Part 2: a way forward for independent E&Ps

An Energy Transition Road-map for E&Ps

io proposes the following steps to support Independent E&Ps in their progression to the era of Energy Transition.

Step 1: Getting the Basics Right

Conduct an overall vulnerability assessment of risks from climate change. TCFD[1] adoption appears to be becoming increasingly wider amongst E&Ps and would appear prudent for Independent E&Ps to ensure these recommendations are followed.

In addition, due to the rapidly evolving regional government policies in climate change, and the different strategies across the globe, Independent E&Ps will need to strengthen “sustainability” capabilities to ensure operational compliance and local stakeholder engagement.

Consider long term objectives of the project and asset portfolio – as we have seen Banks are under increasing pressure to de-prioritise oil & gas and, within this portfolio, the most carbon intensive developments. io recommends that the long-term strategy for targeting future developments and production is discussed at board level considers future ability to finance, attractiveness to shareholders and climate change financial disclosure obligations.

Step 2: Forward Looking Foundations

Establish GHG best practices and pilot clean energy. Independents E&Ps, in establishing best practices for GHG emission reduction, should consider:
  • Using Renewables onshore and offshore to power future conventional oil and gas field developments
  • Consideration of CO2 injected EOR in developing traditional oil and gas projects and how this knowledge might be applied to Carbon Capture Transport and Storage infrastructure
  • De-scoping and Electrification Studies – can existing assets and new developments be powered from onshore with minimal facilities concepts?
  • Reporting GHG emissions and financial disclosures as per the Task Force on Climate Related Disclosures
  • Conducting CO2 Life Cycle Assessments (LCA) of entrained carbon in constructed projects (GHG Scope 3 emissions) and in introducing LCA into the supply chain with contractors.

Establish continuous improvement approach to the performance of existing assets including:

    • Embrace the work of the Global Gas Flaring Reduction Partnership[2] (GGFR) and the technology they have identified for utilisation of small-scale- associated gas[3]. Taking the lead in flaring reduction in host countries could offer competitive differentiation in oil & gas license applications

    • Re-consider Asset Optimisation – redefine the operating envelope for flare reduction and fugitive emissions reduction and understand the plant operating point that maximises value, avoiding fines and meeting emissions targets. This is asset optimisation under new constraints not previously considered.

Consider relationship with government, regulator and partners in addressing new technology and Carbon Capture & Storage. New technology derisking is often too expensive a proposition for Independent E&Ps – however a solution is to form partnerships with others of similar interest in consideration of new technology in the sector. Collectively Independent E&Ps should consider:

    • Constant sweep of regional government policy relating to climate change should be maintained and closer relationship with relevant stakeholders established to anticipate any direction changes

    • Forming trade association with Independent E&P partners for consideration of emerging Clean Energy, Renewables and Carbon Capture and Storage (CCS) projects

    • Emergence of the Carbon Capture and Storage Transport and Storage sector – as many regulators and governments are considering the oil and gas companies for operators of this future infrastructure. Independent E&Ps need to join the conversation and help shape the sector

Step 3: Portfolio Diversification

– Define a vision and invest in clean energy. Ultimately E&P company strategy will need to change and a vision at 2030 and 2050 established. This strategy and visioning exercise should be repeated every three years .

Prioritising conventional oil and gas projects based on least carbon intensity & environmental impact and prioritise short pay-back period projects over long.
Identifying opportunities for clean energy pilots within existing portfolio of assets / developments including:
  • Replacement of facilities fuel sources to Renewables
  • Consideration of developing hydrogen production as a pilot to prove the business case
  • Development of gas-to-wire market and in selling electrical power to markets
  • Consideration of a range of energy technology being explored and consider partnerships
  • Consideration of the application of batteries and energy storage opportunities and in vertical integration opportunities in electrical power
Determining a viable pace of change that protects shareholder value but while migrating the portfolio to meet 2050 Emissions Targets. The pace of this change will be governed by:
  • Carbon Tax and if / when it will apply to hydrocarbon producers
  • Availability of Capital from lenders for hydrocarbon vs Clean Energy projects
  • Market opportunities in Renewables, CCS, Hydrogen Economy, Alternative Fuels and the appetite for new markets within E&Ps
  • Public perception and shareholder expectations in the era of Climate Change activism

Conclusions

io believes there will be some interesting times ahead for Independent E&P CEOs, and this significant now famous quote from Mark Carney, Governor of the Bank of England captures oil and gas concerns perfectly:

“Companies and industries that are not moving towards zero-carbon emissions will be punished by investors and go bankrupt[4]”….
io believes the specific corresponding challenge for Independent E&Ps is now – “Given the risks and potential future disruptions in energy markets, can an Independent E&P remain as a pure play explorer & field developer or is diversification into clean energy required to survive, and does it offer opportunity?”
To this end, it is important for Independent E&Ps to consider how to profit from the clean energy era. Currently as Renewables are on the rise and there are multiple opportunities for project developers[5], it would be prudent for Independent E&Ps to consider Renewable projects in areas local to current field developments and seek opportunities to lead in energy storage, and CCS.
After all Independent E&Ps have capabilities in delivering large scale complex capital projects, understanding of the energy markets and experience in dealing with governments, regulators, joint ventures and contractors, all of which are transferable skills to clean energy projects.

The supplementary benefits of Independent E&Ps having a mixed portfolio of conventional hydrocarbon and clean energy projects would include:

  • Enhancing their “social license to operate”
  • Financing – it may lead to easier balance sheet financing in general
  • Adjusting strategy – causing rethink of existing oil and gas field developments i.e. selling electricity in conjunction with clean energy projects may leverage greater negotiating power in electricity markets with combined low Levelized Cost of Energy (LCOE)[6]
  • Perception amongst Energy and Government stakeholders is that Independent E&Ps are the champions of the CCS Transport and Storage which will in turn promote further collaboration with non-E&P stakeholders and ultimately accelerate this emerging sector.
Moving towards 2050 io see the Independent E&P business model evolving into one of a more diverse energy project mix being involved in clean energy projects in addition to hydrocarbons.

Refences:

  1. http://docs.wbcsd.org/2018/07/Climate_related_financial_disclosure_by_oil_and_gas_companies.pdf
  2. https://www.worldbank.org/en/programs/gasflaringreduction#1
  3. http://documents.worldbank.org/curated/en/469561534950044964/GGFR-Technology-Overview-Utilization-of-Small-Scale-Associated-Gas
  4.  https://www.theguardian.com/environment/2019/oct/13/firms-ignoring-climate-crisis-bankrupt-mark-carney-bank-england-governor
  5. https://ccbriefing.corporate-citizenship.com/2019/10/01/daily-media-briefing-1397/#3
  6. Levelized Cost of Energy – https://en.wikipedia.org/wiki/Cost_of_electricity_by_source

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