As the world’s largest oil and gas companies face mounting pressure to address the climate emergency, new research from global law firm CMS reveals that a significant majority of the sample – equivalent to half of worldwide production – are adapting their strategy to invest in a more diverse energy portfolio.
CMS worked with Capital Economics to examine the energy transition strategies of 15 of the world’s largest oil and gas companies to assess how far they are committed to new and alternative energy. The sample invested USD $6.6 billion into renewables, carbon capture and storage in 2018.
Using International Energy Agency scenarios, CMS presents two projections for future energy demand. It identifies that $209 billion could be invested by oil and gas majors by 2030 – an increase from 3% to 10% of capex budgets – if policies and commitments to the energy transition ramp up:
- Scenario 1: If existing policies continue, our sample could increase their annual investment into renewables and carbon capture from $7 billion currently to $10 billion by 2030 – totaling $100 billion over the period.
- Scenario 2: In a rapid energy transformation, majors could invest $209 billion between 2019 and 2030. The annual investment figure could rise to $31 billion by 2030 – equivalent to 10% of their total combined annual capital expenditure. Majors’ share of all investment in renewables would rise from the current 2.3% to 5.9% by 2030.
Munir Hassan, Head of CMS Energy Group, said: “Oil and gas majors understand that they need to transform their business models as part of a global shift towards a more sustainable future. Both of our future energy scenarios assume a significant change in approach over the next decade.
Energy transition now dominates conversations at board level. Whether it is de-carbonising their own operations or investing in alternative energy, the transition will happen. It will take time, but time is something that is in short supply.”
Drivers and popular routes to cleaner energy
The speed of the transition depends on several drivers, including the declining costs of renewables, investor and customer pressure, and new government regulation, alongside a new risk allocation strategy, given recent oil price volatility.
Wind and solar account for 96% of all current investment in renewables by the companies sampled. Of those sampled, only ConocoPhillips (which was sampled prior to the acquisition of the majority of its UK business by Chrysaor) has failed to invest in either. By contrast, hydroelectric power has attracted investment from only two (Repsol and Lukoil) and geothermal from four (Shell, Chevron, Pemex and CNPC). Carbon capture is also a popular destination for investment, with 13 out of 15 of our sample invested in the technology.
The globe’s best and worst performers
European majors (especially BP, Equinor, Repsol and Shell) are leading progress in the clean energy sector, leaving behind their American counterparts (Chevron, ExxonMobil and ConocoPhillips) and national oil companies (such as Pemex, Lukoil and CNPC), which are constrained by stringent government policies and regulatory frameworks.
Among the national companies, Saudi Aramco leads the way with its $200bn partnership with Softbank in solar energy. More broadly, Saudi Arabia recently tripled its renewable energy target and the UAE Government launched its ‘Energy Plan 2050’, aiming to cut carbon dioxide emissions by 70% and improve energy efficiency by 40%. In Eastern Asia, South Korea has set an ambitious goal of raising the renewable portfolio of its energy mix to 35% by 2040, from 10% at present.
Barriers to investing in the energy transition
Despite the growing appetite for renewables, the report identifies a number of challenges that could prevent Scenario 2 (a rapid energy transformation) and restrict future investment:
- Changing regulatory environments: new legislation, the introduction or removal of subsidies, and new targets for clean energy and emissions vary drastically from country to country. Developing economies like Indonesia have even retracted regulation due to lack of thought and support around implementation, creating an uncertain environment for renewables investors.
- Lower or less certain returns in the energy sector: there remains shareholder pressure for high returns commensurate with the risks in the sector, but this conflicts with both current uncertainties around the future of fossil fuels and the intense cost and returns pressures in the more mature parts of the renewables sector.
- Changing technologies: there is still considerable uncertainty around the longevity of certain technologies. A decade ago, BP invested heavily in wind and solar only to write-off those investments, close its alternative energy headquarters in London and explore other sources like turbine activities in the US.
- Competition from renewable energy firms: large utility companies (the main operators of offshore wind in the North Sea) and new entrants are increasingly gaining traction in the market.
Norman Wisely, Oil and Gas Partner at CMS, said: “One of the greatest strengths of the oil and gas industry has been its ability to think and plan long-term. With the average lifespan of an oil field at 30-40 years, companies are already planning for decades ahead.
This strategic approach to thinking about future challenges and opportunities is what makes the energy transition exciting for major players in the oil and gas sector. The day-to-day details may require dynamic shifts, but we are confident that decisions taken today are being made with these long-term goals in mind”.
