As the drive toward sustainable development shifts into higher gear, one fact about the energy transition has become clear:
Most people who talk about the world going green in energy are underestimating just how tricky and lengthy a process that’s going to be.
A new study from audit and consulting firm Deloitte, “Positioning for green: Oil and gas business in a low-carbon world,” shows the complex choices facing the industry today.
Deloitte surveyed 100 senior executives and environment, health and safety leaders at global oil companies to study their organizations’ strategies for the energy transition. The group included integrated oil companies, international exploration and production firms, national oil companies and others.
- 47 percent of the respondent companies are mapping out strategies for low-carbon operations by the 2030s.
- 30 percent are planning to stay focused on oil and gas as a core business at least through 2040.
- 18 percent are pursuing longer-term, green business models.
- Just 5 percent are planning a rapid “green shift” in the near term.
The biggest group of companies, almost half, are using various strategies to combine transition investments with continued hydrocarbon production. A full 77 percent plan to remain focused on oil and gas.
50 Shades of Green
“There’s a misunderstanding around the word ‘transition,’” said Amy Chronis, leader of Deloitte’s U.S. oil, gas and chemicals sector in Houston.
“I think it’s important for the world to understand there are many different paths to net zero. People have to understand there are many shades of green,” she noted.
Deloitte broadly found four types of companies in the oil and gas industry today, with varied approaches to the energy transition and green investments:
- Low-carbon producers primarily focused on building a lean, decarbonized hydrocarbon portfolio
- “Hydrocarbon stalwarts” focused on gaining market share and nurturing their hydrocarbon business in regions and assets with the lowest upstream costs and least regulatory risk
- Green followers entering the new energy business after hydrocarbon assets are monetized and clean technologies have reached commercial maturity
- Net-zero pioneers creating a primarily new energy-heavy portfolio by divesting most of their hydrocarbon business and fully embracing the green future
Here are a half-dozen major takeaways from the study:
Going green looks more and more inevitable.
“Recent headlines had raised fears that the energy transition would be delayed because of higher prices and increased (hydrocarbon) demand,” Chronis observed.
But in fact, higher prices with increased industry income and accelerated green transition investments “could go hand in hand,” she said.
For oil companies developing green technologies, “Actually having a stronger state of the industry will help them,” she said.
As always, money plays a crucial role in industry plans.
The Deloitte report noted, “Although going green would be an eventual goal, it may not have the first claim on the followers’ extra cash generated – that is reserved for reducing debt and increasing payouts.”
“Additionally, companies may start slashing and monetizing their traditionally higher reserves-to-production (ratio) that could now be less relevant for long-term business growth,” it added.
“The fact that 47 percent (of those surveyed) are looking toward decarbonizing their operations and nearly a quarter are already strategizing about reducing carbon is heartening,” Chronis observed.
“The green shift is certain. It’s growing stronger by the day,” she said.
There’s still a big future in hydrocarbon production.
“In the long run there are going to be survivors,” Chronis said. “Just to make people aware, it’s still going to be a huge volume.”
Successful energy transition “will take a long time, and some prominent energy transition scenarios project oil demand in 2030 to remain around 90 (million barrels of oil per day). This implies there’s likely to be sustained value in oil and gas,” Deloitte reported.
“The 30 percent staying in O&G through 2040 will see concentrated value in a smaller but more competitive market. And given that remaining oil demand could range from 25 million-50 million b/d of oil by 2050, some in this group could reap U.S.$1.3 trillion of value,” it noted.
Also, while recycling could limit petrochemical feedstock demand growth in the long term, overall petrochemical demand looks to remain strong this decade. So, any major deceleration in oil demand likely will begin next decade, Deloitte projected.
OPEC and NOCs have a future advantage but not a total edge.
“OPEC’s oil market share is projected to increase from 37 percent currently to over 50 percent by 2050 under prominent net-zero scenarios, driven in part by international oil companies reducing their O&G capex. If production from non-privatized producing nations such as Russia is also considered, OPEC+ would be supplying most of the demand by 2050,” Deloitte noted.
“Hydrocarbon stalwarts, especially Middle East and North African (MENA) and Russian NOCs, have a built-in advantage or a head start in the net-zero race: They own the large reserves that can be developed and produced comparatively cheaply,” it observed.
Additionally, their competitive position likely will be enhanced by some other companies in the industry making an early shift away from oil and gas.
But NOCs won’t exclusively be the last suppliers standing, because many publicly or privately-owned companies have lower hydrocarbon value-and-resources at risk than NOCs. For example, of companies with less than 16 percent of their hydrocarbon portfolio at risk from declines in cash flows and recoverable reserves, 57 percent are non-NOCs, Deloitte reported.
The energy transition faces technological and workforce challenges.
“Evolution of technology remains the biggest challenge,” Chronis said. “As we see repeatedly in this industry, innovation keeps coming. There’s more evolution on the horizon.”
Of the surveyed senior O&G executives categorized as net-zero pioneers, about 80 percent identified technology evolution as their top challenge. Chronis predicted that public-private partnerships and regulatory help will increasingly be needed for efforts like carbon capture, utilization and storage.
Deloitte cited four critical capabilities for oil companies in the energy transition: operations design, supply chain ecosystems, digital mindset and organizational setup including workforce planning. Two areas of emphasis – decarbonization and optimization in “making operations as effective and clean as possible” – are especially important, Chronis said.
Attracting, retaining and developing expertise for the energy transition will be vital for the oil industry. Deloitte posited a two-track future approach, with professionals in exploration and production working alongside green specialists.
“Green followers could have to build two corporate structures/cultures for driving value and cost-optimization in hydrocarbons, while building new capabilities in renewables,” the study noted.
“This is the industry that powers progress in the world. That’s a real issue for talent in this industry,” Chronis said.
Social and regulatory concerns are also important.
Deloitte noted that environmental, social and governance investing in the oil industry is growing, with companies increasingly focused on not just environmental, but also social and governance issues.
“There’s a heightened scrutiny on the ESG lens,” Chronis said.
Oil and gas companies “are not outliers in terms of their ESG performance – in fact, many producers have been proactively publishing their ESG performance and setting ESG goals for several years already. U.S. E&P companies, for example, have the second highest ESG scores after the health sector in the United States,” Deloitte observed.
There’s a greener hydrocarbon future.
Transitioning to a different and greener energy mix is “a lot more difficult and more challenging than stakeholders and shareholders realize today,” Chronis said.
But “you can still stay in hydrocarbons and address climate change,” she added.
“Although timelines may differ, participating in the transition to the low-carbon future can unlock a multiplier effect and establish a new equation for companies across the spectrum,” Deloitte noted.
It concluded, oil and gas companies that “balance their internal transformation and corporate vision, leave room for innovation and agility, and set a strong ‘low-carbon’ foundation are likely on the right path.”
The industry’s low-carbon foundation and how companies establish it will be key, and it is definitely on the way.
“Even those companies that are hydrocarbon stalwarts today will eventually look for decarbonizing and greening their operations in future,” Chronis said.