×

We are excited to announce that as of February 1, Wood Mackenzie is a portfolio company of Veritas Capital, a leading investor at the intersection of technology and government. Our focus remains on providing you with the best intelligence, analytics, data and tools to ensure you are making the best data-driven business decisions with confidence.  

Read more in our news release here. 

;
Opinion

Oil (and gas) change: game-changing corporate energy transition strategies

Capitalising on competitive advantages while embracing change will shape the business models of tomorrow

7 minute read

Even under the most aggressive energy transition scenario, the world will need oil and gas until 2050. That said, we all realise the need to lower our carbon footprint to slow and limit the effects of climate change. This is particularly true for the high-emitting oil and gas industry, not least when it comes to Scope 3 emissions.

Oil and gas companies have a unique opportunity – and responsibility – to facilitate the energy transition. It’s becoming increasingly clear that they must rise to the challenge if they are to maintain their social licence to operate. Companies that capitalise on their competitive advantages while maintaining sufficient flexibility to change as the energy transition progresses will be the most successful.

But what does a good energy transition strategy look like? What competitive advantages do oil and gas companies have to reduce global emissions? What game-changing strategies are emerging in the oil and gas industry to this end?

This article is based on Rachel Schelble’s keynote speech at the recent ONS Conference 2022 in Stavanger. Missed ONS? Read on for a recap.

Get a grip on your emissions (especially Scope 3)

For starters, oil and gas companies must be able to manage and minimise their emissions. A good emissions reduction strategy will always start with measuring and setting emission targets.

Around 65% of the companies we cover under our Corporate Service have net zero targets for Scope 1 (direct) and Scope 2 (indirect from energy supply to operations) emissions. Scope 1 and Scope 2 net zero in 2050 is now the industry standard; the challenge for most companies will be to accelerate the decarbonisation drive.

The largest source of oil industry emissions are Scope 3 – indirect emissions in the supply or services chains that include the combustion of oil and gas products. Such emissions are often outside the oil and gas companies’ control. Only 10 companies globally have net zero targets that encompass Scope 3: these include the European Majors and a small group of independent oil and gas companies.  

Initial decarbonisation steps have focused on those Scope 1 emission reductions that the oil and gas industry can control, such as reducing flaring and incorporating operational efficiencies. For example, in the US Lower 48, most Scope 1 emissions come from fugitive methane. Companies have made significant progress replacing high-bleed pneumatic devices, the largest source of methane emissions, and are on track to reduce such emissions to negligible levels by mid-decade. Eliminating Scope 1 emissions is a must for the sector to maintain its credibility and social licence to operate.

Electrification from green power sources will play a big role in driving down Scope 2 emissions. Norway is leading the world in electrification from green power, with offshore wind gaining traction as an alternative to onshore power.

Scope 3 emissions make up 80% to 95% of total emissions for oil and gas companies. When we consider emission reductions, this is really the elephant in the room. Who should take responsibility for these emissions?

The simplest Scope 3 abatement strategy is to cut demand for oil and gas, which is not within the control of the oil and gas sector. Reducing Scope 3 emissions will require large structural changes for the industry, because there are few levers that oil and gas companies can pull. They can reduce their production, refining or product sales, use carbon offsets, which are likely to have a cap under evolving standards, or pursue low-carbon projects. 

And the industry is under increasing pressure. Both stakeholders and regulators are pushing for the disclosure of Scope 3 emissions. Banks and investors are trying to understand the risk that Scope 3 emissions will have on their lending and investments. And everyone else seems to be looking for someone to take responsibility. Corporate strategies must evolve to manage Scope 3-related risks.

Capitalise on your strengths

One of the key differentiators when it comes to winning decarbonisation strategies will be how companies capitalise on their competitive strengths.

The oil and gas industry has an unparalleled understanding of the subsurface, expansive seismic datasets and deep experience in developing large energy projects, giving it a competitive advantage in developing carbon capture and storage (CCS). With these synergies, we expect CCS to emerge as a primary decarbonisation objective for many oil and gas companies.

CCS is still a very small industry globally; we estimate that capacity needs to increase more than 100-fold by 2050. Projects in North America have accounted for over two-thirds of global capacity in 2022 and the passage of the US Inflation Reduction Act is a boost to both CCS and direct air capture (DAC).  

In the US, operators with legacy projects focused on enhanced oil recovery (EOR) have a strategic advantage in CCS. Oxy and Denbury, for example, have extensive EOR footprints in the US, providing them with a competitive advantage and a quick pivot to a new business model. Oxy is also an emerging leader in DAC. Along with partners, it’s building a facility in the Permian Basin that will capture 500,000 tonnes of CO2 per year.

Compared with oil, gas has a lower carbon footprint and will act as a bridge to a lower-carbon future. We’re already seeing oil and gas companies pivot to gas projects, with some linking their gas strategies with emerging hydrogen opportunities. New European low-carbon hydrogen industrial hubs are being planned, which will serve as a stable platform from which the industry can climb the learning curve of hydrogen as a new energy.

Equinor has leveraged its extensive offshore oil and gas experience to become a pioneer in floating wind technology for more than 20 years. It is now a major developer in offshore wind and is currently developing the largest offshore wind project in the world in the UK.

Another lever for decarbonisation will be the carbon markets, which are projected to grow to more than US$200 billion by 2050. Attaining the scale, integrity and transparency required for a robust and credible carbon market will be crucial to the energy transition, but this will take time.

BP and Shell have already positioned themselves strategically along the entire carbon offset value chain. Their competitive advantage lies in their robust carbon trading organisations. This will help them maximise strategic flexibility and leverage offsets as a financial instrument that can be held, traded, used as collateral or retired when needed to offset emissions or products.

What goes up(stream) must come down(stream)

It’s not just about upstream, however. Downstream must also decarbonise and prepare for a net zero future. Europe is at the sharp end of this process.

As the European retail fuels sector shrinks with the increase in demand for electric vehicles, big European refiners will need to pivot to low carbon. The main players have already started, spearheaded by converting bottom-quarter refineries into biofuel facilities. Longer term, low-carbon industrial hubs will emerge as a platform for producing e-fuels.

Oil and gas: strategies diverge for Euro Majors, US Majors and NOCs

We are seeing differentiated strategies evolve across the global oil and gas industry, responding to stakeholder pressures and regulatory requirements. One of the major challenges for the oil and gas industry will be to build new low-carbon profit centres to ensure sustainability. Its toolbox includes renewables, retail, carbon as a business, clean hydrogen and biofuels.

The Euro Majors are helping to enable the energy transition by diversifying into new energy, with a major focus on renewables and low-carbon fuels.

This will result in huge structural change by 2050, with 60% to 70% less oil and gas production by the Euro Majors and limited refining, offset by massive expansion in renewables, low carbon fuels and EV charging. These are game-changing strategies that reflect the reality of net zero Scope 3. However, the strategies diverge, mainly in terms of the pace of the transition away from oil and gas.

TotalEnergies, for example, is at one end of the spectrum, with a dual growth strategy increasing oil and gas production this decade while also setting the pace in pivoting to new energy. At the other end of the spectrum, BP is accelerating its shift from old to new energy with plans to reduce oil and gas production by 40% by 2030 while aggressively expanding into low-carbon opportunities. And OMV has announced a complete exit from oil and gas by 2050 as they pivot to low carbon fuels and the circular economy.

The US Majors are at an earlier stage in their strategic transformation and are focused on areas of the energy transition where they feel they have a competitive advantage. In addition to decarbonising their oil and gas operations, they are investing in biofuels, hydrogen and developing carbon as a service.

In contrast, many national oil companies (NOCs) with advantaged low-cost and low-carbon portfolios are doubling down on oil and gas and growing their market share. Accelerating reductions in Scope 1 and 2 emissions strengthens their competitive advantage. Aramco, for example, plans to achieve net zero emissions across its wholly owned and operated assets by 2050. Where NOCs pursue a doubling-down strategy their market share will inevitably increase, while the rest of the sector shrinks, decarbonises and diversifies.

Corporate strategies designed to maintain a social licence to operate, where companies can capitalise on their competitive strengths while maintaining flexibility to change, will have the most successful future. Game-changing strategies are currently being tested by the Euro Majors and companies with legacy EOR operations. And as more attention shifts to reducing Scope 3 emissions, today’s game-changing strategies will become tomorrow’s winning business models. 

Refinery at night
Let's Create Change: Emissions Benchmarking Tool

Evaluate your scope 1, 2 and 3 oil and gas emissions

Find out more