As oil and gas companies respond to the current economic discontinuities, they must choose where and how to compete as the world transitions to a low-carbon future.
The COVID-19 crisis has resulted in a material near-term drop in global energy demand, at one point leading to a 30 percent reduction. Yet this is not the biggest threat the oil and gas industry faces.
The recent crisis has proved just how vulnerable the global economy remains to systemic risks, one of the most important of which is climate change. Long before COVID-19, pressure was building to shift the energy system away from one dominated by hydrocarbons toward one in which low-carbon sources play the lead role. The events of the past year, as a recent report by the International Renewable Energy Agency shows, have “sharpened investors’ interest in sustainable and resilient assets, including renewables.” Investors are increasingly seeking out positions that reduce their exposure to climate change as well as the risk of stranded assets. According to analyses conducted by the Wall Street Journal, in the first three quarters of 2020 alone, oil and gas companies in North America and Europe wrote down asset values of $145 billion, roughly equivalent to 10 percent of their market value. Climate Action 100+, an investors initiative that aims to ensure major companies take necessary actions on climate issues, has more than 500 signatories which, combined, account for more than $50 trillion in assets under management. Likewise, many governments are making sustainable investments a keystone of their economic stimulus strategies. And in an unprecedented global decision, Denmark has cancelled all upcoming North Sea licensing rounds in anticipation of ending oil and gas production in the North Sea by 2050. Given these dynamics, this is a moment for oil and gas companies to make thoughtful choices: both to improve their economic and reputational resilience, and to consider whether and how to reposition themselves to take advantage of the accelerating low-carbon winds of change.
A number of oil and gas companies have already set net-zero-emissions targets. Despite the current economic challenges, many are sustaining efforts to decarbonize their operations and their value chains. Occidental Petroleum, one of the largest international oil companies in the United States, has partnered with Canadian start-up Carbon Engineering to build a plant that will capture and bury 500,000 metric tons of CO₂ each year. In June 2020, China National Offshore Oil Corporation (CNOOC) signed an agreement with Shell to supply China’s first imports of carbon-neutral liquefied natural gas (LNG) cargoes—they would use carbon credits to offset the emissions involved in producing and consuming the two cargoes. And in December 2020, ExxonMobil announced its carbon ambition: reducing the intensity of operated upstream greenhouse gas emissions by 15 to 20 percent over the next five years—relative to 2016 levels—while continuing to invest in lower-emission technologies and support “sound policies that put a price on carbon.”
So, the current crisis has not muted the need—or appetite—for change. There are three key questions we believe the leaders of oil and gas companies should consider:
- How can we make our core hydrocarbon businesses more resilient?
- Should we expand into low-carbon businesses, and if so, how?
- How will our operating model need to change to flourish in a low-carbon world?
The following article provides some initial perspectives on these questions, in the hope of provoking further reflection around executive and board tables.
About the authors: This article was a collaborative effort by Chantal Beck, Donatela Bellone, Stephen Hall, Jayanti Kar, and Dara Olufon, representing views from McKinsey’s Oil & Gas Practice.
Read the full article here.