These companies have aggregate revenues of $2.4trn and account for 52% of global O&G production and 24% of proven reserves.
Here we summarise six ways in which these companies are looking to navigate the energy transition. These transition strategies cover themes focused on reducing the footprint of their own operations, nature-based solutions, digitalisation, ESG considerations and diversifying the business portfolio. Six of the companies sampled have also agreed on a set of principles to create a more consistent set of metrics for reporting on climate-related performance.
Acting on supply and operations
O&G majors are working to reduce the footprint of their own operations by cutting the share of their production represented by O&G, while increasing the share of renewables. There are significant investments in low-carbon energy solutions and energy-efficient products. Companies are also reducing the carbon footprint of their own operations e.g. decreasing methane, emissions intensity and routine flaring, and increasing the integration of upstream facilities.
“Under pressure from investors, O&G majors have sought to reduce the impact of their own operations,” says CMS’s Majumder-Russell. “But they are now are extending their influence beyond their own operations to encourage their extended supply chain to adopt their own sustainability policies. The impact varies, but these increasingly include Scope 2 and 3 emissions. Given their potential to influence their own suppliers in this way, it is short-sighted to see the majors only as a problem in this area. They are also part of the solution.”
(Note: Scope 2 emissions cover indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain.)
The US majors have, somewhat belatedly, followed their European peers in this area.
“ExxonMobil’s big loss of stock market value over the past year has focused minds on the need to take action. The results are being seen in areas like carbon capture and fuel-cell technology,” says CMS’s Radu.
ConocoPhillips’s climate strategy is focused on limiting the carbon intensity and GHG emission intensity of its own business operations, rather than diversifying its portfolio into other renewable energy sources. The company has adjusted its portfolio to concentrate on lower-cost production and divested some higher-emissions-intensity natural gas and oil sands fields. It has also set a GHG emissions intensity reduction target for their scope 1 and scope 2 emissions.
In terms of new technologies, ConocoPhillips has focused primarily on CCUS, arguing that it invests in technologies that complement its processes and leverage on its experience and competencies.
More broadly, the carbon intensity of gas turbines typically used for power on offshore oil and gas installations is coming under increasing scrutiny, particularly in light of major emissions trading schemes setting higher benchmarks for the issuance of emissions allowances. This is the case across existing and new installations alike.
“In the UK, the Oil and Gas Authority is encouraging oil and gas companies to work together to potentially provide electrical power to clusters of existing offshore installations through a series of electrification workshops,” said CMS’s Denham.
A collaborative approach would likely be required for electrification projects to materialise, with significant CAPEX investment likely to be required in order to provide electric power from shore or nearby offshore windfarms. So modern approaches to the design of new installations allow more creative thinking on how to produce oil and gas in a way that is low-carbon by design.
“We expect to see a continued preference for normally unmanned installations and subsea tieback designs that can deliver additional production with significantly lower direct emissions,” said CMS’s Wisely.
Acting on demand
The majors can help their customers through the energy transition by increasing demand for more low-carbon impact products, and scaling back offerings where competitive low-carbon products are available.
One example of this is Total’s decision to no longer sell fuel oil for power generation after 2025. Here the aim is to encourage French customers to switch to electricity, natural gas or wood for home heating. Total also has a JV with Groupe PSA to develop electric battery manufacturing as well as a concession for 20,000 new electric vehicle charging points in Amsterdam.
In the same spirit, Shell is offering customers carbon-neutral lubricants for passenger cars, heavy-duty diesel engines and some industrial applications. It is also purchasing biomethane from Denmark’s Nature Energy to provide lower-carbon choices for customers. Meanwhile bp has partnered with Qantas to reduce emissions in the aviation sector and contribute to a sustainable aviation fuel industry in Australia.
In addition, bp has a partnership with Neste, the world’s largest producer of renewable diesel and sustainable aviation fuels, to offer more sustainable aviation fuel in Europe in 2021-21. Total has been reducing the average carbon content of its mix of energy products, expanding algae gas and the renewable energy value chain, and Eni has been developing decarbonised products for mobility, household consumption and small businesses.
Focus on nature-based solutions
The majors are also focusing on natural solutions to greenhouse emissions. These projects protect, transform or restore natural ecosystems, such as forests, grasslands or wetlands that can absorb CO2. Such projects can also have environmental and social benefits. Examples include reforestation, creating biofuels from algae and cellulosic biomass for commercial transportation.
ExxonMobil has an algae biofuel research programme with Synthetic Genomics Inc. that is aiming to produce 10,000 b/d of algae biofuel by 2025. Elsewhere, bp is scaling up its bioenergy business, which focuses on biofuels, biogas and biopower. Here it aims to replicate the successful model of bp Bunge in Brazil, and of biogas in the US. Meanwhile Shell is planting more than 5 million trees in the Netherlands over 12 years through a project with the Dutch National Forestry Department.
Companies are trying to digitise their operations and ensure that technology is used to improve the sector’s connectivity, efficiency and sustainability. It links in with other strategies to decarbonise internal operations (see above).
Digitalisation can improve decision-making on renewable energy production and assets, reduce the carbon footprint of internal operations, and lower operating costs. Examples include robotic process automation, data-driven decisions supported by artificial intelligence, and blockchain technology.
“Digitalisation helps companies to track operations at every stage, and smart contracts allow contracting in real time, which helps risk management,” says CMS’s Majumder-Russell.
One example of this strategy is ExxonMobil joining the ABM Quantum Network to explore the potential for quantum computing to solve real-world energy problems more efficiently than classical computing. Applications could include the management of the global fleet of merchant ships. And in February 2020, Eni launched the HPC5 supercomputer at its Green Data Center. The computer is used to process data on O&G reserves, saving time and money in the analysis of exploration prospects.
Adopting climate-focused ESG considerations into business models
As investors look for sustainable investment products, the majors are feeling the impact of ESG-driven investment. This pressure encourages them to find lower-carbon solutions as a strategy that may help them to successfully attract new capital.
This pressure is now influencing US companies in new ways. ExxonMobil announced in December 2020 that it planned to reduce greenhouse emissions over the coming five years. This was a response to pressure from investors and climate-change campaigners. Previously shareholder proposals to improve ESG disclosure had been overturned, but things changed after ExxonMobil’s second-largest shareholder, BlackRock, voted in May 2020 in favour of an independent chairman and against the re-election of two directors.
Another example of change is that at the time of its $9.7bn acquisition of drilling company Concho Resources, ConocoPhillips made specific reference to that company’s ESG strategy, including commitments to cut emissions and phase out routine flaring.
Diversifying the business portfolio
The O&G majors are continuing to acquire existing, non-core businesses, especially in the electricity sector, to hedge their traditional operations. These range from established power utility companies to electric-vehicle charging start-ups. The majors’ continuing access to vast capital resources puts them in an excellent position to invest in a wide range of technologies at relatively low risk, and to take advantage of technological breakthroughs when these occur.
Electric vehicles are a good example. “Consumers, especially the younger generation, have woken up to the appeal of electric (including, hydrogen fuel cell powered) vehicles, with all the benefits these can bring especially in terms of improving air pollution in urban settings,” says CMS’s Majumder-Russell.
“One problem remains the lack of charging point infrastructure, but this is an area where the O&G majors can play a big role. Petrol station forecourts offer ideal venues for hydrogen storage and sale, and O&G companies have the experience of working with local councils to understand and control the risks of energy storage.”
In this field Shell has agreed to buy Ubitricity, which operates the largest public electric vehicle-charging network in the UK. Chevron has made a Series C investment in Blue Planet Systems Corp, a start-up that manufactures and develops technology to reduce the carbon intensity of industrial operations. Total has acquired 20% of Adani Green Energy from India’s Adani Group, the largest solar developer in the world, and Eni is working with Enel to produce green hydrogen through electrolysers in Italy (10MW).
In the virtual power segment Shell has acquired Next Kraftwerke, a platform that remotely connects and manages over 10,000 decentralized energy units across eight countries in mainland Europe. These units, which include solar, bioenergy and hydropower plants, produce electricity that is traded on the wholesale electricity markets on behalf of Next Kraftwerke's customers. The acquisition will help Shell meet its aim to sell around 560 TWh of electricity a year by 2030, twice as much as currently. Shell had previously bought two virtual power plants - sonnen GmbH in Germany in February 2019 and Limejump Ltd. in the UK in March 2019.