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Energy Industry: Insights & Opportunities

Executive Summary 

The energy industry is undergoing some of the most challenging times in its history. Oil and gas prices are at near all-time lows, and while in the past there have been ups and downs, this lower-for-longer price appears to be the new norm going forward. 

Additionally, energy companies are facing fundamental disruptions to their margins, growth, and profitability. Some of these disruptions include uncertainty with the global economy, trade wars, geopolitical conflicts, Brexit, fluctuating demand for carbon-based fuels, and COVID-19. Even the utilities sector, a once predictable and reliable investment, is now becoming highly uncertain due to new competition, stronger regulations, and natural disaster risks. The question is—how do energy companies make money in this new reality? 

The answer lies in digital transformation. Digitally transforming the sales and pricing processes is the only way energy companies can improve margins and productivity while reducing costs. This includes getting much closer to customers to understand their wants and preferences better in order to more optimally price and sell the way their customers want to buy. It’s all about using data and science to figure out the optimal price/ margin based on customer demand and willingness to pay, detecting opportunities, maximizing wins on long-term contracts, and making the buying experience far better. 

This paper explores the challenges faced by oil field servicing, downstream, upstream, and utility companies. It then discusses the new rules of digital commerce—listen, personalize, and engage, and how this approach enables energy companies to win on the new competitive front—customer buying experience. Finally, the paper discusses how PROS AI-enabled pricing and selling solutions, founded on data science and over 35 years of deep industry insights, enable energy companies to increase growth in margin and revenue. 

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How Has COVID-19 Impacted The Energy Industry?

COVID-19 has accelerated what was already shaping up to be the one of the industry’s most transformative moments—the shift in customer expectations. The industry is rapidly moving toward an era of intense competition, technology heavy strategies, and continually fluctuating demand. Energy companies could likely face potential bankruptcies and supply chain failures as vendors and suppliers themselves face operational and financial struggles.

The coronavirus outbreak and the Russia-OPEC price war has also dampened consumer demand for oil, resulting in plummeting oil prices and production declines. The pandemic and resulting oil price crash are set to wipe out as much as $1.8 trillion in revenue of exploration and production (E&P) companies. This has placed many companies at risk of not being able to refinance debt or meet existing debt, further emphasizing how vital it is to accelerate the adoption of digital technologies that improve profitability and resilience.

This period marks an unquestionable turning point in the energy industry by highlighting the need to integrate third-party and digital solutions. According to a study conducted by PWC on 200+ oil and gas companies, only 7% identified themselves as digital champions, or having a “clear position in the marketplace with complex and tailored internal, partner, and customer solutions offered via multi-level interaction.”

According to a recent study of O&G companies, industry leaders anticipate companies with digital applications will deliver an average 10% increase in revenue over the next five years. Businesses should also reimagine traditional operating models and place an emphasis on becoming cost competitive through emerging pricing technologies.

What Should Oil Field Service Companies Do To Mitigate Pricing Pressures?

The $100+/barrel days appear to be mostly gone, and oil prices have settled below the $65/barrel range. Consequently, producers have learned to be efficient and cut costs, which has created price pressures on oil field servicing (OFS) companies.

This, in turn, has depressed returns on investment of OFS companies to historical lows. Schlumberger led the OFS sector on ROI at around 3% in the third quarter of 2018, while exploration and production (E&P) companies were showing returns of 10% or more on average during the same period. This is reflected in their stock prices: Halliburton and Schlumberger, the industry leaders, have seen their stocks plummet by 65% and 76%, respectively, from 2014 numbers.

In the past, E&P companies hired more and increased the number of rigs they used when producing more barrels. Today, they are reducing the need for rigs and workers. This has resulted in over a 20% drop in revenues for the OFS sector from 2014. While production increased by 45% since June 24, the number of drilling rigs used has dropped by 49%—nearly half.

In a highly fragmented industry sector, such drop in demand only amplifies already existing intense competition. So far, the response to this by OFS companies has been to slash costs in the hopes of continuing to win business and that oil prices will go up sometime in the future.

How Can Downstream Oil and Gas Companies Make Money On The Margin?

With all the downward pressure on pricing, today’s downstream customers, seeing opportunity to make money on the margin, are demanding faster daily spot pricing to take advantage of fuel cost volatility. Other resellers are entering the market, buying long term, and managing the daily volumes, guided by technology to maximize their profits. They are forcing their suppliers—traditional wholesalers— to submit multiple price bids each day as they price shop.

With so many grades of products and a wide number of locations, the data analysis is getting more complicated and time consuming for wholesalers and retailers. Those still using spreadsheets find they can’t respond quickly enough with the size of their staff. Adding more pricing agents is clearly not the answer, since it only increases costs.

Wholesalers in particular are finding themselves squeezed at both ends—better optimized suppliers upstream and more analytical customers downstream. Without dynamic pricing, they find themselves losing margins one day and losing volume another day, both due to overpricing.

In this intensely competitive climate, speed is everything. The lowest bid does not necessarily win the business but the first acceptable one does.

Downstream companies will improve margins and win rates by using the massive amounts of data available to predict end-user demand, available supplies, cost of alternates, and customers’ willingness to pay. They can respond faster by using new data science technologies and artificial intelligence that can store, analyze, and provide insights on real-time data.

How Can Upstream Oil and Gas Companies Grow and Improve Profitability?

Upstream oil and gas companies are facing some fundamental disruptions changing the growth and profitability trajectory of their businesses.

Over 152 large corporations—including Delta Airlines, Walgreens, and Johnson Controls—have pledged to move to 100% renewable energy sources by 2030.

According to a study from the Boston Consulting Group, electric vehicle sales are expected to pass internal-combustion-engine (ICE) sales and take 51% of the market by 2030.

The price of renewables—solar, wind, and batter storage in particular—is coming down faster than expected.

Regulators are pressing for more stringent control on emissions, moving much faster toward zero emission in cars, household energy usage, and in manufacturing and processing.

The world is moving inexorably toward fewer carbon emissions, hitting upstream oil & gas companies. The market for carbon-based fuels is shrinking.

How do upstream companies make money in this new reality?

The answer lies in data. Upstream companies have gathered years of metrics on exploration, production, and selling. Given how fast customers and supporting industries have shifted toward digitization, the integration of new insight tools such as advanced machine learning, predictive analytics, and other analytic software are no longer an option, but a mandate.

How Should Utility Companies Respond to Changing Business Models, Pricing, Revenue, and Profit Expectations?

What was once a very predictable and reliable business in which to invest is now becoming highly uncertain due to risks resulting from intense competition, natural disasters, and even regulator uncertainty as States fight with Federal regulators regarding air quality standards and more.

Several forces are converging on the Utility sector, disrupting established business models, pricing, revenue, and profit expectations.

  • While the US GDP grew by 22% in the past decade, energy consumption has lagged behind at only 7.5% growth.
  • Over 158 corporations worldwide have pledged to source 100% of their electricity needs from renewable energy sources—known as the RE100.
  • New Power Purchase Agreements (PPAs) between buyers of clean energy and generators shot up 207% to 8.6GW in 2018.

On the other hand, the cost of repairing and replacing energy infrastructure is increasing. With the increasing frequency and severity of natural disasters, utilities are forced to repair or replace their infrastructure more frequently than ever before. Additionally, several utilities are facing financial disasters due to high legal costs and liabilities from a number of natural disaster-related incidents that resulted in major blackouts, gas leaks, and even wildfires causing significant financial damage and even death in certain cases.

Most importantly, consumer preferences have changed dramatically over the past two decades. Not only do they want clean energy, but consumers today prefer to digitally purchase everything, including energy. This is rapidly spilling over into commercial buying as the digitally savvy customers also demand digital management of their energy usage at the workplace, placing the pressure on the industry to adopt new platforms, business models, and Internet-enabled customer solutions. As companies look for new ways to improve effectiveness and reduce costs, digitizing operating models to personalize and simplify the buying experience is critical.

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