The offshore oil and gas sector has been on a wild ride the past few years. From late 2014, when oil and gas prices collapsed, through 2020, the market for offshore services was in a deep slump, volatility increased, and pressure on margins was unrelenting. Then came 2021, and with it a powerful surge in demand as well as prices that revived the sector’s fortunes. The good times appear set to last a few more years, as tight oil supplies interact with rising demand to sustain higher prices. Then the cycle will turn again—only this time, there will be no subsequent recovery. The offshore sector, along with the rest of the oil and gas (O&G) industry, will go into terminal decline, and the offshore sector’s ride will grow even wilder.

Overhanging the entire offshore market—not to mention the O&G industry writ large—has been an ongoing transition to more sustainable forms of energy. The transition gained momentum with the Paris Accords of 2015, ratified at the COP21 climate summit, and took on new visibility and scale in the wake of the COP26 climate summit, which culminated in the ratification of the Glasgow Climate Pact, an agreement between nearly 200 nations to hold the global average temperature increase in 2050 to 1.5°C. Signatories publicly committed to accelerate the transition to renewable, sustainable energy sources and to lower carbon emissions by reducing fossil fuel usage—the first explicit mention of fossil fuel reduction in the history of such agreements

The energy transition described in the agreements constitutes the greatest challenge ever faced by the O&G industry and the offshore services sector. But far more than the industry’s future is at stake because irrespective of how the energy transition eventually plays out, humankind itself faces a period of massive disruption in coming decades, with consequences that are neither entirely foreseeable nor preventable.

With so much at stake, the pressures to diversify into less-carbon-intensive energy sources and operate more sustainably have become impossible for the O&G sector to resist, as ESG (environmental, social, and governance) principles take the world by storm. Consequently, offshore companies find themselves having to consider how to fundamentally transform operating strategies and methods with a view to reduce their direct and indirect emissions of greenhouse gases. Carbon-intensive resources with high breakeven oil prices, such as oil sands and heavy oil, will likely be among the first to go offline, as producers concentrate on lower-carbon, more-sustainable sources of energy. How rapidly the transition away from oil and toward cleaner fuels will occur is an open question. But there’s no question that the transition will happen, with asymmetrical impacts on offshore operators.

To assess the potential financial and operational impacts of energy transition, AlixPartners developed a proprietary scorecard based on the activities of more than 60 of the world’s largest offshore O&G service companies with aggregate revenues north of $100 billion.

The scorecard incorporates 18 metrics that capture a company’s sensitivity to the transition along three dimensions, its:

  1. carbon footprint and ability to diversify and decarbonize operations
  2. overall end-market dynamics
  3. ability to generate cash to fund the transition

The offshore-drilling subsector looks most exposed. Engineering, procurement, and construction (EPC) players seem best placed to weather the storm. And the seismic, offshore-service-vessel (OSV), and floating production, storage, and offloading (FPSO) subsectors are found somewhere in the middle.

Four potential strategies—decarbonization, diversification, consolidation, and/or continuous O&G focus—are available to mitigate or at least lessen the impact of the transition.

Associated risks and opportunities that each strategy presents are discussed at length throughout this report, with offshore wind, decommissioning, and carbon capture and storage being identified as the major diversification markets. Some subsectors will enjoy broader opportunities to diversify and address new markets or decarbonize operations than others will. But all of them can expect that their capabilities, resilience, and adaptability to change will be tested as never before.

Energy transition represents an existential threat to the entire offshore universe in the long term, but the prospect of elevated oil prices until the middle to the end of the decade offers some short-term opportunities. Over the longer term, however, if offshore players do not successfully implement one or more of the mitigation strategies, they will face tremendous adverse financial consequences. In our most extreme scenario, sector revenues could drop by more than $50 billion. That is equivalent to a nearly 50% smaller industry. At the same time, $80 billion to $110 billion would have to be written off—the equivalent of 70% to 90% of the offshore sector’s assets—which would drastically constrain the sector’s borrowing capacity. And already depressed levels of return on capital are expected to continue producing negative economic rents, with little hope of recovery.

All key stakeholders such as management, boards, equity investors, and lenders must immediately consider their strategic responses to the most extreme disruption the sector has ever faced. The nature of each company’s and stakeholder’s response will be unique to their individual circumstances; there is no standard playbook for action. Each company and stakeholder, from its unique competitive position and role in the industrial ecosystem, will have to gauge how to best balance long term operational sustainability against the need to maximize returns in the short term. Equity investors and lenders in particular will each face their own internal investment and/or lending constraints, ESG commitments, and demands by their respective stakeholders that will shape their decisions and their approaches to the sector.

All that is certain is that the industry is in for a long period of transformation and near-constant change.


The energy sector accounts for almost three-quarters of global greenhouse emissions, which have already pushed the global average temperature to 1.1°C higher than the global average temperature of the pre-industrial age (figure 1). The resulting weather and climate extremes are already apparent and will only intensify in coming years. The energy sector has to be at the heart of efforts to minimize temperature increases and hold the long‐term rise in average global temperatures to 1.5°C by reducing global carbon dioxide (CO2) emissions to net zero by 2050. At the same time, modern energy is integral to the livelihoods and aspirations of a global population that is set to grow by some 2 billion people by 2050.

According to the International Energy Agency (IEA), achieving net-zero emissions by 2050 calls for nothing less than a complete transformation of the way the world produces, transports, and consumes energy. But commitments made to date fall far short of the demands of the path to net zero. The number of countries that have pledged to achieve net-zero emissions has grown rapidly over the past 18 months and now covers around 70% of global emissions of CO2, which is consistent with global average temperatures’ rising by 1.8°C in 2050. Most of the pledges, however, are not yet underpinned by near term policies and measures and that implies an even higher temperature increase of 2.0°C by mid-century.

The higher the temperature rise, the greater the risks of severe weather events such as extreme heat, drought, river and coastal flooding, and crop failures. Even during the past decade, extreme heat events occurred almost three times more often than in preindustrial times.

During the next decade, actions in four key areas are essential if we’re to keep alive the possibility of holding global temperature rise to 1.5°C as per the IEA:

  1. A massive push for clean electrification
  2. Renewed focus on realizing the full potential of energy efficiency
  3. Concerted efforts to prevent leaks from fossil fuel operations
  4. A boost to clean energy innovation
22 ap osv report figures emissions sector

The need for a full energy transition is clear—and momentum appears to be irresistible—but the timing and speed of the changeover are highly uncertain. To manage the inherent uncertainty of the energy business, most energy market professionals rely on scenario analysis to predict future demand patterns. To approximate long-term offshore demand, we follow their lead in this report, basing our own scenarios on those devised by the IEA, which has developed several estimates of future emissions growth, energy demand, and mix patterns. Irrespective of the scenario, however, the industry is on an irreversible path toward terminal decline, and the only question is, when does it begin?


1. Status quo (SQ)

Status quo (SQ), which is derived from the IEA’s World Energy Outlook 2021 (WEO) Stated Policies Scenario. SQ represents a conservative baseline that does not assume countries will achieve the reductions they pledged before COP26, and it is consistent with a 2.0°C temperature increase by 2050.

2. Gradual transition (GT)

Gradual transition (GT), which is based largely on the IEA’s WEO 2021 Announced Pledges Scenario. It is an intermediate scenario that assumes that countries will meet the targets they announced before COP26 and is consistent with a 1.8°C temperature increase by 2050.

3. Rapid transition (RT)

Rapid transition (RT), which closely tracks WEO 2021 Sustainable Development Scenario. It is an aspirational scenario that assumes universal adherence to COP26 pledges; a massive, accelerating shift to renewable energy sources; and a steep plunge in consumption of fossil fuels of all sorts, consistent with a 1.7°C temperature increase by 2050.

4. Net zero (NZ)

Net zero (NZ), which represents an ideal scenario wherein the global energy sector achieves net-zero carbon emissions by 2050— broadly in line with the WEO 2021 scenario of the same name and consistent with a 1.5°C temperature increase by 2050.

There is wide variation in the temperature forecasts and CO2 emissions forecasts under each scenario. In the SQ scenario, global energy-related and industrial-process CO2 emissions rebound quickly in 2021, rising to 36 gigatons (Gt) in 2030 before falling back to just under 34 Gt in 2050—about 6% below 2019 levels. In the GT scenario, emissions peak in the mid-2020s and reach around 21 Gt by 2050—the equivalent of a 42% decrease from 2019’s levels. The 2.6 Gt difference in emissions between the SQ and GT scenarios in 2030 points out the implementation gap that exists between announced net-zero pledges and the policy frameworks and specific measures that the pledges require: pledges have to be underpinned by strong and credible policies and long-term plans in order to make them realities.

Global average temperatures would increase by 2.0°C to 1.8°C in the SQ and GT scenarios, respectively, with grave consequences for the climate, sea levels, and human life. Under the RT and NZ scenarios, emissions would have to fall by 77% and 100%, respectively, and hold manageable but still problematic temperature increases to 1.7°C to 1.5°C. There will be a 12-Gt ambition gap between the GT and NZ scenarios in 2030 that requires countries to go beyond existing pledges in order to remain on course to achieve net-zero emissions by 2050.

Oil demand goes into eventual decline in all of the scenarios examined, although the timing and speed of the drop vary widely (figure 2). In the SQ scenario, global oil demand exceeds 2019 levels by 2023 before reaching its maximum level of 104 million barrels per day (MBPD) in the mid- 2030s and then declining very gradually to 2050, thereby still leaving demand levels about 6% higher than in 2019.

In the GT, a peak soon after 2025 is followed by a decline toward 75 MBPD by 2050—roughly 21% lower than 2019 levels. To meet the requirements of the NZ scenario, oil use plummets to 25 MBPD by mid-century, which is equivalent to a 78% drop compared with 2019.

Natural gas demand increases in all of the scenarios during the next five years, but sharp divergences occur thereafter. Natural gas demand continues to rise after 2025 in the SQ scenario, with no peak in demand, reaching 5,100 billion cubic meters (BCM) in 2050, which is around 24% higher than in 2019. In the GT scenario, demand reaches its maximum level soon after 2025 and then declines to 3,830 BCM in 2050—equivalent to a 6% drop compared with 2019 levels. In the NZ scenario, gas demand drops sharply after 2025, falls well below 2020 levels by 2030, and reaches 43% of 2019 demand levels by 2050.

Only under the SQ scenario does aggregate O&G usage grow through 2050. Under the three other scenarios, O&G demand slows to a plateau in the mid- to late 2020s, never to recover. The implication is clear: no matter the scenario, the O&G industry and the offshore sector face long-term decline.

Renewables, meanwhile, and especially wind power, are poised to play increasingly important roles in the world’s energy mix. In the years leading up to 2050, renewables generation is expected to grow more efficient in response to societal pressure and will benefit from preferential regulatory status, riding the cost curve downward until it becomes the dominant energy source—possibly as soon as the mid-2030s in the NZ scenario. As the contributions of coal and O&G diminish and as renewables move to the forefront, competition among the various energy sources will heighten.

Annual growth rates for renewables range from 4% to 6% until 2050 under the SQ and NZ scenarios, respectively. In the RT scenario, renewables would account for 55% of all energy consumed in 2050. The estimate rises to 67% in the NZ scenario.

The rapid rise of renewables, though obviously a threat to oil operations, presents offshore operators with opportunities for diversification into a promising growth market, potentially enabling many players to survive the transition by repurposing their assets and operations toward renewables production.

Wind power is likely the most attractive diversification opportunity, promising annual growth rates of 6% to 10% by 2050 under the SQ and NZ scenarios. However, we are using the more-conservative renewables growth estimates as proxy and input for diversification opportunities for offshore players.

Whatever course the energy transition ultimately takes, it will present the offshore sector with an unprecedented set of strategic considerations. At some point in each scenario, oil demand will go into terminal decline, rendering today’s operating models obsolete. Business forecasting will grow more inexact and liable to error. And shifts in government policy will become more difficult to predict, leaving businesses exposed to sudden and potentially substantial changes in regulation. Under those conditions, boards, C-suites, and other key stakeholders such as equity investors and lenders will come under intense pressure to determine the correct strategy and execute it rigorously. The greatest risk they face will be the failure to think big and act boldly.

22 ap osv report figures scenarios


Despite the onset of energy transition, the outlook for offshore O&G services is positive in the short term. Today 12,800 offshore vessels and rigs support exploration, development, and production at O&G fields that produce about 17% of the global energy supply (27% oil and 32% gas).

Exploration and production (E&P) companies, with deleveraged balance sheets and flush with cash—thanks to higher commodity prices and aggressive cost reduction initiatives taken during the 2020 downturn—have resumed approving large field developments, which more than doubled in 2021. Global E&P CapEx are projected to grow by 8% this year—reaching around $440 billion—with further increases in 2023 and beyond (figure 3 – download the PDF to view). According to Rystad Energy, investments in US shale are expected to expand by 18% in 2022, and shelf and deepwater CapEx are set to grow by 4% and 6%, respectively, thereby lifting global offshore investments to more than $115 billion.

Global annual E&P investments, however, will have to increase and be sustained at roughly $470 billion through 2030 to ensure oil market balance despite slowing demand growth, according to the International Energy Forum (IEF) and IHS Markit. While both think tanks used a materially lower capex baseline of $309 billion for 2020 as compared with Rystad Energy, the IEA’s WEO 2021—with a comparable baseline of $330 billion—reached a conclusion similar to the GT scenario, requiring $572 billion in annual upstream CapEx until 2030 to meet oil market needs and prevent a supply shortfall. Even in the NZ scenario, when O&G demand is forecasted to decline by 1.9% per annum until 2030—and oil alone by 2.8%—global E&P investments would still have to be maintained at $365 billion. Insufficient upstream investment would raise the prospect of higher oil prices, more price volatility, and growing energy scarcity. Daniel Yergin, vice chairman of IHS Markit, said that as energy transition proceeds, “underinvesting in oil and gas before renewables and other low-carbon technologies are ready to scale up to meet energy demand could create recurrent energy crises of the kind we saw in Asia and Europe over the last few months.”

The IEF and IHS Markit indicate that 2022 and 2023 are critical sanctioning and allocating capital toward new projects to ensure that sufficient supply comes online within the next five or six years. E&P companies will likely remain highly selective about new project approvals in light of macroeconomic uncertainty, concentrating their investments in projects with relatively low carbon intensity and breakeven oil prices. Companies will most likely favor small- or medium-scale onshore and subsea tieback projects with multiphase expansion opportunities. Such projects typically require less capital and have shorter payback periods. Average breakeven prices for new oil projects have dropped to $47 per barrel, down 8% compared with 2020 and 40% since 2014, according to Rystad Energy.

With the price of Brent crude above $85 per barrel at the time of writing, the offshore sector can potentially expect a brief period of growth—in anticipation of a mismatch between demand and future supply—before changes in the energy mix start to bite. Elevated oil prices and increased offshore activity levels until mid-decade to end of decade would be a direct consequence. And as demand grows and activity rises, capacity will arise as a major issue in the O&G supply chain. Since the 2014 downturn, the largest O&G service providers have shed around 40% of their workforces, reduced manufacturing capacity, and retired numerous assets such as offshore drilling rigs, offshore construction vessels, and offshore service vessels. As capacity tightens, those cuts could present the sector with the opportunity to improve pricing and financial returns, resulting in overall inflationary pressures for E&P companies.


AlixPartners has developed a proprietary scorecard to assess the potential impact of energy transition on the offshore industry and uses it to analyze the activities of more than 60 of the world’s largest offshore O&G services companies. The screened companies represent more than $100 billion in revenue and carry approximately $100 billion in financial debt. The scorecard incorporates 18 metrics that capture a company’s sensitivity to the energy transition along three dimensions:

  1. Its carbon footprint, including its ability and technological potential for diversifying and reducing emissions
  2. Its overall market attractiveness, including its level of fragmentation, supply/demand dynamics, and expected demand destruction caused by the energy transition
  3. Its ability to generate sufficient cash to fund the required investment for the transition

Applicable to both companies and subsectors, the scorecard can be used to help determine which strategy a company should pursue to meet and overcome the challenges to its operations that the energy transition will pose.

At a macro level, the scorecard confirms what is obvious to most of the industry: the offshore O&G subsector, with more than 75% of its current revenues coming from hydrocarbon sales, will encounter significant disruption (figure 4). Some subsectors have promising opportunities to diversify into new markets. But drilling is at high risk, in light of its significant operational challenges, limited opportunities to diversify and relatively weaker financial position. And even though the OSV subsector has good opportunities to diversify its revenue and reduce current emissions, questions remain about its ability to finance those changes, given its high financial leverage (16x debt/EBITDA) and weak cash generation. Conversely, the subsector best placed to master the transition is EPC, which enjoys plentiful opportunities to diversify, favorable market conditions, and relatively strong financials.

22 ap osv report figures energy scorecard


Although demand for seismic services improved across the middle of 2021 before tailing off, sustained revenue and profit growth is unlikely because there is little chance of significant increases in exploration budgets. Despite the drastic decline in the subsector’s revenues since 2014, however, its EBITDA margins have held at about 30%, thanks to many operators’ shifting to asset-light business models. Leverage ratios have only marginally increased to about 3.5x in 2020 versus 2.8x in the cycle.

Seismic companies have few obvious opportunities to diversify, but operators that can tap their available technologies and expertise may be able to move into site exploration of offshore wind farms, deep-sea mining, and carbon capture and storage. Seismic companies would likely gain from consolidation as competition among energy sources increases; they would also benefit from a focus on efficiency in response to increasing pressure from E&P clients to reduce their carbon footprints. Many will likely refit their fleets to use batteries, biofuels, and other alternatives to hydrocarbons.


The drilling subsector offers few opportunities for diversification because of its limited technological overlap with other markets. Some drillers may have opportunities (1) to apply their technologies and assets to carbon capture and storage in an effort to repurpose their existing O&G wells for carbon injection and (2) to access geothermal sources. Transocean, for example, recently announced it will drill one carbon injection well and the sidetrack for another in the North Sea as part of a joint venture between Equinor, Shell, and TotalEnergies. Stena Drilling, for its part, has established a framework with dCarbonX for decarbonization exploration. Stena intends to use its technology to look for geothermal sources and scout locations for storage of CO2 and other gases.

Even with more such undertakings, drillers have little choice but to focus on reducing their emissions via operational efficiency improvements and on pursuing less-carbon-intensive forms of extraction. Although the drilling subsector has been struggling with declining revenues and margins since the 2014 oil price crash left it heavily oversupplied with rigs, utilization and day-rate levels have started to recover on the back of the 2021 oil price rally. Demand will likely continue to increase until it peaks around 2025 and thereafter, transition into terminal decline. Despite that prediction, comprehensive financial restructurings, asset retirements, and consolidations put the drilling sector on a solid financial footing.


OSV operators are already on track to reduce the emissions they generate, thanks to growing use of liquid natural gas and battery packs to fuel their fleets. They will also have opportunities to diversify into offshore wind turbine installation and servicing as well as support of subsea construction of carbon injection wells.

Over the longer term, demand will follow a path similar to that of drillers, trending upward through the mid-2020s before tapering off as lower-carbon energy sources come to the fore. However, the massive oversupply of OSVs will likely limit operators’ room to maneuver. That oversupply, combined with a debt/EBITDA ratio of 16x and nonexistent cash-generation, makes it likely that the subsector will, with a handful of exceptions, struggle to fund investment in new technologies and service offerings.


Floating production storage and offloading operators have few obvious opportunities to diversify. For them a better course might be to apply existing technologies to cut FPSO carbon emissions, which are the highest among the offshore subsectors. About 65% of the subsector’s emissions result from vessels’ power generation, and therefore, efficiency improvements in power generation by way of alternative fuel sources could yield large emissions reductions.

In the short-to-medium term, FPSO players’ revenues should continue to post solid growth rates, and the sector should be able to maintain margins of more than 25% because E&P companies will increasingly favor floating platforms over stationary rigs for their offshore projects. Despite relatively high leverage ratios—currently at about 6x—the annuity-like cash flows of FPSO operators should continue to provide some financial flexibility.


The engineering, procurement, and construction subsector, which includes subsea operations, will most likely manage the energy transition from a position of relative strength. Because operators can readily transfer their engineering and project management expertise to other capital-intensive projects far distant from the energy sector, they have a range of opportunities to diversify. Boasting the lightest carbon footprint in the offshore sector, with 58 tons of reported direct emissions per $1 million in revenue, EPC players will find many diversification opportunities in adjacent and emerging industries such as offshore wind-power generation and platform decommissioning. Those revenues could offset evaporating O&G-related income. EPC providers seeking funding to invest in new technologies, however, will first have to rebuild their financial health in the face of revenues and earnings that have eroded since 2014, with 2020 margins running at less than 5%. The recent oil price crash has taken its toll on the subsector’s leverage ratio, which has climbed to more than 7x in 2020 compared with less than 4x over the cycle.


Companies in every subsector have opportunities to soften the worst blows that the transition to renewables and other low-carbon energy sources will deliver (figure 5 – download the PDF to view). The exact nature of their responses will be shaped by several important variables such as:

  • The strength of a company’s balance sheet and capital reserves
  • The company’s current portfolio of assets
  • The company’s base of customers and those customers’ levels of environmental activism
  • The company’s prospects for successful diversification and ability to raise capital
  • The company’s continued access to debt funding, given growing ESG- and climate-change-related constraints brought to bear by lending institutions
  • The company’s ownership structure and exposure to shareholder pressure
  • The regulatory environment in which the company operates

The strategies available to offshore players fall into four broad categories; the strategies are not mutually exclusive, and most companies in the sector will likely adopt one or more.

Strategy 1: Operational efficiency and decarbonizing operations

The aim of this strategy is to reduce emissions produced by offshore assets such as drilling rigs and OSVs as well as by overall operations. Achieving that objective requires offshore operators to invest in cleaner, more-sustainable fuel solutions and to maximize the efficiency of both current assets and operations. Failure to do so will negatively affect financial performance because E&P companies, which typically foot the fuel bill for offshore assets, penalize inefficient operators and favor only the most efficient players in their contract awards. Governments and regulators will also punish inefficiency by increasingly linking fossil fuel consumption to carbon prices. Successful risk mitigation and strategic execution will depend on offshore operators’ making the right investment decisions, which boils down to identifying the technologies that will optimize both emissions reductions and returns on invested capital.

Driller Transocean, EPC provider Wood PLC, and FPSO operator SBM are among the companies making concerted efforts to reduce their operational emissions. Transocean has developed automated controls that increase drilling efficiency, and it created a hybrid system that enables operators to use battery power to drive rig thrusters. The offshore driller has also installed smart analytics systems on 19 rigs; the systems have sensors that leverage real-time operational and maintenance data to improve efficiency. Wood is targeting a 40% reduction in its scope 1 and scope 2 greenhouse gas emissions by 2030 through initiatives that include the installation of renewable technology at offices, the appointment of sustainability leads, and improvements in data quality. SBM, for its part, invested over half of its research and development budget in carbon free technologies in 2020.

Strategy 2: Diversification

Companies pursuing diversification would tap their expertise and cash generated through carbon-intensive operations to fund their transitions to new markets and operations.

The success of the chosen diversification strategy depends on identifying market segments in which a company enjoys a competitive advantage over other market participants.

Companies will have to decide whether to focus on more-mature markets and technologies such as wind power generation or to bet big on risky new technologies such as carbon capture. Overall, the strategy implies a high degree of management complexity, requiring companies to engage concurrently in carbon-intensive and low-emissions operations. It presents managers whose experience is in mature businesses with the very different challenge of managing a high-growth business.

Part of the appeal of diversification is the opportunity to repurpose skills acquired in the O&G business (figure 6 – download the PDF to view). For example, some operators have acquired considerable subsea expertise by building wells and pipelines, performing seabed environmental services, and using autonomous underwater vessels. That expertise can be applied to the emerging industries of wind-powered, wave-powered, and tidal energy generation (wind, water, and tidal) as well as carbon capture and storage (figure 7 – download the PDF to view).

The success of the chosen diversification strategy depends on identifying market segments in which a company enjoys a competitive advantage over other market participants.

Other operators have gained extensive expertise in marine support such as the servicing of offshore assets and loading and unloading materials. Their marine-support expertise creates an opportunity to diversify into decommissioning; wind, water, and tidal; and carbon capture and storage. A select number of offshore players, for their parts, have developed advanced underground and undersea capabilities—such as subsurface imaging and modeling and drilling—that they can transfer to markets for facilitating the energy transition. Those markets include energy storage, onshore and offshore mining, decommissioning, geothermal energy generation, and nuclear waste storage. Storage expertise that has been gained by developing wells, reservoirs, and storage facilities can be redirected toward growth markets in carbon capture and storage as well as energy and hydrogen storage. And expertise gained from managing large-scale O&G projects can be readily reapplied to other capital-intensive infrastructure projects in a wide range of markets.

Among the companies already embarked on diversification paths are seismic operators Fugro and SeaBird, EPC players McDermott and Petrofac, and FPSO operator SBM. Fugro has entered the renewables, nautical, and infrastructure sectors, which now account for 55% of the company’s revenue. That’s a sharp departure from the past, when O&G-related business accounted for more than 75% of revenue. The company has applied its technical capabilities to investigate potential wind-power-generation sites and to perform damage assessments after tropical storms. SeaBird is preparing to enter the deep-sea-mining market, targeting 2028 as the date to launch full-scale operations. Last year, McDermott signed a memorandum of understanding with Royal Dutch Shell to collaborate on decarbonizing construction. The EPC player also has more than four decades of experience in delivering more than 200 carbon capture and carbon separation projects and more than 300 hydrogen projects. Petrofac is building expertise in segments it expects will generate high growth in the short or long term such as wind, carbon capture and storage, waste conversion, and hydrogen production. SBM is already capturing and reinjecting 2 million tons of carbon a year produced by its existing fleet.

Strategy 3: Consolidation and strategic alliances

This strategy focuses on market consolidation by means of mergers and acquisitions aimed at achieving operational efficiencies and thus gaining advantage in what promise to be increasingly competitive markets. In the offshore sector in particular, consolidation would enable companies to control a larger share of a shrinking market, reduce the oversupply of assets destined to become stranded, and reestablish pricing power wiped out by the 2014 energy price crash. Under those circumstances, companies that successfully execute consolidations should be able to earn sufficient rates of return.

Companies opting for the consolidation strategy will have to decide whether to focus on a single subsector to maximize operational efficiency or move into multiple subsectors to reduce market exposure, which could increase organizational complexity. Synergies may be difficult to realize when entering new markets. And successful consolidation will require rigorous investment discipline, including the discipline of rejecting low-potential investments even if they offer access to new value chains.

The offshore-drilling subsector has, arguably, made the most progress toward consolidation of all of the offshore subsectors. Consider the Noble Corporation and Maersk Drilling combination. In an announcement in November 2021 as a 50-50 merger of those two leading drilling players, Noble–Maersk claimed the tie-up endows the combined entity with “the scale, capabilities, and resources to successfully serve a broad range of customers” (World Oil, November 10, 2021). Expected to generate $125 million in synergies and thereby create significant value for shareholders, the merged entity boasts a diverse revenue mix, a strong balance sheet, and the potential to generate substantial positive free cash flow. Earlier, in March 2021, Noble had acquired Pacific Drilling, adding the latter company’s ultradeepwater-drilling ships to its fleet and gaining access to clients in Mexico and West Africa and operations in the Gulf of Mexico.

In the seismic exploration space, CGG and PGS have said they intend to form a strategic alliance to tap existing seismic data with a view to evaluate sites for their carbon storage potential. And OSV operator P&O Maritime is pursuing strategic alliances with its platform for storing and sharing maritime data. The company plans to make that data available to other OSV operators in order to facilitate the joint discovery of carbon reduction solutions.

Strategy 4: Maintaining focus on oil & gas

This strategy is based on the assumption that even in the most extreme transition scenario, demand for O&G will persist for many years to come. It reflects the understanding that even a mature business can yield sizable returns if it is run with an eye toward maximizing efficiency and eliminating extraneous costs, as is the case in today’s tobacco industry.

This last-man-standing strategy applies most readily to subsectors like drilling, with its limited diversification options. It may appeal to investors seeking substantial short-term cash generation to fund the transition to lower-carbon energy sources, but it also carries with it significant reputational and financial risks because of the opposition it is sure to elicit among environmental activists and regulators—not mention many investors. It may be most effective when used in combination with consolidation.

This strategy is not for the fainthearted. It demands ever-increasing efficiency and unrelenting focus on O&G resources with low carbon intensity and low breakeven points, which E&P companies will prioritize in their capital-allocation plans. Only the most-closely-focused, most-efficient, best-funded, and most-deeply-determined operators should even consider making the attempt, because the price of failure is simply too high.


Energy transition represents an existential threat to the entire offshore universe in the long term, but the prospect of elevated oil prices until mid- to end of decade offers some short-term opportunities. As asset values rise on the backs of improved revenues and profitability, investors will find potentially attractive exit opportunities. Lenders, for their part, can take the opportunity offered by the favorable short-term outlook to review and rationalize their loan portfolios. The potential for higher collateral values and lower loan-to-value ratios also creates an opportunity for lenders to exit their positions.

Over the longer term, however, if offshore players do not successfully implement one or more of the mitigation strategies, they will face tremendous adverse financial consequences by 2050, as discussed below (figure 8 – download the PDF to view). The discussion that follows does not consider the implementation of any mitigation strategies and should therefore be considered the do-nothing case. The SQ scenario is essentially an extrapolation of today’s performance—yielding a marginal improvement across all key financial metrics—and will not be discussed further in each of the financial implications.

Reduced sales and profitability. More than $50 billion! That’s how far offshore revenues could drop in the most extreme scenario of energy transition (the NZ scenario), which is equivalent to an industry nearly 50% smaller than it is today. In the less extreme, GT and RT scenarios, a more-moderate fall in sector revenues of roughly $15 billion to $35 billion can be expected. At the same time, EBITDA margins will likely tighten from about 12% today to 3% in the NZ scenario and 10% in the GT scenario amid mounting pressure from new regulations, declining economies of scale, and, potentially, carbon taxes. Far-reaching mitigation strategies will be required to address those shortfalls.

Weakening balance sheets and eroding asset values. Facing falling demand and the rise of competing energy sources, roughly 70% to 90% of the offshore sector’s assets could become worthless: in the RT and NZ scenarios, $80 billion to $110 billion would have to be written off. Even in the more-moderate, GT scenario, asset values would plunge by $30 billion, or nearly 30%, which underscores the offshore sector’s significant stranded-asset risk.

Declining ability to service debt. As profitability declines, companies’ leverage will expand, and their ability to service their debt will deteriorate. Total debt/EBITDA ratios could skyrocket to over 50x under the NZ scenario—or 10x and 19x in the GT and RT scenarios, respectively. And as leverage ratios climb, the ability to raise capital to fund mitigation strategies will diminish. It will be further impaired by declining asset prices, which will reduce the value of collateral available and thereby drastically constrain borrowing capacity.

Lower returns for investors. Returns, which have been trending down since 2015 and running below the cost of capital, are expected to continue producing negative economic rents— with little hope of recovery. Return on invested capital could fall as low as negative 16% in the NZ scenario and will be meager in the other scenarios. Restructurings will likely increase in frequency, leading to widespread equity dilution.

Offshore stakeholders of every sort have only a limited time to develop responses to the financial implications of widespread energy transition.

Banks and lenders will have to prepare to respond to the debt-servicing challenges of their offshore borrowers and to blunt the impact of rising levels of stranded assets. To respond effectively, creditors will first have to review their portfolios of loans to companies with exposure to the energy transition and prepare for distressed situations. They will also have to ensure that any new lending they undertake has the support of a robust business plan and collateral that will retain its value for the longer term—assuming, of course, that lending institutions will still be able to lend to corporates with exposure to hydrocarbons, given their own ESG targets and agendas.

Shareholders and other investors can expect lower returns as the profitability of fossil fuels erodes and companies steer their liquidities away from dividends and toward mitigation efforts. Equity holders can expect that some of the companies in their portfolios will divide their businesses into old and new entities to address the pricing penalty often imposed on hybrid organizations that have both fossil fuel and alternative-energy operations. Investors will have to determine their responses to repeated calls for substantial new capital to fund investments in decarbonization markets, which for the most part are still at the low end of the maturity curve. And they can expect continued uncertainty around the risk–return characteristics of many of their renewables and other low-carbon-technology investments.

To prepare for the inevitable, equity investors will have to reassess and review their capital allocations and risk postures. Their aim should be to ensure an optimal portfolio balance of hydrocarbons and more-sustainable energy sources that at the same time complies with a broad and increasingly stringent set of ESG criteria.

Investors will benefit from continual reassessment of their exposure to climate change and their risk of being saddled with stranded assets. They should (1) evaluate their holdings for the ability of those holdings to generate positive returns on invested capital and (2) seek out high-growth markets and investments that can generate robust returns in the post-transition environment.

Boards of directors must accept that the status quo has ceased to be an option and that operating models will have to change. Even as they constantly improve their ESG performance, they will have to contend with increasingly uncertain business forecasts and deal with the risk of abrupt changes in the regulatory environment.

Company management teams will have to manage evolving talent needs and prepare their workforces for a post-transition economy. And they will have to be prepared to make tough strategic choices and act boldly and energetically so as to produce tangible positive results while maintaining their ESG focus. Effective responses will depend on detailed scenario planning across the enterprise and the development and execution of successful mitigation strategies and activities. Detailed cost review is a must to prepare for substantial revenue declines. When possible, fixed costs should be made variable. And with the looming prospect of steep revenue declines, companies should review their talent strategies and needs so they can cope with the declining market for traditional skill sets by developing programs for worker reskilling and retraining.


For all its challenges, the offshore industry weathered the 2020 oil price crash, with some companies using the crash as an opportunity to deleverage balance sheets and in turn pursue consolidation. The recovery now under way could potentially endure until middle of the decade, after which the sector’s earnings potential will dwindle precipitously. Escalating pressure to contend with climate change will lend urgency to the drive for an accelerated energy transition.

The time to take action to meet the transition’s financial, operational, and organizational demands is now. Tomorrow is already too late. From here on out, offshore executives and key stakeholders should brace themselves for:

  1. Increased investor and customer pressures for ESG compliance, coupled with stringent new regulations
  2. A societywide technological and industrial transition to cleaner energy sources
  3. Pressure to fashion new business models in the face of the demise of business as usual
  4. Unprecedented levels of change and transformation
  5. Emergence of a need for massive spending on new technologies that may take years to earn out

There is no longer any time for delay or indecision because the price is simply too high. If offshore companies are to have any chance of meeting the concurrent, overlapping demands of the energy transition, they must waste no time in making bold decisions and taking aggressive action. The most-successful operators will bring to the table a holistic vision, unwavering focus, and relentless execution.