up to 9%); Baltics (~up to 20%); and Central-Eastern Europe (~ up to 15-30%). Southwestern Europe would be largely spared energy disruption, given that those countries' high LNG imports would likely offset any gas exposure from Russia.
Up to 100% reduction in Russian gas imports over the next 12 months would likely bring supply shortfalls to 22 countries.19 Again, the impact would likely be significantly greater in Central-Eastern Europe and the Baltic countries: Germany (~ up to 30%); Baltics (~ up to 50%); and Central-Eastern Europe (~ up to30-50%). Southern Europe would be less affected. In this scenario, only Italy would be expected to experience a significant supply shortfall (17% shortfall relative to demand).
Many industries in Europe depend on natural gas. Several, in fact, rely on gas to meet a third or more of their energy demands.
View chart: Percentage of sectoral energy demand addressed with natural gas
These and other industries are impacted to some degree by higher gas prices across countries. Shortages of natural gas supplies from Russia would compound the problem. Industries in Italy and Germany—especially manufacturing, cement and construction, steel and non-ferrous metals, and consumer goods sectors—may be particularly hard hit. Conversely, the share of Russian gas imports used to meet industry energy demand in the United Kingdom and France is low. In those countries, domestic supplies or alternative export routes could lessen the effects compared to more gas-dependent industries.
A prolonged period of higher energy prices for natural gas and also oil would indirectly affect industries whose material inputs are influenced by energy prices. Material costs for the chemicals industry, for example, are tied mainly to the cost of petroleum. Similarly, the industrial and high-tech sectors rely on energy-intensive material inputs. High energy prices in these sectors would likely drive price inflation down the value chain and could weigh on margins. While our analyses suggest that elevated energy prices could negatively impact corporate margins, there is less evidence to suggest that higher prices will depress equity returns.
In addition to high energy prices, reduced consumer purchasing power and lower demand for industrial products could further erode margins among energy-intensive industries in Europe. Our analysis anticipates demand reductions in the following industries: mobility/freight; cement/construction; steel/non-ferrous metals; chemicals/petrochemicals; and manufacturing.
Utilities and consumer goods industries could also see a slight reduction in demand. But their narrow margins may be less affected because they could pass higher input costs to end consumers (albeit with a time lag). However, it is likely that high energy prices will lead to a reduction in energy demand. Utility earnings would likely be affected negatively in this price environment.
Global inflation was already poised to affect consumer spending in 2022 and beyond. Overall consumer sentiment has been deteriorating for the past two years. Gasoline prices have made people rethink their mobility. Now, with the war driving sudden spikes in energy prices, it's possible that consumers could further curtail their discretionary spending.
View chart: Energy cost impacts: Consumer spending
Energy price rises could have a material effect on people's real incomes around the world. For example, our analysis shows a 20% increase in household electricity bills due to higher energy costs would pull $90 billion from the pocketbooks of households in G7 countries. A 30% or 50% increase would burden households with $130 billion or $220 billion in increased costs in total, respectively.
It is too early to understand how consumer spending might ultimately be affected. But oil and gas companies should be mindful of the potential reduction in consumer demand that lies ahead.
The path forward
The 2020s kicked off as the make-or-break decade for the oil and gas industry. Structural shifts in the industry, the mounting pace of the energy transition, competition from new energy sources and demand for environmental accountability had already pushed many energy companies to plan their reinventions. The COVID-19 pandemic, which decimated short-term hydrocarbon demand, only accelerated the need for change.
Just two years later, energy demand has surged back. Supplies have yet to catch up. Commodity prices have reached record highs. Russia's invasion of Ukraine further roiled the energy markets, making a highly volatile energy system even more so. Building long-term resilience and agility in the energy system of the future is now more important than ever. But, as the war in Ukraine has made abundantly clear, so are the industry's efforts to strengthen energy availability and security.
The oil and gas industry is now at a crossroads, with important decisions to make. Companies seem to be leaning towards ramping up traditional (browner) supplies to help countries that currently depend on Russian oil and gas maintain energy security. However, with this crisis comes the opportunity to accelerate the transition to a greener, more efficient energy system.
Closing the oil and gas supply gap
Today's high commodity prices are giving oil and gas companies a significant financial boost. But the challenges facing the industry and the fundamental elements of the required reinvention have not changed. These challenges must be considered in light of the immediate imperative: bridging the energy gap that might be caused by curtailment of Russia's oil and gas supplies. The industry will need to play a leading role in lessening the world's (and primarily Europe's) dependence on Russian oil and gas by quickly developing a diversified set of alternative energy sources and capabilities.
Growth in US supply of 1.5-2 mmb/day is expected through 2023, with an additional 0.5 mmb/day by 2025. In the immediate term, the United States could also partially offset approximately 0.2 mmb/day of Russian oil volumes through releases from its Strategic Petroleum Reserve.20
OPEC—which can feasibly continue increasing its supplies by 0.4 mmb/day per month through October 2022—is expected to increase supplies by a cumulative 3 mmb/day by 2025.21
Iran could add an incremental 1 mmb/day by 2023 as an alternative to the Russian supply, but that contribution is contingent on overcoming the political barriers related to the nuclear deal.
Other non-OPEC producers could add 0.5mmb/day of incremental supply between 2021 to 2025.22
View chart: Potential alternatives to Russian crude supply (mmb/d)
Oil companies won't just have to offset Russian crude but also meet new demand for oil, which is expected to increase by 4—7 mmb/day by 2025.24 Securing additional production to meet demand in the short-term, especially in the US and Venezuela, would be quite challenging, given the drilling lead times, capital investments and talent needed to accelerate production.
Increasing the systemwide gas capacity to address any Russia-led supply gap will depend, primarily, on the global liquefied natural gas (LNG) supply. The ramp-up of LNG will likely be primarily by the United States, which is the biggest LNG exporter, with ~125 billion cubic meters (bcm) of export capacity this year. The US has already made plans to deliver 15 bcm additional LNG exports to Europe in 2022. By 2030, the goal is to deliver an additional 50 bcm/year, up from 22 bcm in 2021.25, 26
More than 200 bcm of LNG export capacity is approved in North America for delivery by 2025 (although delays in delivery are possible).27 At least four LNG facilities could be operational within the next two years.28 Two Canadian LNG terminals in British Columbia are also expected to come online in the next couple of years29 and could help make up for the Russia-led supply gap.
Beyond North America, countries like Qatar, Australia and Mozambique could help close the gap if their supply capacities allow. But the majority of any new capacity they could deliver is expected to be available only after 2025.
View chart: Global LNG and pipeline export ramp-up (bcm)
Complicating matters is the fact that Western and Central Europe are not currently equipped to meet their natural gas demand by simply accepting additional LNG cargoes. They have neither the regasification capacity they need, nor a robust inland network for distribution. This infrastructure will need to be developed.
European countries could, however, increase the utilization rates of current LNG terminals, which stood at approximately 50% (excluding Iberia) in 2021. The planned increase in utilization to 80% in 2022 would introduce an incremental capacity gain of approximately 60 bcm. A further 14 bcm of new liquefaction capacity can be delivered by 2025.30 That could help offset the curtailment of Russian gas supplies, but would not be nearly enough to meet demand. As a result, there will likely be the need for initiatives aimed at reducing energy demand, switching to new fuel sources and accelerating renewables projects. In both our expanded and extended scenarios, natural gas rationing could be a possibility.
Building resilience
Quickly replacing Russia's contribution of supplies to the global energy system is a top priority for the oil and gas industry. But so is the creation of an agile, resilient, secure and reliable energy system that can withstand future disruptions. We believe six strategic plays could position oil and gas companies to achieve their short-term and longer-term ambitions.
Strategic play #1: Build brownfield capacity and operational excellence
Even before the start of the war in Ukraine, oil and gas companies were poised to ramp up production to record-high levels to meet surging post-pandemic demand for energy. At the time, US Energy Information Agency forecast that 2022 crude oil volumes in the United States would increase by 760,000 b/d in 2022 and another 630,000 b/d in 2023.31 The curtailment of Russian oil has accelerated and amplified the need for more production capacity in the short term.
One possible (and relatively quick) way to boost crude oil supplies involves increasing production from existing brownfield sites. Production from legacy wells declines relatively quickly in tight oil formations, leading to the development of new wells within existing fields such as the Permian region. But existing wells still contain plenty of oil. In fact, it is estimated that reservoirs hold two-thirds of the original crude after primary and secondary recovery efforts.32
US crude oil production forecast
Source: EIA STEO, March 8, 2022, with an estimated share of Lower 48 new production from EIA shown in STEO 18 Feb 2022.
To accelerate recovery, exploration and production (E&P) companies may be required to do four things:
- Adopt a production system view of their operations.
- Develop analytical capabilities that will facilitate faster response to production setbacks.
- Upskill their workforce to specialized roles.
- Improve their planning capability for well restoration.
Making such moves is not a simple undertaking. For a field with several thousand legacy wells, it would require the extensive development of field site automation. We estimate that up to $70 billion per year can be tapped by optimizing production via operational efficiencies, reducing planned/unplanned downtime and reducing inventory surpluses.33
- WHAT TO DO NOW
- WHAT TO DO SIX MONTHS FROM NOW
- Continue to invest in wellsite and facility automation.
- Invest in data ingestion, contextualization and analytical models.
- Increase communication across disciplines.
- Train and upskill employees.
- Identify methods of optimizing production to the last feasible barrel.
Strategic play #2: Maximize greenfield investments
Before the invasion, global capital expenditure (CAPEX) investments were forecast to grow in 2022 by 7% in oil and 14% in gas/LNG and up to 18% within the shale E&P segment.34 Upstream capital expenditures in North America were expected to grow by at least 20%.35
Global exploration and production investment outlook ($US billion)
Source: Rystad Energy Ucube, data from March 31, 2022 Base case, used with permission.
Accelerating the development of traditional assets involves investing in upstream oil and gas fields and liquefaction capacity, regasification facilities, and terminals for storage. There is a particular opportunity to build out the gas distribution network in Europe. Specifically, bringing German regasification plants online quickly could loosen current system constraints and help increase Central/Easter Europe LNG capacity totals by approximately 70 bcm in this decade. New pipelines in Europe could provide an additional flow of about 65 bcm. Throughput expansion from existing pipelines could also provide an additional flow of about 15 bcm.36
Overcoming greenfield hurdles
Two major hurdles arising from the Russian invasion of Ukraine further exacerbate an already constrained supply market for greenfield capital projects:
- Shortages of commodities, raw materials and components. The combined production of mining commodities such as steel, aluminum and nickel from Russia, Ukraine and Belarus constitutes more than 5%, 6% and 18% of the world's production share37, respectively. The impact of sanctions has compounded inflationary pressure to drive year-over-year price increases for these commodities from 20% to 100% in 2022.38
- Lack of people to deliver capital projects. Workforce reductions and talent pool shrinkage, driven by the 2020 supply shock and pandemic, resulted in a 10-20% wage cost increase across the construction, engineering and installation sectors.39 This has created an operating environment where constrained resources are being asked to do more with less.
These challenges have exacerbated greenfield obstacles that have persisted for years. Accenture analysis has found that only 25% of oil and gas companies' CAPEX projects have been delivered on time and on budget.40 In our 100 major capital projects analysis, cost overruns totaled $161 billion.
There are several reasons why greenfield projects have been prone to failure. Root causes tend to fall into three categories: a lack of pre-deal forethought; a lack of visibility; and a lack of analytics agility.
There's no reason for such historical failures to occur in capital projects moving forward. Recent advances in digital technologies and data management have introduced new critical project control oversight capabilities. Analytics play a particularly important role. Recent Accenture research41 has found that approximately half of oil and gas companies have already implemented digital capabilities. While many have not yet scaled such capabilities across the capital project portfolio, they are headed in that direction. Advanced data analytics is the top technology investment area for oil and gas companies between 2020 and 2024.
These new capabilities, tools and methods, coupled with the fiscal discipline and rigor investors now demand, will likely usher in a very different approach to capital project execution.
- WHAT TO DO NOW
- WHAT TO DO SIX MONTHS FROM NOW
- Accelerate final investment decision (FID) on key LNG capital investments (expansions and greenfield developments).
- Activate near-term actions to bolster the ability to react to dynamic market conditions and identify strategic operating model enablers.
Strategic play #3: Achieve supply chain resilience
- Strengthen capital project management visibility.
- Expand implementation of agile operating model techniques.
- Continue the digital transformation.
- Create a data-driven culture.
Strategic play #3: Achieve supply chain resilience
The energy industry has long faced supply chain challenges, and the pandemic made them worse. Regional quarantines either created shortages of vital raw materials such as steel or brought ground production of necessary equipment to a halt. Even when materials and parts were available, logistical issues ranging from port congestions to the lack of last-mile drivers made it difficult to transport them to their final destinations.
Now, Russia's invasion of Ukraine may create additional shortages in iron ore, nickel and other materials used in oilfield equipment. On top of this, countries and energy-intensive industries are looking to quickly replace their Russian oil and gas supplies. With supply chain problems holding up brownfield and greenfield projects, the challenge to meet the world's short-term energy needs has grown exponentially.
Finally, inflationary pressures can't be ignored. Inflation has made products that are available much more expensive. The capital spending set aside to meet demand and offset Russian oil and gas will actually buy less than it used to. Accenture estimates that current supply chain problems in the oil and gas industry put more than 20% of capital plans at risk.42
Root causes of supply chain vulnerability
As the pandemic and the war in Ukraine suggest, crises that have the potential to disrupt oil and gas companies' operations are unavoidable. But the problems—and costs—associated with supply chain troubles needn't be as cumbersome as they have been in the past. Why? Because we now understand the underlying issues that have made the industry—particularly exploration and production companies—more susceptible to supply chain disruption. These issues include:
- Lack of demand and resource pooling across operators.
- Arms-length relationships with oilfield and equipment services (OFES) companies.
- Low visibility/high inefficiencies.
A re-imagined supply chain
Recognizing the issues that make existing supply chains so susceptible to disruption is the first step toward overcoming them. While energy supply chains can usually withstand short-term disruptions, their standard risk models and supply chain capabilities fall short when dealing with longer-term, high-impact events. Building supply chain resilience will require operators and OFES companies to ask hard questions—and then gear their organizations for an integrated and efficient approach to reducing their collective risks.
- WHAT TO DO NOW
- WHAT TO DO SIX MONTHS FROM NOW
- Anchor a mitigation plan in a clear understanding of what is possible and required when supply chains are threatened.
- Consider ways to potentially reduce supply risks, such as: conducting supply chain stress tests, and implementing shared procurement operations to optimize sourcing across basins and leverage a greater scale of purchases.
- Pool demand and resources with other operators (and provide OFES companies visibility into this unified view of demand).
- Develop new contract structures that incentivize OFES companies to improve supply resilience.
- Strengthen relationships with OFES companies to understand supply shortages and work together on mitigation strategies.
- Establish a basin-wide supply chain control tower to improve visibility and resource utilization.
Strategic play #4: Strengthen commercial and trading capabilities
The current energy crisis is already affecting the refining sector. The impact is felt mainly in the United States and Europe and may potentially affect all regions due to the global nature of the crude oil market. Going forward, persistent high oil price environment coupled with inflation may erode fuels demand. This challenge would be more pronounced in Europe.
Refinery margin impact
Notes: 1Net cash margin ranges estimates are based on loss of profit (LOP) revenue minus crude and other fixed stock costs, refinery variable and fixed costs plus non-LOP revenue. Assumes reduction in demand 0.8-1 million barrels per day (mmb/d) versus pre-war estimates; 2Cash margin drop includes impact of supply constraints in Eastern Europe.
Source: Accenture analysis based on company data.
For the energy industry as a whole, however, volatility also brings opportunity. In trading markets, the high commodity prices and increased volatility seen in 2022 are likely to reach equilibrium in 2024 or 2025. In the interim, new arbitrage opportunities might emerge to increase the overall trading value pools across various commodities.
Trading value pools (Million USD) - Global
Note: Electricity figures include Europe, North America and selected Asia Pacific countries.
Source: Accenture analysis based on impact of trading margins and commodity demand on global trade value pools under selected scenarios.
The role of digital technologies in trading
As their trading capabilities mature, leading energy companies increasingly digitize their operations to drive greater efficiencies and better manage and optimize the daily change to their profit and loss. They are shifting to cloud-based ecosystems, unifying data sources, building mobile capabilities, automating operations, and building customer-facing platforms and marketplaces. Importantly, they also take advantage of new technologies to generate insights and make better, faster decisions. Others in the industry should follow their lead.
Re-imagining the trading function
Navigating the economic impact—positive or negative—of the war in Ukraine and the subsequent energy crisis requires oil and gas companies to fortify their commercial and trading capabilities. To build a more resilient trading function, energy companies should consider the following steps.
- WHAT TO DO NOW
- WHAT TO DO SIX MONTHS FROM NOW
- Understand the available risk capital within the organization and allocate more of it to trading.
- Make the necessary tactical operating model changes to optimize margins across the integrated value chain.
- Start investing in value chain optimization technologies and other digital technologies (artificial intelligence (AI) and machine learning) to improve the accuracy and efficiency of key processes across the trade life cycle.
- Review the trading strategy with an eye toward new trading flows, expected arbitrage opportunities (global and regional) and new trade flow access requirements (e.g., terminals, depots, storage, etc.).
- Strengthen cybersecurity protections to protect commercially sensitive data.
- Implement portfolio changes to support the new trading strategy.
- Rebalance term/spot business composition to ensure supplies match market opportunities.
- Overhaul the operating model, with clearly defined roles, responsibilities, accountabilities and risk ownership.
- Expand the scope and scale of the risk management function to cover all types of risk and embed a risk/return mindset for commercial decision-making across the organization.
Strategic play #5: Accelerate clean energy, demand-side efficiency and decarbonization
The short-term and longer-term reduction in reliance on Russian energy can be a catalyst to bring forward the energy transition. It could also enhance the investment case for clean energy and drive the transformation of the industries and sectors that are the consumers of fossil fuels from Russia. Oil and gas players are making their moves. But there are still plenty of opportunities to seize.
Clean energy investments, demand-side energy efficiency and industry decarbonization are three key areas of action for oil and gas companies. And they can do so in a way that opens up new growth opportunities across multiple segments—all while leveraging profits from record-high energy prices and decades of experience collaborating with suppliers and customers, industry peers and other ecosystem stakeholders such as governments, policymakers, investors and consumers. By doing so, oil and gas companies can help countries strike the right balance between energy affordability, security and availability and sustainability imperatives.
Oil and gas companies can play a further role in supporting demand management initiatives, given the greater need for energy efficiency. Commercialization of energy efficiencies (through energy services offerings) will yield significant growth opportunities for well-capitalized oil and gas companies with existing trading capabilities.
Example initiatives to avoid oil and gas demand
Notes: 1) Assumes a car using 720 liters of gasoline a year with 6 l/100km and 12,000 km/yr. 2) Assumes a 40-ton truck using 33.1 L/100km for 150,000 km/year. 3) Based on European 2021 aviation fuel demand. 4) Assumes gas-fired baseload power plants replaced by flexible wind/solar/battery storage mix able to provide stable supply similar to baseload power generation. 5) Assumes 0.03 boe natural gas needed to produce 1kg steam methane reforming (SMR)-based H2 today.
Sources: Accenture analysis with data from Eurostat, European Commission and IEA
To succeed in driving demand-side efficiencies and new energy services, oil and gas companies should consider:
- Rethinking scenario planning.
- Repositioning themselves as energy suppliers rather than hydrocarbon suppliers.
- Channeling new returns toward the transition.
- Participating in decarbonization collaborations.
Practical actions
To address the changes in customers' demand for energy and position themselves as leaders in the energy transition, oil and gas companies can take practical steps.
- WHAT TO DO NOW
- WHAT TO DO SIX MONTHS FROM NOW
- Identify and initiate discussions with potential collaborators.
- Expand into adjacent areas such as blue hydrogen, biofuels and energy. efficiency management services.
- Review short-term economic and portfolio assumptions.
- Build position in long-term decarbonization.
- Develop programs and capabilities to help customers and countries diversify their energy supply mix.
- Reshape portfolios and R&D investments by channeling new returns to meet new demand requirements.
- Revisit long-range planning.
- Repositioning themselves as either integrated energy providers, decarbonized oil and gas leaders, or low carbon specialists.
Strategic play #6: Fortify cyber defenses
Energy companies have long been vulnerable to cyberattacks, but now the risk is higher than ever. The war in Ukraine—and the sanctions placed upon Russia as a result—have triggered retaliatory cyberattacks.
Accenture's Cyber Threat Intelligence and Cyber Investigation and Forensics Response teams found that Russia's invasion of Ukraine has resulted in a significant increase in cyber threats, including to critical infrastructure, by ideologically or financially motivated actors.43
What we’ve found
- A 200% increase in scanning activities within companies that export liquified natural gas to Europe. To date, there have been no significant impact events in critical energy infrastructure.
- An increase in reports of attacks and preparation for attacks against energy generation within the last 60 days, especially against Western and NATO-allied energy infrastructure.
- An uptick in the number of ransomware victims who were publicly outed due to a lack of ransom payment. Five "energy" and one "oil and gas" organizations were listed in March and April 2022, compared to zero organizations from those industries reported between November 2021 and February 2022.
- Diverse threat groups probing and attacking energy infrastructure before and after Russia's February 2022 invasion of Ukraine. Many such groups have chosen sides based on ideological lines. Accenture has seen at least 50 pro-Ukrainian ransomware groups and at least 20 pro-Russian groups, all launching cyber-related attacks aligned with their ideology.
Industry leaders are quite aware of the threats they face. They have been under attack for years. From a sample of 55 Fortune 500 energy sector executives, nearly half had their corporate credentials exposed in a breach or leak since 2018. Also, over the past few years, the 20 largest global energy companies have had millions of records containing sensitive personal and employee data compromised.44 It's not surprising, then, that 83% of executives in the oil and gas industry increased their cybersecurity spending in 2021.45
Increased cybersecurity spending in oil and gas in 2021
Source: Accenture State of Cybersecurity Resilience 2021 (N=4,7444; n=210 for oil and gas).
- WHAT TO DO NOW
- WHAT TO DO SIX MONTHS FROM NOW
The war in Ukraine is an evolving situation and threats change rapidly. It is critical that leaders review readiness questions with their technology and operations cybersecurity teams. These questions may include:
General cybersecurity questions
- Do we have operations and/or suppliers in the affected region?
- Are services underpinning critical business services segmented from corporate networks?
- Do we have any ongoing unresolved/open breaches that could involve state-level actors?
- Have we had any breaches involving a Russian or Ukrainian threat actor over the past five years?
- What specific technical, business and organizational measures and contingency plans have we put in place to respond to the current crisis's elevated threat levels?
- Are all external and remote services fully patched, up to date, and hardened? Is multi-factor authentication enforced? Are all systems underpinning critical business services patched and up to date?
Operational technology-specific cybersecurity questions
- Do our operational technology (OT) systems have remote connections originating from impacted regions? Do we enforce multi-factor authentication for all remote access connections?
- Do we have cybersecurity visibility and OT-specific monitoring and anomaly/intrusion detection tools?
- Do we routinely conduct vulnerability assessments for both IT and OT environments?
- Have we planned to operate the OT systems manually or offline if needed?
- Establish a crisis communications plan.
- Review third-party risks and vulnerabilities.
- Enforce encryption procedures and multi-factor authentication everywhere.
- Patch software and OT system vulnerabilities to enable mitigating controls.
- Segment safety and control systems.
Transitioning amid uncertainty
Russia's invasion of Ukraine has had a deep human, economic and business impact. It has disrupted lives and livelihoods. Supply chains, industries and economies. The energy industry, like all others, is now operating in an uncertain environment. Some may argue that the war and its impact will push oil and gas companies' strategies for reinvention to the back burner. We disagree.
Oil and gas companies have an opportunity—and an obligation—to ensure energy sustainability, security and affordability. The war has amplified, not diminished, the call to action. It has made the energy transition and the need for a reinvented, highly resilient energy system more important than ever.
Special thanks to the following contributors: Jonathan Low, Megha Joshi, Julia Zhang, Natasha Young, Shucayb Ali, Shwan Dizayee, Prasin Roy Chowdhury, Marnus Witte, Sagnik Dey, Amey Ahirrao, Sneha Agrawal, Surya Teja Darbha, Yuhui Xiong, Paola Confalonieri.
Disclaimer
The material in this document reflects information available at the point in time at which this document was prepared on May 6, 2022; however, the global situation is rapidly evolving, and the position may change. This content is provided for general information purposes only, does not take into account the reader's specific circumstances, and is not intended to be used in place of consultation with our professional advisors. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals. Accenture and its logo are registered trademarks of Accenture.
This document refers to marks owned by third parties. All such third-party marks are the property of their respective owners. No sponsorship, endorsement or approval of this content by the owners of such marks is intended, expressed or implied.
1 Thunder Said Energy 2022 (supply, used with permission), Accenture analysis (demand)
2 IEA Oil Market Report February 2022
3 “Oil edges higher on concerns over Russia, Libya supply disruption”, Reuters News, 21 April 2022, Factiva.com
4 IEA Short-Term Energy Outlook, 7 April 2022
5 IEA Oil Market Report, April 2022
6 Accenture analysis with Eurostat and IEA data
7 As per May 3, 2022, EU was planning a sixth package of sanctions, potentially including a ban on Russian oil by end of 2022, as reported in "EU prepares Russian oil sanctions, warns against rouble gas payments", Reuters, 2 May 2022, Factiva.com and "EU leans towards Russian oil ban by year-end, diplomats say", Reuters, 1 May 2022, Factiva.com.
8 “Russia halts gas supplies to Poland and Bulgaria”, Reuters, 28 April 2022, Factiva.com
9 “What are Europe's options in case of Russian gas disruption?”, Reuters News, 10 March 2022, Factiva.com
10 Gas Infrastructure Europe (GIE) LNG Database, 25 April 2022
12 “Germany will end oil imports from Russia by year end, says minister”, Reuters, 20 April 2022, Factiva.com
13 “The US and the UK ban Russian oil and products imports “, Key Energy News, 10 March 2022, Factiva.com
14 “Oil markets fret over supply shock as some buyers shun Russia”, Reuters News, 8 March 2022, Factiva.com
15 1) Oil/TTF: price forecast based on Accenture analysis as detailed out in the following price forecast chart. %-Curtailment: Umlaut/EWI analysis for Accenture as detailed out in the section Country-level Economic Impact. Gas use reduction: 2) Market-based reduction: e.g., companies in Germany, including makers of steel and chemicals, have been forced to curtail production, as reported in “Putin tells Europe: Pay in roubles or we'll cut off your gas”, 31 Mar 2022; and e.g., carmakers and refineries are dependent on either gas or chemical products produced with gas as reported in “Factbox: What happens if Russia turns off gas to Germany?”, 1 Apr 2022, Reuters, Factiva.com. 3) Rationing in non-LNG geographies: “Germany girds for gas rationing, Europe on edge in Russian standoff”, Reuters, 30 Mar 2022, Factiva.com. Impacted: Chemicals/other heavy manufacturing forced to curtail production already today as mentioned in previous note; while shut-down of chemical plants would result in a huge domino effect across almost all industries, as reported in “German chemical industry fears shutdown for months without gas”, Reuters, 30 Mar 2022, Factiva.com . 4) Shutdowns: Germany’s chemical industry association VCI has warned that if gas is rationed, production facilities would have to shut down, as reported in “German chemical industry warns of shutdowns for months without gas”, 30 Mar 2022, Factiva.com. 5) EU B2C: if gas supplies stopped now and storage facilities could not be filled by the end of summer, Germany might have to ration gas for heating, as reported in “Factbox: Can Germany keep warm without Russian gas?”, Reuters, 8 Mar 2022, Factiva.com. Rest of the world: 6) Some LNG Shortages: “European attempts to replace Russian gas by LNG risk sparking gas crisis in Asia”, Reuters, Feb 16, 2022, Factiva.com. 7) Oil prices weigh on import heavy geos: “World Bank official says war-driven oil price hikes to slash growth for big importers”, Reuters, 9 Mar 2022, Factiva.com. 8) Debt defaults from high energy prices supported by “Are we ready for the coming spate of debt crises?”, World Bank, 28 Mar 2022, “New mechanisms needed for debt stress as poor countries hit by surging prices -IMF”, Reuters, 11 Apr 2022, Factiva.com; and “Russia, China woes risk worst EM corporate default wave since financial crash – JP Morgan”, Reuters, 4 Apr 2022, Factiva.com. 9) Rolling blackouts: sustained high coal/gas prices would support continued blackouts e.g., in Asia as reported in “Energy crisis could threaten global economic recovery, says IEA”, Reuters, 14 Oct 2021, Factiva.com
16 “OECD sees signs of economic slowdown in Europe”, CE NoticiasFinancieras, 11 April 2022, Factiva.com
17 “The war in Ukraine: Addressing the crisis and preparing for its impact”, Accenture 2022
18 Based on Umlaut / EWI simulation analysis for Accenture. Case A assumes 50% reduction in gas imports from Russia to Europe starting in Apr 2022 with an interruption to the Nord Stream 1 pipeline with Russia curtailing gas to Europe or Europe further embargoing part of Russian gas. Case B assumes an embargo interrupting all gas supplies from Russia to Europe. In both cases the simulation addresses pipelines, natural gas storages, LNG regasification terminals and the corresponding interdependencies while minimizing total system costs and assuming inelastic demand. The focus of the analysis is on simulating a stress test of the system estimating the impact of the change of one variable to another; and is not intended as scenario analysis to describe the future nor to provide an estimate of what is possible/probable to happen in the current environment.
19 Market-based analysis based on the assumption of European solidarity between the member states
20 Putin's war triggers the third oil crisis
21 OPEC+, comprising the Organization of the Petroleum Exporting Countries, Russia and their allies, has a deal to gradually raise output each month by 400,000 bpd. The group has refused to act more quickly even as prices have soared (Assumptions - Assume either late Q3 or Q4, Assuming addition of .5 mbpd each year). Source: “How much extra oil could OPEC+ pump to cool prices?”, Reuters, 11 March 2022, Factiva.com
22 Other Non-OPEC countries include all other countries except US, Brazil, Canada, Russia
23 Accenture analysis based on data from Rystad / Factiva.com: OPEC+, comprising the Organization of the Petroleum Exporting Countries, Russia and their allies, has a deal to gradually raise output each month by 400,000 bpd. The group has refused to act more quickly even as prices have soared (Assumptions - Assumes either late Q3 or Q4, Assumes addition of .5 mbpd each year). Source: “How much extra oil could OPEC+ pump to cool prices?”, Reuters, 11 March 2022, Factiva.com; Venezuela: Minor expected contribution of Venezuela due to limited incremental production and high levels of currently used capacity. “VOA: Experts believe a 20-point economic upswing in Venezuela is "implausible"”, CE NoticiasFinancieras, 8 April 2022, Factiva.com; “Putin's war triggers the third oil crisis”, Rystad.com, 15 March 2022.
24 Slowing down as electric vehicles accelerate, oil demand set to peak at 101.6 million bpd in 2026, Rystad 2021 avg/max scenarios of 101 – 103 mb/d by 2025; Rystad scenario range comparable with IEA WEO 2020 and 2021 scenarios World Energy Outlook considering also the recent IEA Oil Market Report Apr 2022 forecast of 99.4 mb/d for 2022
26 Liquefied natural gas exports continue to lead growth in U.S. natural gas exports
27 North American LNG Export Terminals
28 Accenture analysis of data available via EIA, IEA, FERC, Gas Infrastructure Europe LNG Database and press releases
29 Ibid
30 Accenture analysis based on information available at EIA, IEA, FERC, Gas Infrastructure Europe LNG Database, press releases
31 U.S. crude oil production forecast to rise in 2022 and 2023 to record-high levels
32 “SPE Tech Director: Three Trends To Shape the Future of the Reservoir Discipline”, Journal of Petroleum Technology, 28 February 2022, used with permission
33 “Collaborate to Reinvent - an Oil and Gas Industry Imperative”, Accenture, 2020
34 Global oil and gas investments to hit $628 billion in 2022, led by upstream gas and LNG
35 “Industry Trend Analysis - North American Capex Set For 24.1% Rise In 2022”, Fitch Solutions Industry Research Reports, 1 February 2022, Factiva.com; “Schlumberger sees 2022 capex rising 20% or more in North America: CEO”, Platts Gas Daily, 21 January 2022
36 Umlaut/EWI analysis for Accenture (interconnector capacity excl completion years); Accenture analysis based on information available at EIA, IEA, FERC, Gas Infra Europe LNG Database, press releases (LNG terminals and interconnection completion years). Not showing the Trans-Mediterranean pipeline with about 32 bcm/a capacity from Algeria to Italy as reported in “Eni and Sonatrach agree to increase gas supplies from Algeria through Transmed”, ENP Newswire, 12 April 2022, Factiva.com
37 2020 production data from USGS Mineral Commodity Summaries 2021, and USGS country sheets
39 “Steel, labor costs influence contractor choice in burgeoning FPSO market”, Rystad Energy, 14 January 2022; “Cost inflation will hit the US oil and gas supply chain in coming years, starting with a surge in EPCI”, Rystad Energy, 19 November 2021
40 Accenture analysis on data on 100 capital projects provided by individual companies
41 “Building More Value with Capital Projects”, Accenture, 2021
42 Accenture analysis
43 Accenture's Global Incident Report, March 14, 2022
44 Constella Intelligence Energy Sector Exposure Report 2021, as reported in “Why Europe’s energy industry is vulnerable to cyber-attacks”, European Council on Foreign Relations (ECFR), 7 March 2022 with Estimated yearly total based on data collected through September 2021, of top 20 energy companies by revenues
45 Accenture State of Cybersecurity Resilience 2021 (N=4,7444, n=210 for oil and gas)
About the Authors
FILIPPOS KAPONIS
Senior Manager – Strategy & Consulting, Energy
