After an extraordinary year of health and economic challenges, the global oil and gas sector has an essential role to play in the economic recovery. The same could however be said of any economic recovery and expansion over the past 100 years – during this time oil and gas companies have provided most of the primary energy that has fuelled huge economic growth. But this time does look different. The oil and gas sector will power economic recovery not just through oil and gas exploration and production, but also (and perhaps counter-intuitively to some) through facilitating the transition to a lower-carbon economy and eventually a net zero future. This report presents a wide-ranging review of the role of oil and gas companies in that future.
The term “energy transition” is generally understood as covering the move from a fossil fuels to a more clean energy economy, from high carbon intensity to lower carbon intensity, and from a fragmented energy sector to one in which the multiple elements (oil and gas, renewables, transport, heating and others) are interconnected and increasingly integrated.
This multi-faceted transition has been going on for the past decade, but in the 18 months since we published CMS’s energy transition report (‘Energy Transition: Evolution or Revolution? The role of oil and gas companies in a net zero future’) much has changed, and the pressure for a faster pace of change continues to increase. This makes the energy transition of crucial and central importance to the companies involved, but also to policy makers and to all of us as consumers, taxpayers, and responsible citizens.
The roll-out of vaccination programmes offers the prospect of a super-heated economic recovery driving us out of the economic doldrums of 2020, but there are many demands for that recovery to rely on more sustainable energy sources and also pressure on policy makers to use the opportunity to accelerate the pre-Covid trend toward a lower-carbon economy.
There is recognition from many quarters that the trend is away from fossil fuels. The International Energy Agency (IEA) forecasts in its May 2021 report ‘Net Zero by 2050 – A Roadmap for the Global Energy Sector’ that investment in upstream oil and gas will, after 2030, decline to roughly 50% of levels projected over the next decade, driven by a long-term downward trend in demand for oil in particular. For the 15 oil and gas companies sampled in this report, this conclusion brings into question where their future capital should be invested. This report therefore looks in detail at their investment plans and, by doing so, presents a holistic picture of their intended role in a net zero future.
Contrary to many accounts, we report that the oil and gas sector is responding to that challenge. Investment in the annual energy transition increased since 2018 by circa 23% across the sample of 15 companies analysed in this report. 10 out of the 15 O&G majors sampled here had announced net-zero emissions pledges by the end of 2020, compared with just one a year earlier. While the majors’ capex investment in absolute terms was down overall in 2020, the decline was smallest in renewable power. It must be acknowledged that in most cases the capex amounts committed to clean energy sources represent a small fraction of the company’s total capex, and there remains in some cases a gap between rhetoric and action, but the trends and direction of travel are clear.
Anecdotally we can also report from our advisory work that the oil and gas companies are now central players in the clean energy and transport markets searching for investment opportunities across the globe to help diversify their portfolios. There are naturally challenges in making the diverse risks and revenues of such opportunities fit the investment criteria of oil and gas companies and their shareholders, but there is significant impetus to stretch internal requirements and expectations to make new propositions fit. Indeed, a number of the players in the sector have reshaped their businesses to reflect their anticipated future, along lines that bring renewables and sustainable energy away from the fringe and to the centre of their business organisation: embracing their future as integrated energy, rather than pure oil and gas, companies.
But there is much still to do. While five of the 15 O&G majors are on track with their emissions pledges made to support the goals of the Paris Agreement, all of them are at the date of writing struggling to commit to actions that would be consistent with the 2 degrees Celsius limit. Nevertheless, due to internal pressures, external economic pressures, and perhaps also increasing shareholder activism and the wave of formal climate change litigation, the need for greater action is not lost on the companies or their senior management.
For now though, the oil and gas companies in our sample do remain exactly that. And for many of them, their ability to finance an expansion into energy transition opportunities come from the strong backbone of returns from oil and gas projects. So, despite impassioned calls to immediately transition to net zero, the reality is more nuanced and, we believe, justified.
This edition of our energy transition report is a record of a step on a journey. We expect to see further acceleration of the trends we highlight here, and as the influence of big players in the sector is felt through their supply chains and to all of us as energy consumers, the implications for the next phase of the energy transition will be far-reaching.