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Energy transition: evolution or revolution

The pace of energy transition varies considerably among 15 international oil and gas companies according to a new report commissioned by research consultancy CMS, reports Brian Davis. The European majors (especially Shell and Repsol) have made far more progress than their American counterparts (such as Chevron, ExxonMobil and ConocoPhillips), while national oil companies (such as Pemex, Lukoil and CNPC) are more constrained in their ability to diversify, often due to more stringent government policies and regulatory frameworks.

In 2018, the majors sampled invested $6.6bn in renewables, equivalent to roughly 3% of their combined capex budges. Typically, companies with larger oil reserves were less diversified in renewable energy, says the report.

The oil and gas majors commonly focus on renewable investment in wind and solar technologies, while very few have stakes in hydroelectric and geothermal energy sources.

Key drivers for the transition were the declining costs of renewables, investor and customer pressure (which threatens to damage corporate brands) and government regulations, alongside a new risk allocation strategy, given oil price volatility and the strong geopolitical risk related to traditional oil and gas production.

Significant challenges are also highlighted in terms of changing regulatory environments (such as UK plans to ban the sale of new diesel and petrol engine cars by 2032 or 2035), competition from renewable energy firms and uncertainty surrounding returns from renewables compared to the higher margins from traditional oil and gas resources. ‘These are challenges that could restrict such future investment by the industry,’ the report comments.

Looking forward, the oil and gas majors’ journey is still ‘in its infant stages’ in terms of the energy transition, and there is much uncertainty about the trajectory going forward, although the direction of travel is clear.’

Under a conservative ‘existing policies continues’ scenario, the sample of oil and gas companies interviewed suggested that their investment in renewables could grow from $7bn to $10bn by 2030. However, a more ambitious ‘rapid energy transformation’ scenario could see this investment figure rise to $30bn by 2030, accounting for 10% of their total combined annual capex.

The report addresses four main strategies for the energy transition.

  • Emissions reduction and improved efficiency.
  • Portfolio diversification.
  • Integration of renewable technologies into oil and gas companies.
  • Continued focus on oil and gas.

Speaking at the launch of the energy transition report, Jonathan Woolf, Partner in the CMS energy team noted: ‘We are seeing an industry in flux, faced with the biggest change since the oil price explosion in the 1970s. Today there is a correlation between proven resources and investment in the renewable sector, and consolidation will be pretty dramatic.’ He continued: ‘Everybody is doing something, but some are more defensive.’

Independent oil and gas analyst Beth Mitchell suggested: ‘Integration of climate change has moved from the edge to a central issue for the oil and gas sector.’ She emphasised that major investors like Blackrock, with a $30bn fund, insist climate change must be integrated in investors’ portfolios. ‘Climate change is now central to company funding’, she said, given investor concerns about physical risks, legislation/regulation and the need for mandatory sustainability disclosure standards coming for all companies.

The report highlights the plummeting cost declines of renewable energy technologies (ie solar technology is over eight times cheaper than a decade ago). While at the same time, decreasing costs have placed the oil and gas industry in a more competitive environment against other power companies that are purely focused on renewables. Indeed, wind and solar are now cheaper than traditional forms of electricity resources. This has underpinned many oil and gas majors’ strategies to integrate renewables into their oil and gas operations.

Mitchell anticipates that significant money will go from oil and gas to invest in new transformation companies. ‘The transition won’t be linear, but s-curves. So, make sure your data is robust and invest low on the cost curve. Nevertheless, oil and gas will be here for a long time,’ she says. ‘The renewables model will be very different from oil and gas. Diversification is always risky. And the last round of oil and gas diversification was not an unalloyed success,’ she noted. ‘Wait a bit, you don’t have to be early. Nobody knows what the ultimate scale of these new renewables businesses will be.’

Ryan Pereira, Global Director in the global gas and LNG group at Gaffney Cline, focused on the role of gas in the energy transition. He recognises there is a changing energy landscape with advances in technology unlocking vast resources, like shale; changing global energy and environmental policies; rapid growth in renewables; and new and evolving technologies, like carbon capture and storage, as well as artificial intelligence.

He noted that fossil fuels will still have an important role to play in the energy transition, due to growing population, where demand for energy and fossil fuels will go up, well before coming down. ‘Therefore, investment in fossil fuels is essential. And not all fossil fuels will be tarred with the same brush. While coal is being phased out in markets like Germany, gas has a key role to play as a bridge in the low carbon transition. We need to look at every aspect,’ he says. ‘It’s a myth that renewables are the cheapest form of energy globally. Payback on renewables can be poor. However, what is indisputable is the need for a good carbon price; the need for system balancing; and significant advances in energy storage.’

Generally, he suggests: ‘The energy transition will be more easily achieved if oil and gas plays a key role. The reality is, it may take 30
40 years. Gas will have a key role unless we are willing to face flickering lightbulbs!’

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