Hydrocarbons are insulating energy business from a recession

Oil and gas (O&G) supply chain companies are reporting record order books. Nice work if you can get it, especially in straitened times – but it was not that way a few years ago. The backlogs from a hydrocarbon resurgence are expected to continue for the foreseeable future, even with all signs pointing to a global recession as economies wrestle with inflation by inducing slowdowns.

Feeling recession-proof 

Nearly 70% of respondents to EIC’s latest Survive & Thrive survey said that they felt recession-proof, with just 5% saying they believed they would be immediately impacted by a recession.

Despite challenging financial conditions, geopolitical tensions and an energy transition that remains highly dependent on net-zero and decarbonisation policies, many companies surveyed by EIC observe an O&G market that is booming for the first time in a decade.

Simplistically, demand is outstripping supply – but this obscures the unique global events that have led to our current situation. The industry was already leaner due to under-investment following 2014’s oil crash, then slashed demand and capacity as economies ground to a halt during the pandemic. This was followed by gas prices that rose as the world reopened for business, then went stratospheric when gas markets scrambled to cut ties with Russia following its invasion of Ukraine. At the time of going to press, oil is approaching US$100 a barrel. According to market analyst Rystad Energy, the rise from US$70 to US$95 a barrel in three months is due to “very strong” demand, sharpened by Saudi Arabia’s extension to cuts in output.

Two-thirds of the World Economic Forum’s  chief economists expect a global recession this year – so why is O&G so resilient? While major economies are implementing policies to steer us to a net-zero future, such as the US’s Inflation Reduction Act and the EU’s RepowerEU package, and while investment in renewable energy exceeds investment in hydrocarbons, the net-zero transition will still take decades. One in seven cars bought globally in 2022 may be electric, according to the International Energy Agency but that means six out of seven are still running on petrol or diesel.

Energy security concerns

Perhaps the biggest reason behind this resilience is that whether we like it or not, the energy discourse is much more nuanced and complex than a couple of years ago, as governments contend with energy security and inflation on top of net-zero imperatives. Hydrocarbons are critical to any approach that tries to reconcile all three. 

James Phipps, Managing Director of Cokebusters, says: “As well as satisfying the national and international movement towards alternative energy sources, responsible and competent governments should be ensuring sufficiency in energy security for their citizens and other infrastructure.”

He adds that growth in both population and consumerism requires not just more energy, but also energy security. “Energy can derive from a multitude of sources, which need to be instantly available and/or portable. The energy transformation process, of course, varies depending on the source, and there are losses incurred during that transformation.

“Investments should also be focused on technologies that continue to enhance fuel efficiencies and minimise the by-products of combustion.”

Alderley Chief Executive Colin Elcoate thinks countries with well-established energy strategies and strong policymaking capabilities around O&G production and supply are more likely to stave off recession and bounce back quickly. On a bullish note, he adds that there are several key factors making recession in the sector far from inevitable – chiefly that hydrocarbon demand is strong and has no sign of weakening, “particularly given present energy security concerns”.

He also points out that the US, EU and EMEA countries are investing heavily in new low-carbon technologies, creating new jobs, skills and opportunities for the whole sector. This diversification – where governments support and enable investment and development in hydrocarbons as well as renewables and other forms of clean energy, will reduce reliance on foreign energy imports, reducing the risk of recession.

As EIC’s latest Survive & Thrive report attests, for many providers of solutions and services within the global energy industry, O&G work provides consistency – and is responsible for many of their profits. For the next few years, they do not see that changing.

Investments should also be focused on technologies that continue to enhance fuel efficiencies and minimise the by-products of combustion James Phipps, MD, Cokebusters

Elcoate says: “Even though peak oil is edging nearer, O&G will continue to play an important role in the energy system to 2050 and beyond – every future energy scenario shows renewables, nuclear and O&G as part of the 2050 energy mix. This requires new O&G developments and investment today to meet this demand and contribution to tomorrow’s energy mix.”  

Many of the skills required to deliver the energy transition are already found within O&G, he adds, so hydrocarbons require investment to retain those skills. Otherwise, they cannot be used to deliver the low-carbon technologies and energies needed to meet our net-zero ambitions. 

Invest in your business and diversify

Downturns follow periods of high demand. Bust follows boom. To weather the impacts of such cyclicality, players must act strategically by investing in their businesses – diversifying into new, emerging markets or  technologies that have strong future prospects. Regardless of any trend, says Phipps, this is “simply good business practice” for spreading risk and capitalising on opportunities with available technologies.

Cargostore Chief Executive Andrew Hart says: “In the context of our business – leasing offshore DNV certified shipping containers – we see the robustness of the O&G market as an opportunity for strategic growth.

“The main approach to capitalising on the next stages of the O&G market expansion is to actively establish operations in emerging markets, combined with a continued investment in the existing and latest models of containers required, to ensure we have enough of the right types of units strategically placed globally to support next phase of rapid market growth.”

Elcoate says: “For Alderley, we must look ahead to future trends such as developing technology that can respond to the needs of providing energy security and reaching net zero. This will enable us, as well as other supply chain companies, to remain market focused and respond to clients’ ever-changing demands.”

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