Energy sector companies are involved in research, discovery, production, transportation, and distribution of energy. The energy industry includes a wide variety of activities and companies. However, when describing issues related to energy sector trends, innovation, and challenges, there is one critical bifurcation. The energy industry consists of 1) non-renewable energy (oil and petroleum, gasoline, natural gas, diesel, and nuclear). It also consists of 2) renewable energy (hydropower, solar power, and wind power). With that in mind, let’s explore energy sector trends, innovation, and challenges!
Energy Sector Overview
Let’s start with a brief energy sector overview. Our objective is to understand the basic facts about the energy industry’s market economics, competitive dynamics, and the business models of energy sector players. Regardless if an energy sector company is competing in the non-renewable or renewable portion of the energy industry, the profitability of the market has a lot to do with the price of oil. The price of oil is simply driven by supply and demand. When oil is more expensive, companies involved in the production of all types of energy can charge higher prices - and vice versa - and will then become more profitable.
Any energy sector overview must also address the sub-components of the industry. In the energy industry, those include:
- Within the non-renewable value chain:
- Upstream activities, such as drilling and exploring for oil and operating wells
- Midstream activities, such as storing and transporting crude oil and natural gas
- Downstream activities, such as converting crude oil and raw natural gas into products that are consumed by consumers and businesses, such as diesel fuel, gasoline, and jet fuel, including a sub-component of companies that produce specialty chemicals and lubricants (as compared with various types of fuel)
- Renewable energy companies that harness power from water, wind, or sun, store it, and use it to power consumer products or businesses
- Electricity production and distribution, powered by a mixture of 48% coal, 22% natural gas, 20% nuclear, and 10% renewables such as water and solar
The energy industry is also sensitive to macroeconomic factors. If the economy is expanding, energy industry participants tend to be profitable as the price of energy stays high. The energy sector is also sensitive to government regulation. As countries become increasingly concerned with global warming, incentives and regulation will drive growth for renewable energy industry participants.
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Energy Sector Outlook
A high-level energy sector outlook certainly takes a positive tone. Why? Humans will always have a need for power/energy. This is unlike, for example, the automotive or airline industries. In theory, it’s possible that preferences and/or concern for the environment could lead to reduced usage and contraction of these industries. As governments continue to push to address climate change, the non-renewable portion of the energy sector is likely to lag behind renewables. We expect renewable energy companies to gain an advantage over those focused on generating power from fossil fuels.
Energy Sector Business Models
For any business in non-renewable energy or competing in the renewable energy sector, competitive dynamics often revolve around investments in research and development. A technological breakthrough that allows a company to get oil out of the ground more cheaply is valuable. Likewise, the ability to harvest energy more efficiently from the sun creates a competitive advantage. Technological breakthroughs like these are what drive value creation in the energy industry. The business models of most of these competitors involve large investments in fixed assets and high fixed costs. These investments might be in land for oil reserves or equipment for processing oil or capturing solar or hydro power. Storage and transportation are also costly and require large investments.
Top Energy Sector Companies
Let’s look at some top energy sector companies in both the renewable and non-renewable portion of the energy sector.
Top Non-Renewable Energy Sector Companies
Aramco
Aramco is a Saudi Arabian petroleum and natural gas company. It is one of the largest companies in the world by revenue at $330 billion. It has the second largest amount of oil reserves of any company in the world, and is ranked first in daily oil production.
Exxon Mobil
Exxon Mobil is the largest direct descendant of Standard Oil, which was one of the bedrocks of John D. Rockefeller’s U.S. business empire. It has consistently been one of the largest companies in the world, as measured by both revenue and market capitalization. Most of its value is derived from its “upstream” businesses, meaning oil exploration, mining, and processing activities. However, it is also a well-recognized “downstream” brand. It operates Exxon Mobile gas stations and sells oil related products under brands Exxon, Mobile, and Esso.
Royal Dutch Shell
Royal Dutch Shell is an English-Dutch multinational oil and gas company headquartered in the Netherlands. In 2020, it was the largest company in Europe and fifth largest in the world as measured by revenue. It is completely vertically integrated, much like Exxon and more so than Aramco. It also has renewable energy activities in its expansive portfolio, which happens to include operations in over 70 countries.
Here is a longer list of the world’s top energy sector companies (non-renewables focused).
Top Renewable Energy Sector Companies
Orsted
Orsted is a highly profitable company engaged in the provision of a range of renewable energy solutions. Headquartered in Denmark, wind power is clearly a focus for the company. It designs, manufacturers, and operates multiple wind farms, but is also engaged in operating bioenergy and thermal power heating plants.
Renewable Energy Group Inc.
Renewable Energy Group Inc. produces biofuel and renewable chemicals. It processes waste, vegetable oils, animal fats, and other feedstock by-products into biomass-based diesel. It also designs and produces biomass-based diesel production facilities and is engaged to manage the ongoing operations of third-party facilities.
SunPower Corp.
SunPower Corp. is a totally different type of energy company. It is a $1.4B designer and manufacturer of solar panels and systems for retail and business use. Its solutions include engineering, procurement, construction, and ongoing maintenance.
A list of 10 major renewable energy companies can be found here.
Renewable Energy Sector
Put simply, the renewable energy sector is expected to grow faster than the broader energy sector. So the renewable energy sector outlook is pretty rosy! Drivers of the renewable energy sector include:
- Policies and regulations from governments across the world to curb CO2 emissions
- Improving technologies that make renewable energy more cost-competitive relative to fossil fuels
- An increasing awareness of climate change and an increase in demand for renewable energy sources
Renewable energy sector growth is expected to exceed 5% from 2020 to 2025, by which point the renewable energy sector will be meeting 13% of total global energy demand. From a technology perspective, wind is the primary driver of renewable energy growth. From a regional perspective, Asia-Pacific has the largest installed base of renewable energy capacity. But in Asia, hydropower has the largest share of the renewable market.
Challenges Facing Energy Industry
There is momentum for continued expansion of renewable energy relative to fossil-fuels. However, the energy sector outlook dims with the friction and job losses that can occur when regions or companies shift focus from fossil-fuel based power to renewable energy. Those losses are a key challenge for the sector. In the U.S., renewable energy growth has certainly been slowed by political struggles over the implications of climate change.
Reckoning with the impact on the environment - even outside of climate change - is another challenge faced by the energy sector. These types of challenges facing the energy industry include societal and political reactions to major accidents like oil spills and issues such as the Keystone pipeline debate, where the environment is disrupted by drilling in remote areas.
Conclusion
The energy sector is at once interesting, exciting, and frightening. We need increasing amounts of energy to feed the planet’s growing population and power our lives and businesses. At the same time, the largest oil and gas companies may be, from one perspective, key drivers of climate change. Over time, we anticipate an acceleration of the integration between the non-renewable and the renewable energy sectors. This is good news for everyone and the energy sector outlook!
Additional Reading:
- Oil & Gas Companies Face Difficult Road Ahead, According to New BCG Study
- BCG Study Says Banks Must Adapt To Digital-First Model
- Pyramid Principle Applied