- Although some predict that oil demand has peaked, a significant portion is likely to remain in the foreseeable future.
- The key challenge is to determine which investments can produce the lowest costs and bars of oil and gas units with the lowest emissions.
- We present five reflections of what the industry needs to consider in order to thrive.
Can oil and gas (O&G) investments go hand in hand with a commitment to the energy transition? Reading the news, it doesn’t seem to be. The stories often highlight institutional investors and banks announcing their rejection of fossil fuel exposure, citing the need to align their portfolios with the Paris Climate Agreement. Similarly, attention is paid when O&G companies respond and change their strategies to increase investment in renewables and set zero emission targets for their business (scope 1 and 2 emissions) or even the use of their products (band 3).
The urgent need for action cannot be underestimated. Only the existing infrastructure (energy, industry, etc.) blocks the temperature rise of 1.65 ° C, and the current planned production of fossil fuels (which includes coal) by 2030 is twice the maximum production in accordance with the limit of 1.5 ° C. So is the sale of O&G assets the only alternative and are all O&G assets destined to become stranded? Will these disinvestments have a positive impact on global emissions? Or can O&G investments support energy transition?
There are three key factors: O&G supply, O&G demand and the energy transition itself.
Most of the world’s O&G production and reserves come from national oil companies (NOCs) controlled by governments – often in developing countries – instead of from institutional investors. These governments depend on their NOCs to generate revenues that contribute to government budgets, fund key government services, and provide a significant source of foreign exchange reserves. Until countries diversify their economies (in some cases made possible by the energy transition) or feel pressured to follow others in declaring net-zero targets, they are unlikely to make decisions against cashing in their valuable O&G reserves.
Although some predict that oil demand has peaked, a significant portion is likely to remain in the foreseeable future. The International Energy Agency (IEA) has estimated that even in the scenario harmonized with the Paris Climate Agreement, the demand for crude oil will continue to be approximately 67 mb / d in 2040 (compared to 91 mb / d in 2020 affected by COVID-19), and gas demand will be more or less similar to the 2019 level. However, current O&G investments do not follow these demand projections. The IEA analysis indicates that without new investments, oil supply will be reduced to 16 mb / d by 2040. Adding projected investments to existing fields will lead to the expected production of 39 mb / d by 2040.
Given this scenario, it seems unlikely that the assets sold by European oil companies today will run aground immediately. If demand remains, over the next ~ 20-30 years, it will justify the continued operation of these assets, and other companies are likely to take ownership – in the absence of further regulations or restrictions on the operation of these assets. Therefore, the resulting impact on global emissions could very well be marginal.
At the grassroots level, a “fair energy transition” is one that achieves equally important but sometimes competitive goals of economic development and growth, energy security and access and environmental sustainability.
Renewable energy sources, especially wind and solar energy, are one of the main solutions for providing affordable and clean access to energy and can provide significant opportunities for economic progress. However, challenges remain around intermittency and decarbonization Sectors that are difficult to reduce, such as aviation, shipping and heavy industry. Furthermore, given the current impact of the O&G industry and the strategic importance for economic growth, job creation and socio-economic prosperity in many countries, investment in the sector is assessed taking into account this “fair” definition of energy transition.
The task before us is significant. The O&G industry must shift to align with global climate goals, while requiring significant new investment, especially in the coming decades. Therefore, the key question is: which investments can produce the lowest costs and bars of oil and gas units with the lowest emissions?
In other words, how to make investments that enable industry to meet existing, albeit reduced, demand for oil and gas, while supporting a “fair energy transition” and keeping all stakeholders, including shareholders and governments, satisfied?
1. It should be borne in mind that there are different roadmaps for different O&G players, depending on their current asset mix, value in the value chain and the country in which they operate. In addition to electrification, technologies such as carbon capture, use and storage (CCUS) and bioenergy will need to be recognized as important solutions. Undoubtedly, the energy transition is shaping the future of the O&G industry, but the transition pathways and the way investors react to them vary greatly among players.
2. In the fight against climate change, the general goal is to reduce emissions consistently and rapidly, regardless of where they come from. So one area of focus should be on the most cost-effective, lowest measures of hanging fruit. Potential measures include a focus on energy efficiency and electrification operations, CCUS, torch removal, and methane leak detection and repair. The good news is that many O&G companies, including large NOCs, have included these measures in their strategies, and have included others such as the use of 4IR technology such as remote reading and big data to record process efficiencies.
3. The adoption of low-carbon technology and rapid innovation in value chain decarbonisation have changed the game and sources of competitive advantage for companies that manufacture and sell products. Industry ingenuity and extensive project management skills are invaluable traits needed to manage the energy transition. Recent examples of these innovative capabilities are hydrogen-ready pipelines or turbines.
4. Investment decisions in energy projects, including O&G, require a holistic approach. Feasible investments (especially in emerging markets) must achieve the goal in a number of places, including sustainability, inclusive economic growth and access to energy. The systemic value framework, developed by the World Economic Forum and Accenture, aims to shift the political and commercial focus beyond costs to value. This framework could very well form the basis for the investment decision criteria needed for a holistic assessment of investment in O&G projects.
5. Finally, since you cannot change what you cannot measure, O&G companies need to be transparent about their climate strategies, emissions targets and progress. Preferably within an agreed industry-wide framework so that investors can rely on data disclosures and compare apples to apples to make the right and well-informed investment decisions in efforts to achieve a climate-friendly portfolio.
Given the importance of industry in terms of market capitalization, economic contribution, employment and carbon footprint, the O&G sector should play a role in the path of a “fair energy transition”. A collaborative and inclusive approach to financing this transition requires continued engagement between O&G and the financial sector for it to succeed.