When multi-billion-dollar businesses go public with their plans, the stakes can hardly be higher. Investor confidence, bottom-line success, long-term prospects, stakeholder support – all will be impacted by the position they take. Making the right calls, meanwhile, depends on robust, incisive analysis of developments and trends. But for oil and gas (O&G) companies, in a global energy system transitioning to a low-carbon future, this is especially challenging right now. As Shell’s Chief Executive Ben van Beurden recently commented, “nobody can see how the energy transition will play out”.
Despite the difficulties, many big-name players have now gone ‘on the record’, committing to courses designed to deliver success in a low-carbon but still energy-hungry era, with decisions based on hard-headed appraisal of opportunities, threats, risks and potential rewards. What’s really striking is how varied their stances are – with some consolidating around core business but others vigorously diversifying portfolios or even stepping right back from fossil fuels. So why are responses to the same dilemma so different? And will there inevitably be winners – and losers?
Reaching for the ‘Sky’
Shell’s new Sky scenario is crammed with eye-catching assertions. It argues that a net-zero emissions global economy by 2070 is technically and economically possible but will depend, for example, on 50-fold growth in clean energy, and development of 10,000 large-scale carbon capture and storage (CCS) facilities. A scenario rather than a prediction, Sky is nevertheless in step with the Anglo-Dutch giant’s broad direction of travel: in November, Shell announced it would slash carbon emissions from the products it sells as well as from its operations (an intention shared by French multinational Total); and its Energy Transition Report published in April unpacks plans to invest in renewables, hydrogen, and electric vehicles – although the firm still aims to produce around 80% of its proven oil and gas reserves by 2030. In May, interestingly, Shell defeated a resolution at its stakeholders meeting to turn ambitions (e.g. halving the carbon intensity of products and operations by 2050) into targets – an indication perhaps of the uncertainty of tomorrow’s energy terrain.
BP is another oil and gas supermajor publicly fronting up to a changing energy world. Published in March, its Technology Outlook 2018 highlights potential advances in the energy sector up to 2050, concluding that the Paris Agreement’s goal of limiting a rise in global temperatures to well below 2°C compared with pre-industrial levels is feasibly technically, as long as policy-makers and consumers play their part. In April, the company followed this up by announcing its intention to cap its carbon footprint up to 2025, including a 3.5Mt cut in its projected emissions, and to expand its renewables businesses – though not offering a Shell/Total-style commitment to cut emissions from products sold.
What’s in a name?
Other companies have gone much further. Last November, Denmark’s biggest energy company, DONG (Dansk Olie og Naturgas) Energy, announced that it had become “too green” for its name and was adopting a new one: Ørsted. Buoyed by a rousing call to arms (“let’s create a world entirely on green energy”) and having now divested itself of its upstream oil and gas business, Ørsted’s goal is to become fully dedicated to green energy – as evidenced by its planned implementation of a full phase-out of coal and a massive 96% cut in its carbon emissions by 2023.
Similarly, last month Norway’s Statoil announced that it was changing its name too – to Equinor. “Looking towards the next 50 years, reflecting on the global energy transition and how we are developing as a broad energy company, it has become natural to change our name”, said President and CEO Eldar Sætre. Leveraging offshore skills honed during decades of North Sea operations, and no longer seeing renewables as a sideline, the firm plans to plough 15-20% of its capital expenditure into renewables by 2030 and is already the prime mover in pioneering projects such as Hywind Scotland, badged as the world’s first floating wind farm. Like Shell, Equinor is stepping away from oil sands and, while remaining a key oil and gas producer, sees a future where some of its fossil fuels stay in the ground. Overall, its broadened strategy could be defined as targeting the right resources in the right way, while working to reduce its own emissions and investing more effort in key areas such as CCS.
Total may not have changed its name but it has rebranded itself tellingly from ‘oil major’ to ‘energy major’, and using the IEA’s ‘Two Degree Scenario’ as the baseline for its 2035 ambitions. In its May 2017 report ‘Integrating Climate into our Strategy’, Total’s Chairman and CEO Patrick Pouyanné stated “Our goal is to have low-carbon businesses account for close to 20% of our portfolio in 2035”. Acquisitions – including SunPower (2011), Saft (2016), Lampiris (2016) and PitPoint (2017) – have helped position Total as a global leader in solar energy and lithium-ion battery technology, and a European leader in biofuels marketing and natural gas vehicle fuel – all part of realising the company’s strategy of becoming “the responsible energy major”.
Nearly all of these companies have come together to establish the industry-driven Oil & Gas Climate Initiative (OGCI). This initiative, launched in 2014 by 10 O&G companies (BP, CNPC, Eni, Petróleos Mexicanos, Reliance Industries, Repsol, Shell, Saudi Aramco, Statoil and Total), aims to catalyse collective action to address the Paris Agreement targets and to advance technological solutions through collaborative programmes. With a focus on carbon capture, utilisation and storage (CCUS), methane emissions in the natural gas value chain, and improving energy efficiency in the industrial sector and in transportation, the OGCI members have together pledged $1 billion to OGCI Climate Investmentsover a 10-year period from 2017.
Back to basics?
Other firms have plotted much more conservative paths forward. US-based supermajor Chevron, in ‘Climate Change Resilience: A Framework for Decision-Making’ published in March, confirms that it “cannot forecast exactly what will happen in the future”. But trusting projections that fossil fuel demand will keep growing, it’s committed to retaining its focus on oil and gas, while responding to a lower-carbon agenda by working towards industrial-scale CCS, increasing its own operations’ energy efficiency and investing in low-carbon technologies (including some activity in renewables). Another US-based supermajor, ExxonMobil, strikes a similar note in its ‘2018 Energy and Carbon Summary: Positioning for a Lower-Carbon Future’. Arguing that “the world will need to pursue all economic energy sources” to meet growing requirements and that significant investment will be needed in oil and gas capacity, even within the 2°C pathway – and notwithstanding its own green initiatives in areas such as biofuels and CCS – ExxonMobil’s near-term drive to cut carbon will focus on expanding supplies of natural gas and mitigating emissions from its own facilities; in the longer term, though, it envisages developing alternative energies with lower carbon intensity.
Such positions lie at the opposite end of the spectrum from Ørsted. Yet, crucially, it is still the same spectrum. The evolving energy landscape is vast and varied, with clean energy expanding rapidly but fossil fuels’ underpinning role set to continue (along with the imperative to make them safer, cleaner and more efficient). Surely the point is this. Given the energy sector’s size, diversity and complexity – and notwithstanding the eternal pressure for hydrocarbon companies to be seen to ‘do more’ on climate change – scope exists to carve out niches framed around very different but, arguably, equally logical viewpoints. And, as ever, success will ultimately be dictated by whether individual strategies are fundamentally coherent in conception and efficient in execution – and by businesses’ agility and flexibility as the energy transformation unfolds.