How can oil and gas companies thrive in the transition to lower-carbon energy?
Society is demanding cleaner energy and a switch from using traditional fossil fuels to renewable energy, such as wind and solar. At the same time, a rising global population and improving standards of living will continue to drive growth in energy demand for decades to come.
With some analysts suggesting that the need for refined oil products will never return to the levels it reached before the COVID-19 outbreak, oil and gas companies will have to transform their strategies to meet the dual challenge of reducing emissions while increasing a sustainable energy supply.
Consumers want energy that is reliable, widely available and affordable. For that reason, coal, oil and gas have accounted for more than 80 percent of the total energy supplied in recent years. Trillions of dollars of capital investment, over decades, will be required to develop new sources of sustainable energy. In addition, existing infrastructure will need to be adjusted, such as charging points for electric vehicles.
Net zero ambitions
Since the start of the year, many oil and gas companies have announced their ambition to reduce the net carbon footprint of the energy products they sell by 2050 – by as much as half or more.
Achieving this will require a significant shift in strategy in what they produce, offering customers more and better choices of low- and no-carbon products.
It will mean investing in carbon capture and storage as well as planting forests and restoring wetlands to act as carbon sinks.
BP and Shell have both gone one step further, by announcing their ambition to become net zero emissions energy businesses by 2050 or sooner. To deliver this, both have committed to fundamentally transforming their entire organisations.
One size does not fit all
Profound changes in consumer behaviour will be required, from heating our homes, the vehicles we drive and the flights we take, to adapting or replacing entire industries.
For example, in the UK by 2030, it will be impossible to buy a passenger vehicle that is powered by an internal combustion engine with battery or hydrogen powered cars being the norm.
But one size does not fit all and switching to cleaner sources of energy is not straightforward.
The solutions will have to vary by what and where the need arises. Clothes and food manufacturing, as an example, only require low temperature processes and can be powered by zero-carbon sources of electricity (such as from wind or solar).
Other sectors, such as steel, cement and plastic industries rely on the unique ability of hydrocarbons to provide extremely high temperatures or chemical reactions. Currently, these processes either cannot be decarbonised or at a prohibitively high cost.
The solutions will also vary by geography. Different countries have different needs depending on their local situations, including how developed the nation is, their pace of growth, government policies and also their current energy supply sources and reliance on fossil fuels.
While coal-fired power generation is being phased out across many developed countries, in Asia and Africa the investment in new coal-fired power generation is growing. As a result, the energy industry will have to transition at different rates across the world, producing different solutions as needed.
What are the strategies for success?
Innovation has been the cornerstone of the oil and gas industry’s resilience over the years and we expect this to continue. Investment will be critical in each of the following areas;
- Reducing emissions. Installing energy-efficient equipment in existing operations, and ensuring new projects are designed to meet requirements for emissions targets
- Supplying lower-carbon products by growing the share of natural gas. Gas emits 45-55 percent less greenhouse gas emissions than coal when used to generate electricity. Switching to liquefied gas for transportation will reduce emissions from trucks and ships
- Renewable source for power generation, such as wind farms and solar
- Biofuels for transportation, made from sugar cane and other biomass from non-food sources
- Building a network of electric vehicle (EV) charging points
- For industries that cannot switch from fossil fuels, Carbon Capture and Storage (CCS) investment is required to capture and store the CO2 emissions deep underground to prevent their release into the atmosphere.
Not every solution will be economical; CCS is a very capital intensive technology. Commercial viability for CCS will require government financial support. However, as more plants are built, and technology advances, the costs will fall.
While it is impossible to predict precisely how the energy transition will play out over the coming years, it is clear that the natural resources industry is ready for change and leading the (electric) charge to achieve net zero by 2050.