How can the oil and gas sector help in the drive to build back better?

The oil and gas industry has grown accustomed to experiencing shocks throughout the decades, yet the demand contraction of more than 10 million barrels a day in the first half of 2020 during the peak of lockdown provided a glimpse of what a new baseline could look like. In response, according to analysis by Accenture, the industry has cut more than $150 billion of capital expenditure, while pressure from investors to improve returns and environmental, social and governance (ESG) performance has increased. This demonstrates why the industry must focus not only on improving business resilience, but also on responding to stakeholders’ demands to build back better.

Beyond the immediate health and economic impacts of COVID-19, severe humanitarian and environmental crises are unfolding in the background. The pandemic has highlighted the vulnerability of some groups within our society, potentially derailing years of progress on global issues such as poverty, hunger and income inequality, and on the UN Sustainable Development Goals (SDGs).

Climate-related issues dominate the top-five global risks over the next 10 years, according to this year’s Global Risks Report. While the lockdown measures have led to temporary reductions, emission levels have already returned to pre-pandemic levels as economies have reopened. Without a year-on-year fall in greenhouse gas emissions of 7.6% between 2020 and 2030, the world will not be on track to meet the 1.5˚C goal of the Paris Agreement.

As a result of the pandemic and beyond, environmental awareness is growing globally. In recent consumer surveys, 70% responded that climate change is as serious as COVID-19 in the long-term, while 59% said that they will avoid brands that are not demonstrating progress against goals that impact our society and planet.

In addition to environmental concerns, nations dependent on oil revenues face a grave risk of falling behind on their development agenda and social welfare programs while also facing increasing challenges to respond to the health emergency in the short-run.

Some investors see this crisis as a turning point for ESG investing. Almost three-quarters of investors polled across 50 global institutions agreed that COVID-19 would likely increase awareness and actions to tackle high-impact risks such as climate change and biodiversity losses. Prior to the crisis, companies with consistently high ratings for ESG performance enjoyed operating margins 4.7x higher, on average, than companies with lower scores. During the first half of 2020, this trend continued with the top ESG performers within the oil and gas industry consistently outperforming the others. As a result, without concrete action on climate change and ESG performance, the oil and gas industry risks facing greater difficulty in raising capital, while the gap in the cost of capital between oil and gas assets and competing renewable energy assets could widen further.

Governments and international organizations are also emphasizing the importance of a sustainable and responsible recovery. As countries transition from the rescue to recovery phase, the European Union and countries like Germany are allocating large shares of government stimulus packages for a green recovery and measures aimed at carbon emission reductions. The picture is not the same in other geographies.

Here are three approaches the sector can take as it seeks to build back better:
1. The ecosystem lens: Cross-industry partnerships to drive systemic transformation

The oil and gas industry has a key role to play in the clean energy transition, and could explore public-private partnerships and cross-sector collaboration in this context. Possible opportunities include public-private partnerships to increase the scale and pace of investment in lower-carbon infrastructure, such as carbon capture and storage and hydrogen, and the development of clean industrial clusters in partnership with hard-to-abate sectors such as cement, steel, plastics, chemicals and heavy transportation. Together, these sectors represent 30% of emissions today and could increase to 60% by 2050 as other sectors lower their emissions.

Businesses must also factor in the social impacts of the clean energy transition. Workers and those employed in the fossil fuel supply chain could face significant challenges including job losses and a need to re-skill. Public-private partnerships should seek to reduce disparities that emerge from the transition to a lower-carbon economy.

2. The operations lens: Collaborative innovations to achieve net zero targets

While some of the oil and gas majors have announced net-zero emission targets by 2050, several technical and operational challenges must be overcome to progressively reduce the carbon intensity of operations (such as methane leaks, flaring and energy extraction processes). Collaborative innovations and knowledge sharing can help oil and gas businesses successfully navigate these challenges, while improving cost competitiveness and operational resilience for the entire industry. The adoption of digitalization and automation technologies such as blockchain for supply chain traceability can help accelerate efforts across companies and regions.

Similarly, regional resource and logistics-sharing hubs can help companies reduce the environmental footprint of oil and gas operations and support the strategy to decarbonize logistics, while increasing utilization of assets and maximizing operational synergies. Successful examples of this model already exist, such as Petronas’ CORAL 2.0 programme, which was executed in Malaysia between 2014 and 2019.

3. The portfolio lens: Capture new value pools emerging from the clean energy transition

The oil and gas industry has been making investments in clean energy including generation assets, EV charging networks, battery charging technologies, biofuels and carbon capture and storage technology. However, these non-core business investments have cumulatively added up to less than 1% of the industry’s total capital expenditure. While the energy transition could benefit from the industry’s expertise, oil and gas businesses have struggled to differentiate themselves and generate superior returns. Balancing diversification with risk and shareholder returns has also been a challenge for the industry. However, examples such as Orsted’s accelerated transition into a leading offshore wind developer has highlighted the growth potential of clean energy technologies and the value that can be derived from combining a niche focus with scale.

The pandemic has created challenges for the oil and gas industry, but it has also given the industry an opportunity to hit pause and reflect on the urgent action needed to build back better for a more fair, sustainable, and resilient future. To enable The Great Reset and to address the needs of all stakeholders, the oil and gas industry must define a new social contract, aligning sustainability to overall corporate strategies, and embracing responsible leadership. By doing so, this sector has the opportunity to contribute towards the energy transition.