Top issues to watch in 2020 for energy companies

The question on the tip of everyone’s tongue at the moment is “what are the top global oil and gas market challenges for 2020”? The views of many, and confirmed by our experts, are that the continued tensions in the Middle East, the evolving conversation around climate change, and the increased focus on ESG implications will dominate throughout this coming year. We take a look at why these topics are viewed as some of the major risk challenges for the industry.

Middle East North Africa

The tug of war between uneven demand and attempts at tightening supply are a heady mix for oil markets. Alongside the threat of disruption risks materialising across the Middle East, the 2020 outlook is turbulent. The region’s explosive start to the year – with a targeted drone strike killing senior Iraqi and Iranian military figures, and Turkish intervention in Libya – highlights the potential for worsening disruption risks across the entire region, encompassing at least 35% of global oil supply.

The second round of OPEC+ supply cuts agreed in December 2019, designed to avert oversupply and support prices, committed members to increase total cuts to 2.1mbpd from 1 January 2020 for at least two months. Improved compliance in January across OPEC’s members proves their desire to support oil prices towards the USD70 per barrel mark. But the coronavirus outbreak and sharp fall in demand from China have stymied any immediate impact the cuts would have had.

Growth in US shale oil production is set to decline, influenced by fiscal tightening, lower well production and year-on-year falling rig counts across the Lower 48. Whether this can strengthen the weight that OPEC changes bring to bear on oil markets depends on how deep and long the consequences from the coronavirus outbreak last.

Climate change

Climate risk will continue to permeate the oil and gas sector throughout 2020 as companies come under increasing pressure from shareholders and regulators to demonstrate how they are dealing with the threat. Crucially, this year’s annual results will show us how closely companies are aligned with the TCFD recommendations, a set of guidelines designed to help organisations assess and disclose the climate risks they face. They should reveal whether strategies are in step with a worldwide goal of limiting global temperature rise to 2˚C and the higher risks from more frequent and intense weather events.

Repsol led the way with a pledge to align its exploration strategy with the Paris Climate goals, while Shell and other European-based companies have invested in biofuels and wind and solar energy much more substantively than US counterparts. With regulators threatening mandatory climate risk disclosures in the near future, investors will be watching closely to see which companies are taking the initiative.

The big gap we see is that many companies in the sector are still failing to use accurate and granular climate data to analyse the resilience of their corporate strategy.

Those that do will add consistency and credibility to the process and take a significant step towards convincing investors that these risks are being managed appropriately.

Environmental, social and governance (ESG)

The environmental, social and governance (ESG) agenda continues to be front and centre of any discussion related to oil and gas. While energy companies are trying to offset risks to their brand-related to climate change through green initiatives and attempts to limit carbon emissions, the next reputational risk waiting in the wings is likely to be their supply chains.

To date, we have seen that energy companies often fail to integrate ESG or sustainability-related initiatives into their supply chain strategies. As investors and consumers alike continue to press businesses to implement measurable and sustainable change to their ESG practices, energy companies have largely lagged behind other industries in integrating this into their supply chains.

To be sure, the majors are very much in the crosshairs of climate-related protesters, including the recent Extinction Rebellion movement, but these protests are largely linked to the direct operations of energy producers, i.e. the extraction of fossil fuels. Our view is that a step change is needed in the thinking of energy companies with regards to integrating ESG risks into their supply chains; if not, they risk the type of scrutiny from the media and NGOs that we’ve seen hit the F&B and retail sectors relating to the circular economy, environmental degradation and labour rights.

A recent report suggested that carbon emissions from suppliers to the energy industry are on average 5.5 times greater than those linked to direct operations. The continued focus on ESG in the supply chain is not going away and will likely emerge as a key theme throughout 2020.