Last month, Lux Research presented at the Go Net-Zero Carbon Energy Virtual Summit hosted by Globuc. Given the impact from COVID-19 and the oil price plunge in May, the summit was buzzing, as the oil and gas industry faces not only the challenges of decarbonization but also a sudden shock in reduction of demand and subsequent shrinking of revenue streams and valuations, with oil prices dipping below $20 per barrel. During the day-long event, multiple topics were discussed, including the outlook for the energy transition post-COVID, how oil and gas companies are preparing for decarbonization, and what opportunities emerging technologies present for the industry.
Throughout the four panel discussions, three key takeaways emerged:
While decarbonization is quickly becoming a strategic priority for the oil and gas sector, the efforts from U.S. and European oil majors are drastically different. In the first five months of the year, Eni, Equinor Repsol, BP, Shell, and Total have all made pledges of net-zero emissions by 2050, albeit in varying levels of capacity. For instance, Shell's pledges include all Scope 1, Scope 2, and Scope 3 emissions and will address all life-cycle emissions of its products from production to final use. On the other hand, Equinor will focus primarily on its onshore and offshore facilities in Norway at first. This is in stark contrast to its U.S. counterparts, which have all largely remained focused on optimizing their core business, while diversification into new energies has been largely nonexistent. Aside from 42 MW of solar from Chevron, no other U.S. oil and gas company has renewable energy capacity under ownership and development, while European oil and gas companies have a combined 30 GW of renewable energy. The contrast is not just a pull factor from renewable energy. Europe's dramatic shift toward decarbonization has been catalyzed by regulations, investor pressure, and social factors as well. The trends we are witnessing in the decarbonization of oil and gas support the idea that the energy transition is inevitable, but the pace at which it occurs is largely dictated by government.
Currently, companies are only required to report Scope 1 emissions, which are the company's primary emissions, including directly generated greenhouse gases from combustion of fossil fuels, transportation, industrial processes, and fugitive emissions. When it comes to Scope 1, the oil and gas industry is pursuing several options to mitigate its carbon footprint. Equinor is aiming to electrify its offshore operations, and GlassPoint Solar was pursuing integrating solar-powered alternatives into enhanced oil recovery prior to its liquidation due to COVID-19. CO2 capture is steadily gaining traction as well, with 51 facilities either in operation or in development, and strong support from the U.S. 45Q CCUS tax credit scheme – which provides a credit of $50 per MT of CO2 sequestered and $35 per MT of CO2 utilized for enhanced oil recovery (EOR) – is bolstering development in the U.S. Methane is also a key emission, with recent analysis showing that methane emissions from Permian oil production equate to 260 million MT of CO2 equivalent, twice as much as previously thought. BP partnered with the Environmental Defense Fund for methane detection and prevention, and Chevron tied its methane emissions reduction goals to executive bonuses. However, for the oil and gas industry specifically, Scope 3 emissions – emissions from the use of its products – are the largest contributor to its carbon footprint. This will require thorough collaborations between the industry and its customers and suppliers.
While COVID-19 is likely to cause a 20% decrease in oil demand globally this year, the global energy system will still need oil and gas in the coming decades, especially for industry, aviation, shipping, and heavy-duty transportation. However, with pressure to decarbonize, rapidly increasing the introduction of emerging technologies will be important, but it is necessary to ensure that their development is complementary and addresses the upstream, midstream, downstream, and retail portions of the business. Key technologies in the coming decade include biomass pyrolysis for refinery feedstock diversification to mitigate the risk of volatile oil prices, water electrolysis for green hydrogen production to decarbonize downstream products, and electric vehicle charging to expand existing retail station business in preparation for the growing fleet of electric vehicles on the road. In the long term, building out hydrogen infrastructure for the transport and storage of renewable energy will be critical in the transition toward a hydrogen economy, with CO2 utilization serving as a complement for industries likely to still require liquid fuels and building blocks for the petrochemical industry. While the initial shock of COVID-19 has had a negative impact on the oil and gas industry, it also presents a significant opportunity to enter the new energies space as well as leverage its strong R&D and innovation expertise to pursue long-term technologies.
The oil and gas industry has always dealt with changes that come with the volatility of its business and continues to adapt and evolve. From the initial growth of the automobile industry to the first and second oil crises, followed by 2008 financial crisis and the 2015 oil price crash to now COVID-19, the industry has always responded by fortifying its core businesses and in more recent times expanding into new areas. The oil and gas company of 2050 is unlikely to look like the ones we have today, but it will still exist. The time is now for companies to lay the foundations that leverage the fossil-fuel wealth they have built over the past century and transition their profiles, both from a branding and a technological standpoint, for a decarbonized future. The trends triggered by COVID-19 will shift the path of tech innovation and reshape the industry by improving resiliency, becoming more agile, to insulating it from macroeconomic impacts. Those able to quickly respond will continue to be pillars of the new energy landscape, while laggards will continue their downward trajectory and lose the position they hold today.
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