Energy Transition and the Extractives Sector

5. Implications for the oil and gas sector

Despite the fact that fossil fuels still account for around 86% of energy used for transport, heat and power worldwide, significant cost reductions in renewable energy projects have already resulted in disruptions in the global energy system. The energy transition has had a major impact on the cash flow and market position of international and national oil and gas companies. Renewable energy investments are already undercutting new fossil fuel investments. The questions for companies and investors across the sector are how fast will this change take place and what should they do to prepare?

The Oxford Energy Institute reports that a key issue facing oil companies and oil-exporting countries is how they should now position themselves as part of the renewables ‘revolution’. For oil companies, moving beyond their core business is risky, but a ‘wait-and-see’ strategy could be costly, therefore oil companies need to gradually ‘extend’ their business model and rather than make a complete shift from hydrocarbons to renewables. They are likely therefore to aim to build an integrated portfolio which includes both hydrocarbon and low-carbon assets. This Oxford Energy Institute podcast discusses recent trends in renewable energy.

A major implication of energy transitions for oil and gas companies is the displacement of motor vehicles by electric vehicles, which would take away the special role oil has enjoyed in transportation since World War II. The IMF acknowledges that the transition away from oil has deep implications. The economic model of many oil exporting nations would not be sustainable in such a world. Even if one believes that the probability of such a future is low, the decline in oil revenues for many oil exporters would be so large that the expected loss would nevertheless be sizable.

Another threat to oil and gas majors is fossil fuel divestment by institutional investors, such as pension funds. The divestment movement does not aim to make fossil fuels suddenly unprofitable by reducing the value of shares, but envisages increasing awareness by governments of the issues and prompting moves to legislate against fossil fuel extraction.

A key element in the success of efforts to reduce GHG emissions is engagement by oil and gas companies to develop best practice guidelines for emissions monitoring, reporting and management, and to develop and implement new technology for sustainable energy options. For instance, the oil industry association, IPIECA, participates in the Intergovernmental Panel on Climate Change (IPCC) and the UNFCCC activities, and through this means provides its members with updates on the actions of governments and arguments made with respect to climate change. IPIECA has a working group that has been developing GHG emissions management guidelines as well as other documents that assist in raising the level of oil industry best practice on this matter: for example, on emissions reporting and business  models for carbon capture and storage.

Individual companies take actions to limit GHG from their own operations and to help their customers to use their products more efficiently. This includes working with governments, research organisations and other sectors to develop innovative ways of supplying energy in an environmentally sustainable manner and deploying low carbon technologies, investing in new fuel technologies including renewable, hydrogen, biofuels and fuel cell technologies.