As the world struggles with the impacts of high energy prices and regional shortages of supply and UN officials prepare to convene the COP26 conference later this month to assess the status of global efforts to deal with climate change, Deloitte has issued a new report quantifying the progress of oil and gas companies in their efforts to go green. The report, titled “Positioning for green: Oil and gas business in a low-carbon world,” is the result of a survey Deloitte conducted with 100 C-level senior executives and environment, health, and safety leaders of global oil and gas companies to determine the strategies companies are adopting to meet the challenges of the ESG-dominated environment in which they must now do business.
The top-line findings are interesting to say the least, with 23% of surveyed companies planning or starting to go green all the way, and 77% of the companies planning to maintain hydrocarbons as their main, long-term business. While the efforts of these companies can be arrayed all along a matrix containing many shades of green, Deloitte divides them into four major categories:
- Net-zero pioneers with net-zero targets and a bold vision to divest their hydrocarbon business model built over decades—especially at an oil price of $75/bbl—could create and unlock significant value through capex redeployment, valuation uplift, and divestment proceeds. The companies already on this pathway are undertaking green change now.
- Green followers with an ultimate goal of going green could realize significant financial gains by monetizing their traditionally higher reserves-to-production (R/P) ratio in the near term and using this revenue to make a big foray into the green business at a reduced risk in the medium term. These companies seek to right-size oil reserves and pace into new energy solutions as more green technologies reach commercial maturity around the mid-2020s.
- Low-carbon producers could create new value by streamlining their portfolio, decarbonizing their business, and optimizing their operations.
- Hydrocarbon stalwarts with the capability to remain the last-standing suppliers have the potential to gain value through increased market share. According to Deloitte’s survey, about 30% of O&G producers expect to remain focused on regions and assets with the lowest costs and extract the remaining value of reserves.
For any oil company, planning for anything even a year in advance can present great challenges given the constant volatility in the business. Planning for how your business is going to develop over a span of 30 years raises a variety of challenges, especially for independent producers, that management teams have seldom been forced to address in the past.
I asked Amy Chronis, vice chair, the US Oil, Gas & Chemicals (OG&C) leader, and the managing partner for Deloitte’s Houston practice, what the firm heard from these industry leaders related to these challenges. “All of these executives have a frustration with the difference between ‘transition’ and the apparent expectations of the marketplace, in social media, etc.,” she said. “What I mean by that is that ‘transition’ does not mean an overnight switch or waiting it out; it’s all about thoughtful acceleration in times of change. People tend to forget that it’s an energy transition: It’s a journey.”
Kate Hardin, Executive Director at Deloitte’s Research Center for Energy & Industrials and lead researcher on the study added “This volatility in the market is not new to the oil and gas industry. If ever there were an industry with the ability to plan around change, it would probably be the energy industry. I think the other issue is to separate the long-term trends from what we’re seeing in the market today.”
To that last point, Chronis noted that the high prices for oil and natural gas in the market today do not necessarily mean that the transition will be delayed. In fact, the surveyed executives said the opposite. “What we heard [from these executives] is that an accelerated transition and high oil prices can happen together,” she said. “In fact, robust oil prices, or a stronger state of the oil and gas industry is a must to enable the riskier and expensive alternatives. Many of these lower carbon alternatives that companies are investing in are very expensive and very difficult undertakings. They would be even more difficult to do if they didn’t have the higher returns they are getting now.”
One question that arises whenever oil and gas companies make these ‘net-zero by 2050’ pledges is whether there is real commitment behind them, or do they just amount to ‘green-washing?’ There is some validity to this, especially in the upstream sector of the business where many independent producers focus business plans on high-grading their asset bases in order to become more attractive takeover targets.
If a company is basically in business in order to be sold within 5-10 years, how much commitment is really behind a pledge to achieve a goal 30 years out?
Both Chronis and Hardin said they saw very real commitment behind these goal-setting exercises, and one of the main reasons why is that some acquiring companies are now making ESG performance a key consideration. “This is a key area of focus for every CEO” Chronis told me. “The demand for transparency on everybody’s supply chain cuts across all industries and sectors.”
“We’ll be doing additional research on M&A early next year,” Hardin added. “We’ll be addressing ESG focus in that context. We have seen some deals done partly because the acquisition involves low-carbon assets that enhance the acquiring company’s portfolio. Eventually, it may be harder to find an investor who is not looking at that.”
In fact, ESG specifically and the energy transition in general have become such a key focus area for the oil and gas business that Deloitte has taken the step of creating an innovation center at its Houston operation. “We’ve used a lot of science, the science of learning, combined with the needs of our clients to have a place to co-create, to experiment, to talk about the future and craft what they need to create in this space,” Chronis said.
The world is changing for these oil and gas companies and their executives, but that is nothing new. This is an industry that has always been nimble and able to adapt to a broad array of pressures and crises. It should come as no surprise to anyone that one of Deloitte’s main findings in this report is the various players they surveyed are embarked on a wide variety of business strategies and innovations, and, perhaps most importantly, none of them are standing still.