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Tariq Siddiqui's picture
COO Upstream EP Advisors LLC

Oil & Energy | Business Development | Capital Projects | Offshore Wind -  Proven leader in offshore development and operations, with 25+ years’ expertise in managing business through cycles...

  • Member since 2021
  • 127 items added with 84,584 views
  • May 17, 2021
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The exact pace and path of the energy transition is unknown, the end destination - LOW CARBON ENERGY SYSTEM - is no longer in doubt. Each oil & gas company will evolve their own strategy for transition and transformation in its own way. The one fact is very clear, whereas renewable energy companies saw their market capitalization increase by up to 200% in last ten years, the super majors; Shell BP, XOM and CVX saw their combined capitalization decline by 40% from USD 980 billion to USD 570 billion in the same time frame. 

KEY INSIGHTS:  

The challenge for oil and gas is to explore three fundamental questions

  1. How to build a more resilient core business?
  2. Should we expand in low-carbon business and How?
  3. How our operating business model need to change or adapt.

Oil & gas companies  and their strategies are spread across three archetypes:

  1. RESOURCE SPECIALIST: Betting on material need for hydrocarbon for next 30-50 years, consolidation their mature business, offering little growth, but high potential yield. Most are mid-sized companies, best example is LUNDIN petroleum
  2. INTEGRATED ENERGY PLAYERS: Rely on profitable core business, but also capturing opportunity in low-carbon markets like renewable, where they expect to maintain significant edge and capabilities in future. Examples would be super majors like Shell, XOM, CVX and Shell.
  3. LOW CARBON PURE PLAYERS: They are moving totally away from fossil fuels and developing core capabilities in renewables. Danish Oil & Gas Company (DONG) has completely moved away from fossil fuel and have rebranded themselves as Ørsted and  now become a major player in offshore wind. 

INSIGHTS NOT COVERED IN THE ARTICLE

  • STRANDED ASSET THREAT: Barring few super majors that finance through on-balance sheet financing, most independents rely on investors to fund their growth and development projects.  An international group of funds manager with nearly USD 20 trillion in AUM, have decided to remove oil and gas from their portfolio. Another group of funds with USD 17.0 trillion, will keep oil & gas in their portfolio but with a strict screening for their credible efforts in transition and transformation plans for clean energy
  • VOLUNTARY CARBON CREDIT (VCC) trading and markets offer great opportunity for oil companies to meet their carbon targets and Paris Agreement through offsets.
  • SHORT-TERM : Prime focus of oil & gas companies should still be on Avoiding/Reducing emissions through investment in renewables. M&A is the best tool for it.
  • MID/LONG-TERM: Focus of oil & gas companies should be on Removing emissions to meet net-zero (emissions that cannot be reduced) through emission trading capture projects (reforestation, DAC CCUS)

BOTTOMLINE

The oil & gas companies need to adapt, engage and articulate their transition plans to the investors. Setting up baseline emission is first step towards target setting following up with  developing aggressive but credible transition plans to avoid, reduce and eventually remove emissions that cannot be reduced.  

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Mark Silverstone's picture
Mark Silverstone on May 24, 2021

Thanks for supplying the link and information about this Mckinsey report, and for your astute comments.  I think the "stranded assets" issue is the one that really keeps the Boards and CEOs of major oil companies awake at night. 

One of the big question marks seems to be whether or not there will be a meaningful carbon price, as there are few shallow water and conventional resources (Exhibit 1) left to the large, non-governmental owned, independent, integrated oil and gas companies.

I am intrigued by Exhibit 4 and can see that the large majors are trying hard to monetize those capabilities.  The problem is that with oil at about $60-$70 per barrel, they are too timid to sacrifice those considerable returns, as in Exhibit 2, in order to fully invest in developing those "non-core" capabilities.

So far, stakeholder initiatives have had little effect, though there is evidence of increasing insistence that they move more quickly away from fossil fuel E&P.  At a recent Shell shareholders meeting they did approve a plan to

"...reduce planet-warming carbon emissions to net-zero by 2050 by slowly reducing oil and gas output, growing its renewables and low-carbon business, and offsetting emissions through carbon-capturing technologies and measures such as forestation."

However, a much more aggressive plan, though non-binding,  including one to commit to reduce absolute emissions, as opposed to emissions intensities, was rejected by 69% of the votes.  The more aggressive plan was put forward by the activist group Follow This. It´s the first I´ve heard of this group. Sounds interesting.

The only good news is that the same resolution last year received only 14.4% support. So, there may be a way ahead.

The Church of England, no less:

"...also urged Shell to set short and medium-term targets to reduce emissions in absolute terms."

"Adam Matthews, Director of Ethics & Engagement for the Church of England Pensions Board said at the AGM that if Shell doesn't meet its 2023 targets the fund would divest its stake in Shell."

So, I imagine McKinsey will revisit this issue fairly regularly as events unfold and more data are available.

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