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En­ergy Trans­ition: The evolving role of oil & gas com­pan­ies in a net-zero...
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.
Dur­ing 2020 and so far in 2021 the en­ergy trans­ition as it af­fects the oil and gas in­dustry has gained fur­ther mo­mentum from con­sumer and gov­ern­ment led pres­sure to re­duce green­house gas emis­sions and mit­ig­ate the ad­verse im­pacts of cli­mate change. At an in­dustry-wide level, the dir­ec­tion of travel re­mains clear, al­beit the jour­ney has a long way to go and the des­tin­a­tion it­self is not yet clear in many re­spects.The dir­ec­tion of travel re­mains clear be­cause, as pro­jec­ted in our Janu­ary 2020 re­port, the oil and gas com­pan­ies in our sample have in­creased the per­cent­age of their cap­it­al ex­pendit­ure ded­ic­ated to en­ergy trans­ition activ­it­ies re­l­at­ive to their pure oil and gas cap­it­al ex­pendit­ure. Whilst the oil price crash in March 2020 and the Cov­id 19 pan­dem­ic are po­ten­tially con­found­ing factors whose im­plic­a­tions are yet to be fully played out, these cap­it­al ex­pendit­ure fig­ures demon­strate an atyp­ic­al, but non­ethe­less pre­dicted, re­sponse to crisis. Rather than hunker down and stick to what they know best, our sample has, at an ag­greg­ate level, leaned in fur­ther to the chal­lenges and op­por­tun­it­ies presen­ted by the en­ergy trans­ition. The jour­ney re­mains a long one as the world is not yet ready to do without oil and gas as a primary en­ergy source. Whilst we see peak oil de­mand hav­ing been brought for­ward to the early 2030s, a long tail of de­mand re­mains and the oil and gas in­dustry con­tin­ues to take a gen­er­ally prag­mat­ic ap­proach re­flect­ive of the world’s en­ergy needs. Rid­ing out that long tail will have far-reach­ing im­plic­a­tions at all levels of so­ci­ety, from in­di­vidu­al work­ers who may need to re­train or change ca­reers to gov­ern­ment rev­en­ues and geo­pol­it­ic­al ten­sion. These is­sues are worth watch­ing now and will only be­come more press­ing in the fu­ture. And in the mean­time, in­vestors with short- to me­di­um-term ho­ri­zons look­ing for strong re­turns from po­ten­tially un­der­val­ued as­sets are in­creas­ingly look­ing to the oil and gas sec­tor. Wit­ness the in­flux of private equity in­vest­ment in­to the United King­dom North Sea over the past dec­ade.The des­tin­a­tion is not yet clear due to net zero scen­ari­os de­pend­ing sig­ni­fic­antly on pro­cesses and tech­no­lo­gies that are either at a very early stage of their de­vel­op­ment, such as com­mer­cial CCUS, or not yet in ex­ist­ence. U.S. cli­mate en­voy John Kerry has said that 50% of the car­bon emis­sions cuts ne­ces­sary to achieve a net zero fu­ture need to come from tech­no­logy we don’t yet have. This rhet­or­ic can of course be viewed as an in­spir­ing chal­lenge to be ris­en to. The oil and gas sec­tor in­tends to play a large role in ef­forts to do so. Equally though, oil and par­tic­u­larly less car­bon-in­tens­ive gas can only be re­placed once oth­er primary en­ergy sources are ready at suf­fi­cient scale to do so. Fi­nally, the meas­ur­able steps be­ing taken to re­duce net green­house gas emis­sions from oil and gas ex­plor­a­tion and pro­duc­tion mean that oil and gas com­pan­ies can of­fer more en­vir­on­ment­ally-com­pet­it­ive products to their con­sumers. This year saw a U.S. oil com­pany de­liv­er what was de­scribed as the first cargo of car­bon-neut­ral crude oil to In­dia, as a first step to­wards a net zero oil busi­ness and with the car­bon neut­ral­ity com­ing from CCUS and geo­lo­gic­al se­quest­ra­tion of car­bon di­ox­ide.This re­port has been our second hon­est look at the role of oil and gas com­pan­ies in a net zero fu­ture. It presents a com­plex pic­ture that has evolved sig­ni­fic­antly over the past 18 months. We ex­pect this evol­u­tion to gain fur­ther mo­mentum in the com­ing years and de­vel­op in ways that we can­not yet fore­see. At the same time though, we ex­pect that mo­mentum to con­tin­ue to be driv­en by the back­bone of oil and gas pro­duc­tion.
Eight O&G ma­jors agree en­ergy trans­ition prin­ciples
In Decem­ber 2020, bp, Eni, Equi­nor, Galp, Oc­ci­dent­al, Repsol, Roy­al Dutch Shell and Total an­nounced that they had agreed on six prin­ciples to ap­ply to their en­ergy trans­ition strategies. The aim is to cre­ate more con­sist­ency and trans­par­ency on the met­rics used to re­port on cli­mate-re­lated per­form­ance.Pub­lic sup­port for Par­is Agree­ment goals – in­clud­ing in­ter­na­tion­al co­oper­a­tion as a vehicle to en­sure that those goals can be achieved at the low­est over­all cost to the eco­nomy.In­dustry de­car­bon­isa­tion – re­duce emis­sions from their own op­er­a­tions and strive to re­duce emis­sions from the use of en­ergy, to­geth­er with cus­tom­ers and so­ci­ety. Meas­ure firms’ con­tri­bu­tions us­ing car­bon in­tens­ity and / or ab­so­lute met­rics at dif­fer­ent points in the value chain.En­ergy sys­tem col­lab­or­a­tion – col­lab­or­ate with stake­hold­ers, in­clud­ing en­ergy users, in­vestors and gov­ern­ments, to de­vel­op and pro­mote ap­proaches to re­duce emis­sions from the use of en­ergy in sup­port of coun­tries de­liv­er­ing their Na­tion­ally De­term­ined Con­tri­bu­tions to­wards achiev­ing the goals of the Par­is Agree­ment.De­vel­op­ment of car­bon sinks – con­tin­ue to sup­port and pro­mote the de­vel­op­ment of emis­sions sinks such as CCUS tech­no­logy and nat­ur­al sinks Trans­par­ency – provide dis­clos­ure re­lated to cli­mate change risks and op­por­tun­it­ies con­sist­ent with the aims of the re­com­mend­a­tions of the Taskforce on Cli­mate-re­lated Fin­an­cial Dis­clos­ures (TCFD).In­dustry and trade as­so­ci­ations – re­port in­form­a­tion about their mem­ber­ships of main in­dustry and trade as­so­ci­ations and their align­ment with the com­pan­ies’ key cli­mate ad­vocacy and policy po­s­i­tions.
New UK agree­ment could be a mod­el for oth­ers
In the United King­dom, the role of oil and gas com­pan­ies in a net zero fu­ture will be in­flu­enced by a unique agree­ment between the gov­ern­ment and the oil and gas sec­tor that is set to spur in­vest­ment in de­car­bon­iz­a­tion and lower car­bon tech­no­lo­gies, and en­sure that the sec­tor is well pre­pared for the wider ef­fects of the en­ergy trans­ition.The highly an­ti­cip­ated agree­ment, the North Sea Trans­ition Deal (the “NSTD”), was pub­lished on 24 March 2021 and sets out a plan for the gov­ern­ment and UK off­shore oil and gas sec­tor to work to­geth­er to ac­cel­er­ate the en­ergy trans­ition whilst pro­tect­ing jobs and the eco­nomy.The NSTD con­tains pro­posed in­dustry and cor­res­pond­ing gov­ern­ment ac­tions, along with a joint com­mit­ment to in­vest up to £14-16 bil­lion by 2030 to re­duce car­bon emis­sions. The UK is the first G7 coun­try to agree to form a unique part­ner­ship of this kind, of­fer­ing an op­por­tun­ity to lead the way in the en­ergy trans­ition.The key ac­tions and out­comes of the NSTD re­late to five areas of de­vel­op­ment:Sup­ply de­car­bon­isa­tion: the NSTD fo­cuses on cut­ting in­dustry emis­sions with an am­bi­tious sec­tor tar­get to re­duce emis­sions 10% by 2025, 25% by 2027, and 50% by 2030 on 2018 levels;Car­bon Cap­ture Util­isa­tion and Stor­age (“CCUS”): in or­der to de­vel­op CCUS tech­no­logy, in­dustry has com­mit­ted to lever­aging ex­ist­ing in­fra­struc­ture to provide trans­port and stor­age fa­cil­it­ies;Hy­dro­gen: the gov­ern­ment will cre­ate a Net Zero Hy­dro­gen Fund to boost pro­duc­tion ca­pa­city and en­cour­age private in­vest­ment;Sup­ply Chain trans­form­a­tion: to sup­port the di­ver­si­fic­a­tion of the UK sup­ply chain, in­dustry has com­mit­ted to en­sure that, by 2030, 50% of de­com­mis­sion­ing and new en­ergy tech­no­logy pro­jects be­ing de­veloped are provided by loc­al com­pan­ies. Un­der­pin­ning this is the ap­point­ment of an In­dustry Sup­ply Chain Cham­pi­on to co­ordin­ate growth and job op­por­tun­it­ies with oth­er sec­tors; an­dPeople and Skills: a key aim of the NSTD is to de­car­bon­ise the eco­nomy whilst util­ising ex­ist­ing skills to pro­tect jobs and of­fer op­por­tun­it­ies for job cre­ation. This in­cludes a com­mit­ment to sup­port up to 40,000 new jobs and re­tain­ing the trans­fer­able skills of in­dustry work­ers al­low­ing them to work across the en­ergy sec­tor.The key chal­lenge to the suc­cess of the NSTD will be turn­ing sec­tor-wide in­ten­tions in­to ac­tions taken by in­di­vidu­al com­pan­ies to de­liv­er on those in­ten­tions. Whilst the NSTD has been broadly sup­por­ted by the sec­tor and whilst, as this re­port demon­strates, the ma­jor oil and gas com­pan­ies in our sur­vey have made and in­tend to con­tin­ue with sig­ni­fic­ant in­vest­ment in lower car­bon pro­jects, there re­mains a risk of an in­er­tia ef­fect res­ult­ing in the sec­tor as a whole not de­liv­er­ing as the NSTD pro­jects. The gov­ernance struc­ture of the NSTD should help in this re­spect, with im­ple­ment­a­tion led by a de­liv­ery group that in­cludes an in­dustry rep­res­ent­at­ive. We ex­pect that oth­er states with sim­il­ar reg­u­lat­ory struc­tures to the UK will con­sider sim­il­ar ap­proaches to the NSTD and will closely re­view the early stages im­ple­ment­a­tion of the NSTD as an in­dic­at­or of its po­ten­tial long term suc­cess.
Why are European ma­jors tak­ing the lead?
European O&G ma­jors have set more am­bi­tious tar­gets and are fur­ther ad­vanced in the en­ergy trans­ition than their non-European coun­ter­parts for sev­er­al reas­ons.
On the Pulse
Wel­come to ‘On the Pulse’ de­livered by the Glob­al Life Sci­ences & Health­care Sec­tor Group A video/pod­cast series, On the Pulse, brings to­geth­er CMS law­yers and ex­perts to dis­cuss key in­dustry top­ics...
CMS com­mis­sioned Cap­it­al Eco­nom­ics to as­sess the sig­ni­fic­ance of the ma­jor oil and gas com­pan­ies di­ver­si­fy­ing in­to re­new­ables, and to provide eco­nom­ic ana­lys­is to as­sess the out­look for in­vest­ment by these oil and gas com­pan­ies in the en­ergy trans­ition glob­ally.Our re­port and find­ings are based in part on an ex­tens­ive lit­er­at­ure re­view, which in­cludes a re­view of in­di­vidu­al com­pany re­ports, fin­an­cial state­ments and stated strategies of our sample of fif­teen oil and gas ma­jors. In ad­di­tion, we drew on re­spec­ted pub­lic sources to in­form our views on the cur­rent state of, and fu­ture longer-term trends in, the glob­al en­ergy mix in­clud­ing the In­ter­na­tion­al En­ergy Agency (IEA), BP, and the In­ter­na­tion­al Re­new­able En­ergy Agency (IRENA). We also used data from the World Bank and the United Na­tions to help un­der­pin our re­gion­al eco­nom­ic ana­lys­is.Our fore­casts for the out­look of in­vest­ment in re­new­able en­ergy are un­der­pinned by two scen­ari­os put forth by the In­ter­na­tion­al Re­new­able En­ergy Agency (IRENA). We used our ana­lys­is of the cur­rent levels of in­vest­ment in re­new­able en­ergy by our sample of fif­teen ma­jor oil and gas com­pan­ies, as well as as­sump­tions re­gard­ing the speed of trans­ition, to gen­er­ate plaus­ible pro­jec­tions for fu­ture di­ver­si­fic­a­tion.
How well are they do­ing?
The Trans­ition Path­way Ini­ti­at­ive (TPI) is a glob­al ini­ti­at­ive to as­sess how far com­pan­ies are pre­pared for the trans­ition to a low-car­bon eco­nomy. 
Tech­no­lo­gies be­ing used
The 15 com­pan­ies in our sample in­vest in a large and grow­ing range of re­new­able and clean en­ergy tech­no­lo­gies.
Over­view of the strategies of O&G ma­jors
We have ex­amined the en­ergy trans­ition strategies of 15 of the world’s largest O&G ma­jors.
The route to de­car­bon­isa­tion
Dur­ing 2019 the 15 O&G ma­jors in our sample in­ves­ted roughly 3.6% of their total budget in en­ergy trans­ition. That com­pares with 2.9% in 2018, and rep­res­ents a strik­ing jump in clean in­vest­ment in just one year. Much of that in­crease was driv­en by two European ma­jors - Eni and Total – who re­cor­ded a rise in the per­cent­age of their in­vest­ments go­ing to re­new­ables to 17% and 10% from 4% and 3%, re­spect­ively.Over­all cap­it­al in­vest­ment for the sample was $247.1bn in 2019, up 8.4% on 2018. Of that total, $8.8bn was in­ves­ted in re­new­ables, com­pared with the 2019 fig­ure of $6.6bn. The largest single in­vestor in re­new­ables in ab­so­lute terms was Roy­al Dutch Shell with $2bn, fol­lowed by Total ($1.7bn) and Eni ($1.6bn).These lead­ing com­pan­ies clearly in­tend to go fur­ther. Eni has pledged to raise its re­new­ables in­vest­ment to 21% of capex between 2021-25, and Roy­al Dutch Shell is tar­get­ing 26% by 2030. In fact, of the 15 ma­jors in the sur­vey, 10 had an­nounced net zero emis­sions pledges by the end of 2020, com­pared with just one (Repsol) at the end of 2019. 10 ma­jors in our sample have made net zero pledges as of early 2021, up from one at end-2019
In­ter­view with Will Web­ster, Oil and Gas UK
Oil and Gas UK (OGUK) is the lead­ing rep­res­ent­at­ive body for the UK oil and gas in­dustry. Its aim is to strengthen the long-term health of the in­dustry and speak on be­half of its mem­bers, which are all com­pan­ies act­ive in the UK con­tin­ent­al shelf. Will Web­ster is OGUK’s En­ergy Policy Man­ager.