Moving Away From Oil 

From big oil to big energy

While the world’s dependency on oil won’t entirely stop overnight, the clean energy transition is impacting oil companies’ strategies. The switch from “big oil” to “big energy” is at its beginning but clearly already underway.

• In IEA’s sustainable development scenario, electricity is to overtake oil and becomes consumer’s main energy spending in the next decade.

Oil is not as profitable as it used to be 

The recent oil crisis has demonstrated the uncertain nature of upstream oil investments while showing the stability & resilience of renewable assets. Revised oil prices forecasts forced many oil majors to announce sizeable asset writedowns.

• $43bn of writedowns have already been announced and more is likely to come as the practice is likely to generalize to all oil majors.

ESG and responsible investment adding pressure

Increased pressure from financial, social and political sectors is challenging the “business-as-usual” model, forcing oil companies to address environmental impacts and develop sustainable business models.

• The oil and gas industry accounts for 42% of global greenhouse gas emissions and ESG-sensible funds are avoiding fossil-fuel investments.
• In 2018, so-called “sustainable investments” were estimated to have reached $30.7tn of assets, about a third of global assets under management.

Is «Net-zero Emissions» Just Green-wash?

Emissions reduction has become unavoidable

Oil & gas companies are under severe pressure to show they are taking measures to decarbonize their activities. Many Oil majors have announced targets to clean-up their business, however these targets are deliberately vague and inconsistent among players.

• Some have established strict & stringent targets but many others have very light climate goals, and are being accused of greenwashing.

Separating the wheat from the chaff

Reduction targets differ depending on the emissions’ “scope”. Scopes 1 and 2 concern emissions directly related to the companies operational activities (direct emissions from operations like extraction, transport, etc. and indirect emissions from the generation of electricity or hydrogen used in the process). Scope 3 represent the emissions related to the energy products they sell to consumers (i.e. emissions from the vehicles powered by their fuel).

• Scope 1 & 2 account for about 20% of the full life-cycle emission intensity.

A thin line between greenwashing and sustainability

Integrating Scope 3 into the carbon reduction targets means that the company is assuming the responsibility of such emission (and not transferring it to the consumer) and implies a long-term strategy of moving away from oil production.

• The cleanest approach is to consider all scopes 1, 2, and 3 and provide absolute limits to carbon emissions.

Different Visions Of «Net-zero Emissions»

Several approaches to reduce emissions

To distinguish between these strategies, one needs to look at scopes covered, at whether emissions are considered on an absolute basis or only on intensity, and at the scale (how much and by when).

• If focus remains on proportional levels, target could be achieved without reducing oil production but by increasing other less-pollutant activities.
• Just improving environmental efficiency of standard activities means that the total emissions, in absolute values, can potentially keep on increasing.

European oil majors are one step ahead

Most majors have announced reduction goals but the main differentiator is on scope 3 targets, and European majors are clearly leading the way.

• BP and Repsol have a zero-oil vision.
• Shell, Total, Equinor, and Eni have an “oil + clean energy” vision.
• US companies like Chevron and Exxon intentionally omit scope 3 in their targets.

Paris’ Agreement still the guiding light

What has been announced so far won’t be enough to meet Paris Agreement’s climate goals, but is already a significant step in the right direction. More can be expected as this trend spreads across the various oil majors.

• A recent study showed that world’s largest oil & gas companies must cut their total production by 35% by 2040 in order to reach the 2°C goal set by the Paris Agreement on Climate change.

Multiple Pathways To Benefit Cleantech

Existing technologies to the rescue

Reducing emission from oil & gas operations (scopes 1 & 2) can be easily achieved by implementing mature cost-efficient technologies & practices, such as methane flaring reduction, enhanced oil recovery (EOR) with captured CO2, digital optimization of processes, using renewable-based electricity, etc.

• It appears that about 40% of the emission reduction solutions have a positive net present value at current carbon prices, with an average emissions abatement cost of $50 per ton of carbon-dioxide equivalent.

Oil & gas industry can help nascent cleantech to reach maturity

While most of the cleantech investments have been so far directed to small unitscale mass-produced technologies (e.g. solar PV, EV batteries, heat pumps, etc.), the energy transition does also need some large-size technologies which tend to feature higher upfront capital & risks. Oil & gas players would be best positioned to boost such investments as they hold resources and skills needed to scale up.

• Carbon capture storage and utilization (CCUS), green hydrogen, or biofuels, could benefit from oil & gas’ expertise in engineering and project management.

Portfolios reallocations to benefit renewables

Oil companies willing to target scope 3 emissions are likely to reallocate part of their activity to renewables; a significant opportunity for the sector. 

• For every 1mn barrel/day of oil equivalent produced, oil companies would have to deploy 200-350GW of wind or 500-1’000GW of solar capacity to achieve an emission intensity reduction of 50-65%.

Catalysts

• Oil price volatility. Recent oil price collapse has shown the uncertainty underlying the sector which is pushing oil players to diversify their activities.
• Climate policies. Governments’ regulations, such as carbon taxes or EVs subsidies, could incentivize oil & gas players to accelerate their transition to clean technologies.
• Increased investor pressure. Investors are increasingly challenging companies for setting GHG reduction targets and disclosing sustainability performances (e.g. the upcoming EU taxonomy of Sustainable Economic Activities and the Task Force on Climate-related Financial Disclosures).

Risks

• Regulation laxity. Carbon reduction initiatives are not necessarily made mandatory by governments, leaving many companies with the choice to keep doing business-as-usual and leverage on greenwashing advertisements.
• Shift to petrochemicals. Oil & gas players might decide to rush investments in other «less harmful» sectors, such as petrochemicals or LNG, and put aside clean energy solutions.
• Oil crisis hitting green investments. The recent oil price shock could end up impacting low-carbon investments in the short term, as companies become focused on slashing costs and capital spending.