How will triple-digit oil impact the energy transition?

The following article was originally posted on the Mercer website.?You can find this article along with more benefits news content?here .

By Milan Taylor, Global Energy Leader, Dan Blobaum, Global Energy Operations and Geoff Smith, Gulf Coast Leader

Within hours of the Russian invasion of Ukraine, the prices for both Brent and WTI crude topped $100; several analysts in the days following forecasted significantly higher prices in the months ahead. Although it remains to be seen just how high prices will climb (and for how long), we’ve been considering a few questions of our own about the impact of triple-digit prices on the energy transition, talent and rewards.?

Energy transition

Will higher oil prices speed up the energy transition or slow it down? There are compelling arguments on both sides and a number of factors at play, and we believe higher oil prices are likely to spur an increase in M&A activity across the energy industry, which will serve to accelerate the transition. A sustained period of triple-digit oil prices should lead to increased opportunities for integrated energy companies (IECs) to sell off their oil and gas (O&G) assets to companies looking to expand their scale of operations. Why? Not only should valuations be higher for the sellers, but the buyers (who may have difficulty obtaining financing) will have more liquidity from increased profits to leverage and finance acquisitions. The increased cash flow, from both profits and sale of O&G assets, will therefore allow those IECs to accelerate their investments in carbon reduction and capture, as well as LNG, hydrogen and renewable energy projects.

Should this scenario play out, there is a risk that many M&A teams (including HR, finance and legal professionals) may prove to be under-resourced. While our actuaries may cringe at the math, we tell our clients that M&A is 90% operational and 60% strategic, so having sufficient resources dedicated to addressing each of these aspects is absolutely crucial. Organizations without a well-established “playbook” find it particularly difficult to navigate intense M&A deadlines. And the “soft stuff” in M&A transactions is often the toughest to prepare for and the hardest to deliver. In a competitive talent market in particular, those who fail to pay attention to communication and culture do so at their own peril.

Talent

Talent availability is also likely to be a significant issue for those companies expanding their O&G operations (infrastructure risk from rapid expansion without the underlying talent in place to fully support) as well as the IECs (pressure to hire from a limited pool and/or to develop and redeploy talent with the renewable skills necessary to rapidly create and ramp up new revenue streams in order to replace the divested parts of the business).?

With tight labor markets in many geographies, higher oil prices may provide energy companies the flexibility to be more “generous” with packages to attract new talent. In a recent Mercer North America Energy Transition study, the majority of respondents reported that the energy industry premium for current roles is likely to remain — and even increase — in the case of current high-skill roles and future energy-transition positions.

High oil prices also provide energy organizations with more financial bandwidth to accelerate their digital and automation aspirations when it comes to driving efficiency and productivity. Doing so may require companies to evaluate how to source additional digital and IT talent for technological design and deployment — and these are already challenging roles to recruit and retain given the competition for this talent across all industries.

Rewards

Sustained higher oil and gas prices are likely to drive high inflation even higher. The economic forecasts of late 2021, which suggested that inflation would be broadly under control by Q1 or Q2 of this year, will likely be extended by several quarters — if not years. Higher levels of inflation for extended timeframes will reopen the conversation as to how organizations should respond regarding the annual rewards cycle. In a January 2022 Mercer poll on wage inflation, 41% of American and 64% of Western European respondents indicated they were planning to adjust their pay review budget to reflect rising inflation. With regard to mid-year adjustments, most companies were not yet proposing to change the number of pay cycles in 2022 but this may change should inflation remain elevated for a long spell (as is now anticipated).

Energy companies may also want to leverage this opportunity to double down on their previously established strategic benefits priorities (for example, enabling flexibility in working and rewards, improving mental health and wellbeing, delivering on DEI and ESG initiatives and increasing investment in technology and processes). Ensuring these focus areas maximize the employee experience and are fit for purpose — that is, to attract, hire and retain a diverse and agile workforce — means recognizing the unique needs of different demographics across the organization. Strategies such as lifestyle spending accounts can address the needs of such workforces while providing an avenue that allows everyone to get something back. Companies may also look to increase the importance of ESG metrics in incentive programs and KPIs in order to accelerate their progression toward delivering on firm-wide commitments.

Accelerating the transition

As daunting as triple-digit oil prices are for many, we see it as an opportunity in some ways. The longer it continues, the more if may facilitate (rather than hinder) energy industry transition: Reshaping may happen more rapidly and any resulting proceeds put to good use in the form of increased investment in the talent and technology so vital to future success.