Top risks facing the oil and gas sector

The instability that defined the oil and gas market for much of 2022 has continued into 2023.

With bullish and bearish pressure on oil and gas, this can fluctuate quickly depending on what happens in European markets, OPEC+ decision-making and the situation in Iran, where a nuclear deal has stalled and tensions — internal and with neighboring countries — are elevated.

In what could be a year of volatility and uncertainty ahead, here are some of the top oil and gas risks KPMG anticipates for 2023.

War in Ukraine

The outcomes of the war in Ukraine will have a potentially lasting impact on the oil and gas industry, including what it means for the Russian markets.

It is likely that the West’s decision to cut off even more Russian imports and start transforming its energy supply chains will have repercussions on the market.

At the beginning of February, Russia announced it was cutting its oil output by 500,000 barrels per day in retaliation to G7-led sanctions and price caps.

This increased Brent crude futures by around two percent in London trading.

Russia has basically become a pariah state while still being a large economic power. Whether the conflict spills over into direct confrontation or cyberattacks remains to be seen.

Inflation repercussions

The high inflation peak seen as a short-term consequence of war is starting to subside, but there’s no sign the world will go back to zero inflation anytime soon.

This is causing headaches for central banks that will need to keep tightening monetary policies.

A global recession could foster debt crises, social discontent and political instability, particularly in emerging markets without welfare budgets to soften the shock of inflation and the increasing cost of living.

Gas as a geopolitical commodity

Oil has always been a geopolitical commodity. Now the same is happening with natural gas as the war in Ukraine continues.

Russia’s attempt to weaponize natural gas exports and impact European support for Ukraine caused major shifts in European gas supply chains.

With an unprecedented increase in LNG exports, which come at a higher price, countries like Norway, Qatar, Algeria, Nigeria and others have become geopolitically significant in facilitating Europe’s cutoff from Russian gas.

As Europe secures supplies for the 2023-24 winter, South and Southeast Asian markets may struggle to compete, with the agriculture sector likely to suffer the most.

High gas prices may keep fertilizer costs and food prices at historically high levels. This could result in energy shortages, food insecurity and social unrest.

The energy market problem

Particularly in Europe, energy market fluctuations and the energy crunch due to the war in Ukraine are drivers of this unprecedented inflation.

Oil and gas are still the most common forms of energy worldwide. In 2019, the International Energy Agency reported that more than 80 percent of the total global energy supply came from fossil fuels.

Moving away from that will come at a cost, and different parts of the world have economic and strategic decisions to make.

Competition for oil and gas resources, particularly between Europe and Asia, might price less wealthy countries out of the market and fuel animosity in the global south.

Cyber threats and AI

In the wrong hands, recent technological advances such as generative AI could inflict reputational and financial damage on oil and gas companies and cause broader political and economic instability.

 Generative AI allows users to easily create images and videos, even those who are not overly tech savvy.

Generative AI is one of the forthcoming challenges in a growing trend of intentional misinformation.

Cyber criminals continue to evolve and wreak havoc on businesses. Oil and gas companies have worldwide operations and a complex ecosystem of partners and suppliers — many with connected computer networks.

If even one of these third parties experiences a cyber-breach, it could put anyone in the network at risk.

Oil and gas companies should adopt a “zero trust” strategy that enables adaptive protection and proactive risk management.

Oil production in OPEC+ countries

OPEC+ member countries have maintained similar oil production levels even as Europe moves away from sourcing Russian oil and gas. OPEC+ countries are not likely to increase production, as they prefer to protect a price floor of about US$90 per barrel for Brent crude (much higher than before the war in Ukraine). This decision could increase conflict between the US and its Gulf allies.

Minerals and labor in cleantech

Cleantech relies on rare minerals concentrated in parts of the world that are less politically stable or on labor in parts of the world with human rights issues.

Worldwide, policies are increasingly aimed at decoupling. If this continues, its anticipated cleantech won’t be able to replace fossil fuels by sourcing enough raw materials.

While the world talks of reaching net zero, meeting the demand for critical minerals has been heating up in Latin America.

Demand has surged despite the global abundance, causing prices to jump sixfold in 2022. Supply and demand imbalances, long timelines for new mines, and geopolitical concerns have sparked a race for lithium.

ESG pressures and reputational risks

Decarbonisation is becoming increasingly important to shareholders, employees, and the public.

Although oil and gas are central to the economy and energy markets, companies are under pressure to take the energy transition seriously.

 Oil and gas companies should show both intent and action when setting and meeting ESG targets.

There is a risk that the license to operate may be reduced or revoked because of reputational risks.

The tension between ensuring a stable and abundant energy supply while making strides in decarbonizing energy systems will likely continue to play out.

Supply chain

Supply chains are crucial for achieving net zero, and there is growing concerns about the environmental and social impact of the oil and gas industry.

When low-carbon infrastructure is installed and created, carbon-free energy can be produced, but the emissions and carbon intensity of building these solutions must be considered.

The time required to obtain and access materials will likely be a concern throughout 2023. As inflation rises, it’s anticipated that materials costs will increase as well.

Attracting and retaining talent

There has been a talent shortage in the industry for years due to growing competition, aging workers and limited new entry.

In an industry that is often cast in a negative light, attracting and retaining the next generation of workers, most of whom are quite socially conscious, can be difficult.

A company’s retention rate can be increased by embracing flexibility to adapt to the reality of the modern workforce, improving the understanding of working with people from different backgrounds and providing new employees with challenging opportunities and chances to grow.

Source: Oil & Gas

Leave a Reply

Your email address will not be published. Required fields are marked *