A common misreading of Darwinism is that only the strongest survive. Not quite. Charles Darwin argued that organisms that mutated to adapt to changing environments would, through a process of natural selection, lead to the evolution of new species. It had nothing to do with strength, but adaptability. And while the oil and gas industry has some of the world’s cleverest engineers and scientists, they don’t call it Big Oil because it’s especially good at change. We all know that if the energy sector’s cost structure does not evolve, the entire industry will end up like the prehistoric giants who provided the raw material for fossil fuels in the first place.
The good news is that there is a clear, four-step path to industry-wide cost restructuring, leading into a future where smart companies can thrive. There is between $500 billion and $1 trillion in trapped value from inefficiencies in global oil and gas upstream and downstream. Unlocking that value will put the industry on competitive footing with the future.
The bad news is that there is no option but to head down this path, and not everyone who does will make it. Right now, the oil and gas industry does not pencil out. The collapse of commodity prices in 2014 pushed the break-even points, on average, from $80/bbl to $60/bbl. It wasn’t enough, because prices never recovered fully, or for long. Market returns are in the single digits while ESG concerns are pushing investors to demand closer to 15% returns.
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