Engineering and consultancy businesses that have traditionally served the fossil fuel industry believe it is possible to thrive in the energy transition, even maintaining margins on lower-carbon energy similar to those earned on complex, capital-hungry oil and gas schemes, according to senior executives and analysts.
However, uncertainties about the future — and about the commercial risks — remain.
Many of the companies that grew by designing, building, operating and installing the world's oil and gas platforms started to diversify their end markets as long ago as 2014, spurred by that year's oil price crash.
The Covid-19 pandemic has accelerated that shift to cleaner energy projects.
“I think the momentum now is unstoppable,” says Andrew Stewart, executive president for strategy & development at Aberdeen-headquartered Wood.
In 2014, about 90% of Wood’s business came from upstream oil and gas. Today the figure is about 35%, with a large and growing proportion of its work and future orders comprising renewable and low-carbon energy projects.
Geeta Thakorlal, president, energy transition & digital at Australian contractor Worley, tells Upstream: “This year we have seen an absolute uptick in activity in all types of projects relating to the energy transition across all the geographies we operate in.”
Worley’s long-term view indicates that the energy transition will open opportunities across all the sectors it serves, including upstream, midstream, power, refining, chemicals, mining, minerals and metals, she adds.
EPCI companies' advantage
According to analysis by Norway-based consultancy Rystad Energy, the revenues of the 50 largest global oilfield services businesses in 2019 totalled about $220 billion, with some $55 billion of that going to engineering, procurement, construction and installation services.
Rystad says EPCI companies generally will find it easier to deploy expertise in the energy transition than more tightly focused businesses in the well services, drilling tools, fracking and related segments.
“The Covid-19 aftermath is bound to accelerate oilfield service companies’ foray into energy transition,” says Audun Martinsen, head of energy service research at Rystad.
One market where engineering houses, fabricators and equipment manufacturers have a big opportunity to thrive, according to Rystad, is providing support services for blue hydrogen (made from natural gas with carbon captured) and green hydrogen (produced from water using using renewable power), carbon capture and storage, or energy storage in general.
Another is supplying "end-to-end" development and operations for renewable power generation, such as solar power plants, offshore and onshore wind farms and geothermal energy.
Wood is excited about hydrogen as a “credible fuel” to help achieve net-zero emissions, says Stewart.
In particular, steam methane reforming coupled with carbon capture — one process for producing so-called “blue hydrogen” from natural gas — is an area where it feels "differentiated”, he adds.
Wood has recently won work to help design the Humber Zero project, which aims to decarbonise large-scale industrial sites in north-east England.
For Worley, offshore wind is a keen – but not the only — area of focus.
“We see capabilities required in offshore wind projects as complementary to our skills and expertise in offshore oil and gas projects. We also have a very strong Power business. That combination we believe is a very strong offering,” says Thakorlal.
Worley recently acquired offshore wind and inspection maintenance service company 3sun. It is also supporting oil and gas majors in carbon capture and storage projects.
Saipem is planning to use its EPCI expertise to become “increasingly active” in offshore wind by stepping into the role of project developer, it said recently.
Mauro Piasere, chief operating officer of the Italian contractor’s XSIGHT division, tells Upstream: “We have realised that waiting for jobs to become available is not a good strategy if we want to become more active in the energy transition.”
Norway’s Aker Solutions, meanwhile, recently spun off parts of its business to create Aker Carbon Capture and Aker Offshore Wind, revealing its ambitions in Europe's fast-emerging offshore wind, hydrogen and carbon capture economies.
Aker Solutions, however, is also devoting attention to solutions to help the oil and gas industry to decarbonise its own operations, says Sian Lloyd Rees, the company's UK country manager.
Oil and gas, particularly that produced with a lower carbon footprint, will remain a focus for others, even though the relative proportion of work they do in this sector will reduce over time.
Wood has adopted “a proportionate and probabilistic approach” strategically that does not “pit fossil fuels against renewables”, says Stewart.
“The world needs everyone to come together," he says. "For us, it's about expanding our services and sectors rather than picking one over another.”
As well as opportunities, the energy transition is presenting risks and uncertainties around ensuring appropriate returns for investors.
Another risk is that the transition may play out differently in different geographies, with Europe pushing forward faster on hydrogen, carbon capture and storage, and arguably offshore wind than, for example, the US and Asia.
Furthermore, for some regions of the world, bringing people out of energy poverty, not the energy transition, remains the priority.
“Regulatory environments and competitive landscapes will be different, so agility is key,” says Stewart.
“The risk and reward allocation during the contracting mechanism might not make sense for us to apply a uniformly consistent service offering in every market,” he says.
Wood, nevertheless, believes it can maintain “premium margins commensurate with its traditional oil and gas infrastructure businesses”, though Stewart declines to give a target.
Wood recorded margins of 8.6% in 2019.
Wood does not provide further breakdowns of its margins as within each of its business units there is a mix of margins from work in oil and gas, renewables and other work.
Worley’s Energy & Chemicals Services business saw its margins increase to 9.9% in 2019 from 8.8% a year earlier, while in its Major Projects & Integrated Solutions unit margins decreased to 7.3% from 7.9% primarily due to increased volumes of lower margin construction revenue in North America.
Worley’s Thakorlal points out that many low-carbon projects can be just as complex as those in the oil and gas sector, meaning: “We see our ability to certainly retain or increase margins.”
She adds: “What we bring is deep domain knowledge, technical and technology expertise, our IP and experience of delivering complex projects.”
Lloyd Rees says Aker Solutions sees itself primarily as a technology company.
“Generally there is a level of R&D investment needed to develop technology and that commands a particular return,” she says.
But she points out that commercial models are still emerging for a lot of the newer energy transition solutions.
“It's not clear yet fully how those will evolve,” she says.