written by Lee Billingham & Mark Dickson
what can Independent Oil Companies learn from the Majors?
Every day it seems the pressure and rhetoric increase in relation to climate change. In response, the Major oil and gas companies (Majors) have taken steps to evolve their operations. Many have made investments in renewable power generation and seek to find alternative revenue streams and viable returns. Others have reacted with a focus on finding ways to sustain their existing fossil fuel businesses, however very few have committed to targets related to Net Zero – so far only BP[1] and Repsol[2] have done so.
Meanwhile the smaller Independent oil & gas companies (Independents) find themselves in a uniquely vulnerable position i.e. without the deep pockets of their cousins or the breadth of portfolio to easily rationalise or diversify. These companies are in many ways more exposed to Energy Transition risks than the Majors – given that Independents and have fewer capabilities, less capital and resources than the Majors to respond to these risks, what can Independents learn from the efforts of Majors so far.
This analysis based on the 2018 annual reports of a select sample of the Majors finds three themes:
The Majors are divided in their approach to alternative or “new” clean-energy-based revenue streams: a clear common direction has not yet been identified. Vertical integration into power generation and trading has been adopted by some.
The Majors are not yet at the forefront of new technology development – although a significant step has been taken on key technologies such as Carbon Capture and Storage (CCS)
A clear direction is emerging on financial disclosure and reporting Task Force on Climate-Related Disclosures (TCFD) guidelines[3]
We discuss these conclusions and learning for Independents in the following article.
new energies
The Majors have been investing in new revenue streams for some time, and their activities in ‘new energies’ can be split into two categories: Low Carbon fuels or renewables.
low carbon fuels
Low carbon includes natural gas, which on its own is of course not new (and still produces CO2 emissions) but some Majors have gone further than simply supplying gas and have moved into power generation. Some Majors, namely Total & Shell, are active in gas fuelled power generation and include this capability within their ‘low carbon / renewables organisations’.
Biofuels are also included in Low Carbon and are a common interest within the Majors, possibly as production is closely related to current Refining & Marketing expertise. However, there are complexities and concerns with biofuels[4],[5] , relating to follow on consequences – such as knock-on emissions due to land-use change, degradation of land and increases in food prices. This makes the long-term future of biofuels less clear.
The activity of each major in these two aspects of Low Carbon is shown in Figure 1, which also shows there is more diversity and activity levels with regards to renewable energy.
renewable energy
Renewable energy investment across the Majors is varied but there are some common themes. Based on the annual reports, a summary of renewable energy activities is shown below.
Figure 1 – Major Oil & Gas companies’ low-carbon and renewable energy activities.
Hydrogen is an area of activity across many given the product’s potential for low emissions and the possibility to use existing capabilities for production, distribution and sale.
Solar power and onshore wind have been integrated into many Majors’ businesses given their green credentials, proven revenue streams and low risk.
Despite close alignment with the skills inherent in the oil & gas sector, geothermal energy has generally not attracted attention or investment.
No single theme dominates but there are a range of responses within the operators:
“comprehensive” – seeking clear business pivot opportunities and,
“conservative” – focussed on maintaining the viability of the existing business.
Currently, none of the alternatives to the Majors’ fossil fuel businesses offer comparable returns, and as clean fuels and renewables offer different margins it is easy to see why Majors are cautious. Majors while decarbonising their existing oil & gas portfolio, must ensure balance between:
Migrating their producing assets and development focus to hydrocarbons with lower carbon intensity of hydrocarbon supplied (by migrating to highest quality hydrocarbons with least CO2 emissions).
Investment in clean energy and renewables while figuring out a business model that allows them to compete at scale and setting expectations with shareholders on future profits and dividends.
The advantages that the Majors have in tackling the Energy Transition include:-
Leveraging capacity for scale (of investment & capital commitment) to take a portfolio approach to new Clean Energy projects- hedging the portfolio for future potential failures of yet unproven business models.
Overcoming barriers-to-entry : Majors have an ability to enter markets at scale and engage a familiar set of stakeholders in terms of regulators, government ministries and institutional investors.
decarbonisation technology – carbon capture & storage
io has considered the position of the Majors in respect of CCS and Carbon Offsetting.
Figure 2 – Decarbonisation activities
The analysis shows several common themes:
Alignment across Majors with regards to decarbonisation (than with new energies) indicating a clearer route forward. All companies refer to CCS in their strategies, many are already active in this area of carbon management.
Commitment to annual GHG Intensity reporting, absolute emissions reporting and reduction targets in relation to both is almost universal.
Collaboration on decarbonisation is taking place, the Oil & Gas Climate Initiative (OGCI) is one example but there are several others (e.g. Hydrogen council).
Application of Carbon pricing to stress test investments and projects.
lessons for Independents
prepare for changes in regulation – Whilst not guaranteed, it is now anticipated that COP26 in Glasgow (2020) could be a key in gaining alignment on Carbon Pricing. If implemented, and applied to fossil fuel production, this could have the impact of making some current oil & gas facilities too expensive to operate.
measure to improve – Majors report their absolute emissions along with their intensity and are actively aiming to meet their own reduction targets. Once the emission performance of an asset is understood it is straightforward to assess and prioritise the opportunities for reduction utilising technologies, rationalising functionality or changing the operating philosophy. Independents should therefore consider how to integrate Emissions Management into existing Operational Management Systems (OMS).
implement GHG Disclosure & Reporting industry appears to be aligning toward the FSB[6] Task Force on Climate Related Financial Disclosures (TCFD) who has published an advice document[7] for Oil & Gas companies.
collaborate to leverage investment and expertise – The Majors are collaborating to leverage their expertise and capital. The OGCI, which has thirteen members, has made a series of specific investments aimed at reducing methane leakage, reducing or recycling CO2. It is actively supporting and leading Carbon Capture, Utilisation and Storage (CCUS) projects such as Net Zero Teesside[8]. Independents as their business model does not support such scale of investment and risk taking, should be seeking minority shareholder equity stake in JVs to gain the knowledge, expertise and experience in CCUS, Renewables, Energy Storage and in the Hydrogen Economy. io will explore what collaboration for Independents could look like in our next article.
carbon capture, utilisation and storage and carbon sinks – All the Majors list CCUS as an element of their strategy for decarbonising. Implementation rate has been slow though, the GCCSI[9] indicates 19 facilities are operating, 4 are under construction, 10 are in advanced development and 18 are in early development. However, CCUS is a key technology that is required to meet climate change targets and is here to stay. Independents are currently not getting the required experience and are being left behind and in danger of being left out entirely.
new developments: test for the best – It appears that many more parameters will be considered in future investment and projects (as already adopted by the Majors) including KPIs related to Scope 1,2 and 3 emissions[10] which includes the hydrocarbon output product of the development project. Independents should start to consider the additional project KPIs and potential Carbon Pricing within their future portfolios. This in turn may drive the field development approach to change and consider integration with renewables, offshore descoping & electrification and producing Blue Hydrogen as the output product rather than fossil fuel.
what next for Independents?
The Majors are responding to the increasing challenges they face from stakeholders. Independents can learn from them and introduce similar actions to ensure they are prepared for an increasingly challenging business environment.
io suggests that Independents should:
Set up an ET team / organisation, to own the strategy, roadmaps, stakeholder communications, partnering activities and internal coordination of activities.
Align Emissions Management with current trends – TCFD.
Consider geographic footprint and identify the local Clean Energy, H2, CCUS opportunities. Seek minority partner status to start with.
Consider the ET risks and establish mitigations based on partnering approach, technology investments and portfolio migration.
Define an ET strategy that defines roadmap, milestones, targets, resources and investment to get there. Think big but think big partnered companies with similar risk exposure and appetite for change.
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