For the oil and gas industry, the risks and uncertainties that have permeated the current scenario are heightened in 2022, starting with the Russia-Ukraine War. US and EU sanctions on Russia are expected to take three million barrels a day of Russian exports off the market. The long-term impact of the pandemic also persists. All of this results in a supply shock, with restricted distribution and supply disruptions, pushing the price per barrel to US$ 139, the highest level since 2008, when Brent was valued at US$ 146.

Despite this scenario of price increases, a reversal in this situation could occur if the Organization of Petroleum Exporting Countries (OPEC) increases production and unconventional extraction in the United States grows at the rate forecast by analysts. If said possibilities materialize, there will be a oil supply surplus of up to 6.4 million additional barrels per day by the end of this year. The volume could be even greater if there is a new nuclear agreement with Iran, replacing that country as a provider of the international market.

Another factor that could reduce global demand involves to China, as its ‘zero COVID-19’ strategy, including strict intermittent lockdowns and other measures, limits businesses. Moreover, President Xi Jinping’s economic and environmental policies could slow down the country’s economic expansion and, therefore, lower its oil consumption. Furthermore, the geopolitical scenario of conflict is expected to continue for a period longer than estimated, especially if Sweden and Finland join NATO.

Such factors could accelerate the implementation of the European Union’s Fit for 55 legislative proposals, aimed at reducing greenhouse gas emissions by at least 55% by 2030. This implies significantly reducing the use of fossil fuels. Despite all these initiatives and forecasts, such energy transformation has proved to be more complex than expected and it will not be surprising if we have to live depending on oil and gas for many years.

In a scenario of doubts between the insufficient or excess supply in the international market, oil and gas companies also need to pay attention to governments and the social and ecological pressures related to climate change, which are gaining momentum, including the widespread ease communication and mobilization of social networks. Despite the large profit generated in this first quarter of 2022, with free cash flows for the payment of very robust dividends, activist investors have transferred part of their contributions to green energy.

As a result of all these factors and the consequent transformation in the portfolio of companies within the industry, adding clean and renewable energy assets to their project portfolio, national oil companies will have even more power and market dominance. After all, whatever happens down the road, the world’s energy needs are not decreasing.

As noted, there are more questions and uncertainties than answers, and they are beyond the control of the oil and gas industry. Oil and gas companies must remain cautious and adopt strategic measures. In this sense, we present seven actions that companies can adopt to overcome the turmoil. The first is having an ESG (Environmental, Social and Governance) plan to proactively address investor and stakeholder concerns. The second suggestion is to review the crisis manual and verify whether it includes all emerging risks and likely future scenarios.

Another step is to reassess the company’s commodity risk management policy, aiming to prepare it for short- and long-term changes in the pricing environment and its impact on clients and shareholders, in addition to government involvement. It is also worth thoroughly studying legislation and government actions, assessing how they can affect business. The purpose here is to prepare the company to change rapidly and take advantage of opportunities in the event of changes in rules, laws and public policies.

It is also important to try to build relationships, maintaining, strengthening and expanding connections with all relevant stakeholders (an increasingly collaborative environment), including consumer groups, governments, regulators and the society in general. Likewise, cooperation between different industries is advisable, helping to proactively create reasonable regulation.

The sixth suggestion is to review the current supply chain configuration and assess how disruption can be reduced and resilience enhanced. It is worth observing whether the operations are sufficiently flexible and strong for real-time adaptations and adjustments in relation to changes in trade flows eventually caused by conjunctural factors. Finally, cyber security must be reassessed. Virtual attacks are perhaps the most underestimated visible threat in the industry, considering that the latter is not a new topic and that we have already had some negative experiences with it in Brazil.

When it is not possible to control the causes of risks, one must be prepared to face the consequences. Doing this homework effectively is the only certainty in the oil and gas industry today.

About the authors:

Anderson Dutra is Lead Partner for Energy and Natural Resources at KPMG Brazil and Rodrigo Milo is a Cybersecurity Partner at KPMG in Brazil.