Nearly all the major oil and gas companies are addressing the energy transition due to a combination of multiple drivers and pressures in the market, shows a CMS report recently released. Yet this is still some way from becoming the norm, with only three percent of the sampled companies’ CAPEX being committed to alternative and new energy portfolios.
“All the big players are doing this to some extent”, writes the CMS Oil & Gas Energy Transition Report, and “many of the medium-sized companies in the oil and gas sector are likely to follow suit in the following years and decades”. Experts also see this forcing change upon the supply chain, “which generally has been slow to react to the energy transition”.
8 key drivers of the energy transition in O&G sector
Declining cost of renewables is the first of the eight key drivers pushing the oil and gas companies to react to energy transition, according to CMS. Technological advances and increased investment have dramatically reduced the cost of renewables. This means that they are now a more attractive option for oil and gas companies looking to diversify and expand their energy portfolio. In some locations and markets, solar and wind can now beat conventional generation on cost without subsidies, making the purely business case for renewables more attractive.
- Declining cost of renewables
- Investor pressure addressing climate change
- Customer pressure to make the transition
- Increased government regulation
- Government support of alternative technologies
- Information disclosure requirements
- A desire to mitigate reputational damage
- Uncertain outlook
4 main strategies from O&G majors
CMS commissioned research consultancy Capital Economics to assess and evaluate how far some of the largest international oil and gas companies are committed to new and alternative ways of generating energy or otherwise responding to the energy transition.
The energy transition strategies of 15 of the world’s largest international oil and gas companies were examined and four main strategies addressing the energy transition emerged.
1. Emissions reduction and improving efficiency
Many oil and gas majors have set themselves emissions targets in respect of their own operations, and some (e.g. Shell) have tied executive pay to those targets. Internal operational changes are required to address the challenges of energy transition e.g. regular audits, upgrading equipment, implementing energy management systems.
2. Portfolio diversification
Research points to renewables offering the most attractive opportunities for oil majors to diversify and add value to the group’s overall business, with solar, wind and electricity technologies being the most popular to invest in and acquire. However, transition for oil and gas companies has also included moving into the power generation business, often banking on their own production of natural gas. A number of oil majors are also setting up partnerships with innovative start-ups.
3. Integration of renewable technologies into oil and gas companies
Some oil and gas majors are decarbonizing their upstream and downstream activities to create their own energy supply from renewables. This can include the use of wind and solar power in remote areas to power oil production, or the use of renewables to power the oil refining process. The continuing reduction in the cost of many renewables means that this strategy can reduce operating costs as well as emissions. In addition to renewables, in many mature production areas with marginal output, distant from the natural gas transport system, companies are using “gas to power” to produce electricity for their own operational consumption and selling the excess electricity to the grid.
4. Continued focus on oil and gas
Although the research shows that most of the oil and gas majors are investing in renewables to a greater or lesser extent, hydrocarbons look likely to remain the core of their businesses for many years to come. This is particularly true of companies from Asia and the US, and for smaller oil and gas players seeking to profit from the partial exit of the oil majors. The reality is that oil is generally still more profitable than renewables. As the profitability of renewables investment is proven, strategies in this group of companies may change, but there will remain less incentive to diversify when a company has large oil reserves.
Oil and gas will continue to play an important part
Although the global energy system has been transformed several times over the last two hundred years, we are experiencing a new wave that combines the dawn of new (renewable) energy sources with consumer led pressure to reduce greenhouse gas emissions and mitigate the adverse impacts of climate change, concludes the report. “However, before banishing the best days of the oil and gas industry to a nostalgic past, we must take an honest look at what the industry is doing to respond to the existing landscape. Oil and gas will continue to play an important but decreasing part in the energy mix for decades to come and the oil and gas majors must respond as to how quickly they will transition themselves into broader energy companies.”
The 15 companies analyzed were Shell, BP, ExxonMobil, Chevron, Total, ConocoPhillips, Eni, Equinor, Repsol, Pemex, Lukoil, Petrobras, Saudi Aramco, China National Petroleum Corporation, Petronas. They represent USD 2.7 trn in annual revenues, USD 250 bln net income, and cumulated capital expenditure of USD 228 bln.
The Oil & Gas Energy Transition Report is authored by a team of CMS experts lead by Partners in Energy Munir Hassan (London) and Norman Wisely (Aberdeen). CMS is a top six global law firm, with 70+ offices in 40+ countries, and a global team of over 4,800 lawyers.