Cameron Tandy | Managing Director | Resources | Accenture Africa | mail me |
Oil and gas companies looking to establish winning positions in the decarbonisation transition and beyond cannot achieve that goal by themselves. They will need the help of their customers, particularly those that are heavily dependent on hydrocarbons, and adjacent sectors, and be part of developing the cross-sectoral actions.
This will be a new and valuable role for the industry to play. A recent study analyses six critical sectors that are not only most impacted by the decarbonisation transition, but also critical in making it a reality.
In each sector are three key levers for emissions abatement. In a two-part series, this article analyses the trends in the first three sectors, with a focus on the near-term actions that oil, and gas companies will have to take.
Hydrocarbon extraction and refining
The production, transport, processing, and consumption of oil and gas products account for 60% of all global greenhouse gas emissions, with a 15% directly attributable to the oil and gas industry (Scope 1 and 2 emissions).
Our 2050 stretch goal is to achieve a 93% reduction from 2050 business-as-usual emissions through near elimination of Scope 1 and 2 emissions.
Moving to a structurally lower emissions intensity portfolio will make it easier for first-mover operators to achieve cleaner core oil and gas operations and reduce the risk of stranded assets. As they look ahead to 2030, operators will need to increase the sophistication of their portfolio strategies to balance breakeven price, emissions intensity, and evolving demand outlooks to increase returns while reducing the risk of future asset write-downs.
Being able to show clear linkages between company targets, portfolio decisions, and the Paris Agreement target is likely to become increasingly important as a factor in attracting capital to the sector. In parallel, immediate action is needed to clean the core of oil and gas operations.
Reducing the emissions intensity of existing portfolios through methane leakage reduction and reduced flaring will have the single greatest impact on the sector’s emissions, and much can be done to generate an NPV positive return.
Decreasing the energy intensity of operations through increased operational efficiency and low-carbon power sources can, likewise, be NPV positive.
We see four discrete sets of actions that oil, and gas companies can take to mitigate the risk to the core business, namely:
- Increasing sophistication of portfolio management and capital planning to balance financial and environmental objectives,
- Monitoring and reducing Scope 1 and 2 emissions across portfolios and services,
- Reducing the energy intensity of operations, and
- Continuing to increase CCUS deployment for EOR.
Power generation
The power sector is the single biggest contributor to greenhouse gas emissions, accounting for approximately 38% of global CO2 emissions.
Our 2050 stretch goal is to achieve an 86% reduction from 2050 business-as-usual emissions through accelerated displacement of coal by gas and 70% renewables penetration.
A completely decarbonised power system will require either a solution to long-term energy storage or expanded sources of nonintermittent, economical carbon-free generation. The direction and pace of the decarbonisation transition in the power sector have stark implications for gas.
Many oil and gas companies have shifted their portfolios to gas in the past decade. They believe that gas will act as a transition fuel between coal and renewables, primarily through a sizable share in the growing electricity sector. They further believe that gas demand growth will hold up more than oil.
However, the rapidly plunging costs of renewable generation and day-to-day storage facilities put this strategy at risk. By 2030, existing gas generation will be uncompetitive with new-build renewables.
The implication is that the number of new gas plants built will be limited. Simply put, its prospects as a ‘true’ commodity could be stunted.
Operations should take the following actions:
- Driving a step-change in the competitiveness of gas,
- Refining ‘transition to gas’ portfolio strategies to reflect the evolving power landscape, and
- Maintaining market share in power generation by moving into renewables where skillsets are complementary or adjacent.
Light-duty passenger vehicles
Our 2050 stretch goal is for a 71% reduction from 2050 business-as-usual emissions by accelerating electric vehicles, penetration to 50%, while also doubling internal combustion engine efficiency.
The light-duty passenger vehicle sector currently accounts for roughly 10% of global CO2 emissions and it accounts for 23% of oil and gas demand. All this sector’s emissions originate from the combustion of oil and gas products.
With high hopes for fuel efficiency improvements fading, there are limited opportunities for market forces to get fuel efficiency rates back on track. This slowdown is attributed to consumers purchasing both larger, heavier cars like SUVs and fewer diesel cars.
As a result, it is highly likely that the 2030 target set by the Global Fuel Economy Initiative (the leading global partnership on fuel efficiency), requiring a 3.7% annual rise in efficiency, will be missed.
With economics looking increasingly favourable for electric vehicles, charging infrastructures and potential rare metal supply chain constraints become the biggest barriers to adoption.
In the short term, EV adoption rates will be determined by how fast the charging infrastructure is built, the ability to reduce range anxiety, and further cost reduction. In the medium term, rare metal and battery manufacturing constraints may come to the fore. In all cases, strong acceleration is expected over the next decade, creating a drag on oil demand growth.
Today, we have a shifting perspective on when peak oil for the light-duty vehicle sector will happen. It could be as soon as 2025. But every year, this window of uncertainty will become narrower and the timing clearer.
In addition to the substitution threat from electrification, fuel retailers are also at risk of losing the associated sales from stores co-located at the pump. If more regulations are introduced to get fuel efficiency back on track, the nature of fuel retail sales volumes and product characteristics may change.
Immediate actions to take include:
- Accelerating the rollout of EV charging stations to existing fuel stations to capture market share before other players move in,
- Doubling down on efficiency research, blending, branding, and pricing to create differentiated fuel products, including additives that maintain engine cleanliness and performance efficiency,
- Engaging in the research into hydrogen fuel cell solutions for vehicles, and
- Promoting fuel efficiency behaviours and driving practices to enhance fuel efficiency.
Navigating a new route in energy
Near-term priorities will be focused on transforming today’s core portfolio, while also creating optionality to win in adjacent sectors.
The decarbonisation transition won’t be as effective – or may not happen at all – if oil and gas companies don’t play an active role in developing solutions for their customers in those sectors. This active role in finding solutions entails more than investment – they need to adopt a keep focus on innovation and collaboration with partners to make the transition to a low- or no-emission future a reality.
Cross-sector R&D teams must, for example, work together to identify potential uses for hydrogen with biofuels in the aviation industry or oil and gas companies might join up with utilities to extend the traditional value chain to cross-sector offerings like mobility-as-a-service solutions.
In these and countless other ways, oil and gas companies will be actively architecting and creating the low-carbon opportunities in which they can invest – and through which they can grow.
