Eric Croeser | Managing Director | Industry X and Applied Intelligence | Accenture Africa | mail me |
Decarbonisation of the energy system, from a hydrocarbon-based to a sustainable, low-carbon energy system poses an existential threat to the oil and gas industry.
On the other hand, it presents oil and gas companies with new portfolio opportunities to build adjacent businesses, shape and participate in new markets, and drive new sources of value from existing assets and capabilities.
No company can afford to sit on the side-line. The core climate-related target, agreed at the 2015 Paris Climate Change Conference, is to hold the global average temperature increase this century to within 2°C (3.6°F) of pre-industrial levels.
The Paris Agreement has formed the backdrop for much of today’s greenhouse gas narrative and also serves as the standard against which country and company sustainability commitments are judged.
Nationally declared commitments (NDCs) are also used to describe sustainability goals, but they typically fall short of meeting the Paris target. By 2050, we should have a very clear understanding of what is acceptable across the ecosystem and every country should be in line with or have achieved the Paris target.
Climate change as we know it
In recent years, as understanding of the climate change imperative has accelerated, we’ve seen greater alignment and consensus across the scientific, political and business communities around the need to control greenhouse gas emissions.
Against this backdrop, there’s a strong business case for oil and gas companies to change what they do and how they do it.
At the beginning of 2020, our analysis found that global energy-related CO2 emissions totalled 40 GT. Nearly two-thirds of those emissions were related to oil and gas; coal was largely responsible for the remainder.
Of the two-thirds emissions attributable to oil and gas, activities around extraction, processing, transportation and refining accounted for around 20%. The other 80% occurred when hydrocarbons were converted for other uses such as fuel for transportation or heat, or in the production of petrochemicals.
Three requirements for the decarbonisation transition
The imperative for oil and gas companies is to take actions that will limit not only the 20% of emissions that occur in their operations but also the 80% of emissions that occur beyond their operations at points of conversion or consumption.
Energy sustainability
Sustainability requires steady movement toward a carbon net-neutral energy system, and the elimination of processes that release emissions that negatively impact the environment.
Our analysis finds that as much as 80% of the energy system’s emissions can be eliminated by 2050. There are three possible scenarios that energy-related supply and consumption sectors may find themselves in on their sustainability journeys between now and 2050. In one scenario, no clear pathway emerges.
Sectors such as aviation – which require energy-dense, yet transportable solutions – will likely not have developed fully scalable, zero-emission alternatives that can compete with hydrocarbons by 2050.
In the second scenario, a few pathways may emerge. In energy-intensive industries such as steel, mining and chemicals, net-zero solutions will be available, but they will co-exist with today’s hydrocarbon-based energy system. Success will be based on a combination of technological advances, aligned regulations and policies, consumer preferences for low-carbon products, and the complementary deployment of carbon capture, utilisation and storage (CCUS) solutions.
In the final scenario, multiple pathways emerge but full transition will require more time and investment. Sectors such as light vehicle transportation and buildings will have mature solutions beyond today’s hydrocarbon-based approaches, for example, connected autonomous shared electric (CASE) battery-powered vehicles.
While a complete decarbonisation transition is possible, the timing of the transition will depend on how quickly a sector can phase out existing capital stock.
Energy equity
Oil and gas companies need to ensure that a move to decarbonised solutions improves access to reliable, affordable energy.
The global population is expected to grow from seven billion today to over nine billion by 2050. That growth will occur primarily outside of today’s developed economies, in nations where energy consumption is rising sharply.
At the same time, up to two billion people are expected to move out of energy poverty and gain access to modern energy systems. Today, per capita energy consumption in the developed world is up to seven times higher than in developing countries.
Meeting this growing need equitably and with low prices while maintaining progress on sustainability is fundamental to a successful energy transition.
Pathways and speed of migration will differ from country to country, depending on their starting points and access to resources. The extent of international energy policy coordination, technology transfer, and alignment of energy transition agendas will affect their momentum.
Energy fundability
Our estimates place the operating expenditure (OPEX) and capital expenditure (CAPEX) required to support the decarbonisation transition at between $3 and $3.5 trillion per year through 2050.
A significant portion of this investment will be dedicated to building out the energy transmission infrastructure. Significant spending will need to occur across upstream, midstream, generation and energy management, spanning every type of energy supply, including hydrocarbons. However, the sector will only be able to attract this investment if there can be an expectation of a competitive return.
Our analysis has shown that energy infrastructure investments have traditionally achieved payback within 10 and 15 years and positive cashflow within four to seven years. However, over the past decade, few oil and gas companies have generated sufficient cash from their operations to meet their annual CAPEX requirements and also return cash to shareholders.
More recently, margin declines and the COVID-19 pandemic have further limited the industry’s ability to fund long-cycle investments. Investments in oil and gas are expected to drop by over 30% in 2020, compared to 2019, whereas investments in the power sector are only estimated to drop by 10%.
In short, the industry’s struggle to attract capital will continue. In response to this challenge, industry leaders have started to explore shorter-cycle investments, asset-light business models and alternate funding structures. They are also focusing on delivering against holistic environmental, social and governance (ESG) commitments.
Balancing sustainability with equity and fundability
Successfully navigating the decarbonisation transition is about more than achieving emissions-reduction targets and ensuring sustainability through carbon net neutrality, nitrogen oxide reductions and environmental stewardship.
It’s also about ensuring equity in energy access to enable global growth and improve living standards, and ensuring fundability of the transition. Companies will need to generate competitive returns to attract the infrastructure investments the transition will require.