Listed below are the key macroeconomic trends impacting the Environmental, Social and Governance (ESG) theme in oil and gas, as identified by GlobalData.
The balancing act necessary to meet net-zero objectives while retaining scale demands companies to sustain sufficient cashflows to handle demand volatility, overhaul their asset portfolios, make incisive investments, and please sustainability stakeholders.
The Paris Agreement
The Paris Agreement is an international treaty on climate change. Its goal is to limit global warming such that temperatures do not exceed 2 degrees Celsius more than pre-industrial levels. Meeting the goal requires a significant reduction in global greenhouse gases (GHG) emissions, and, consequently, most signee nations have set targets of being net-zero by 2040 or 2050. Governments will take measures to discourage emissions and ensure targets are met, which will harm the economic viability of conventional oil and gas activity.
Carbon pricing will be a key driver in oil and gas activity. Nations, particularly Paris Agreement signees, will seek to meet emissions goals by imposing higher prices. Oil and gas companies should be cautious about the climate ambitions of nations in which they are active and anticipate that rising carbon prices will render continued hydrocarbon activity there unprofitable. Global carbon pricing initiatives will drive companies to decarbonise both their processes and products.
Disincentives for fossil fuels
Governments are imposing methods beyond carbon pricing to discourage emissions. For example, some governments are giving grid priority to renewable energy, while others are reducing fossil fuel subsidies.
Covid-19 and the associated oil price crash exacerbated the existing strain on industry profitability. Some nations have seen record-breaking percentages of energy demand met by renewable energies and committed to prioritising green initiatives in their fiscal responses to the pandemic. Many governments are aiming for a green recovery as economies rebuild after the pandemic. The EU has dedicated 30% of its recovery package to green and digital transitions.
China and India
China and India are the primary contributors to the growth in global energy demand. China’s total power generation, already the largest in the world, is set to double by 2050, and India’s is expected to grow even more rapidly. Currently, their power mixes are far more hydrocarbon-heavy than those of Western nations. Supplying demand while meeting commitments to reduce GHG emissions will require the adoption of low-carbon technologies.
China is currently the world leader in manufacturing wind turbine parts and photovoltaic (PV) cells and has a more aggressive target for renewable generation by 2030 than the EU. India has set an even more aggressive renewable capacity target of 450 GW by 2030.
China offers subsidies to promote renewable energy
China has a 2060 net-zero emissions target. Its government has sought to raise renewables’ share in the energy mix to at least 40% by 2030. Taxation measures in China include a 50% VAT reduction for wind power generation. Some local authorities have also exempted tax on renewable energy production enterprises. The Chinese finance ministry has set 2021 renewable power subsidies at $921m.
US incentivises renewable energy adoption
In the US, at a federal level, tax cuts such as the Production Tax Credit and Investment Tax Credit are the main incentives given to encourage investment in renewable energy projects. Many states have also implemented a renewable portfolio standard (RPS) programme requiring utilities to purchase between 10% and 20% of their power from renewables using renewable energy certificates (RECs).
EU will pursue ambitious decarbonisation targets
The EU’s targets include having at least 32% of energy generated come from renewable sources by 2030 and being net-zero by 2050. Previously, the EU has used feed-in tariffs (FiT) to make renewables more competitive, but some countries are replacing these with auctions. Renewable energy auctions bring down the cost as developers underbid one another.
The remaining attractiveness of oil growth projects
Although net-zero goals have been set and demand declines are expected, production growth remains attractive to oil and gas companies. The six supermajors (Shell, Chevron, Shell, BP, Total, and Eni) are investing heavily in new production and infrastructure: they are expected to contribute over four million barrels per day (mmbd) of oil production by 2025, of which their entitlement will be two mmbd.
Overall, despite the decline in production from existing conventional fields (estimated at 5% annually by 2025), upcoming developments look set to deliver significant growth in global oil production over the medium term.
Investment in short-cycle projects that can deliver returns quickly will intensify in the next few years as companies look to secure cashflows before carbon taxes make such projects infeasible.
Hydrocarbon demand will not vanish in the foreseeable future. The three largest sources of hydrocarbon demand are the transport, power, and industrial sectors. Though electric vehicles (EV) will become dominant in transport, current electric engine technology is insufficient for large ships, planes, or rockets. Several technological breakthroughs are necessary before this changes.
The power sector’s transition must negotiate the reluctance of emerging economies to forego the easy growth fossil fuels offer, the comparative unreliability and weakness of renewable energy, and the remaining attractiveness of fossil fuel products. The industrial sector must negotiate society’s ongoing dependence on plastic products.
The May 2021 pressure increase
May 2021 saw a sequence of surprising events wherein oil and gas majors were told, both by their own boards and by courts, that their climate change targets were insufficiently ambitious. ExxonMobil shareholders overthrew much of the company’s board and introduced new directors under instructions to aggressively pursue lower emissions.
Chevron investors defied executives by setting the company’s first emissions target. Having targeted a 20% GHG reduction by 2030, Shell was ordered by a Dutch court to reach a 45% reduction in the same period. The ruling was hailed as a landmark, precedent-setting victory for ESG, and similar rulings are now expected.
Greenwashing and clandestine lobbying
‘Greenwashing’ is when oil and gas companies make disingenuous shows of environmental concern in an effort to evade public criticism while continuing their profitable but environmentally harmful activity. Greenwashing accusations are publicity disasters as they suggest not just environmental negligence but dishonesty. Activists are most suspicious of offsetting initiatives, adverts, and top-line executive statements, since none commits companies to operational change, and each tend to generate good press.
Hostility from Big Tech
Big Tech is distancing itself from the oil and gas industry. Groups such as Amazon Employees for Climate Justice can put pressure on cloud providers who service the oil and gas industry. In May 2020, Google pledged to cease building custom artificial intelligence (AI) for the industry.
National oil company (NOC) invulnerability
NOCs are insulated from many of the pressures that international oil companies face. NOCs are run by governments, so they are less vulnerable to public social pressure and unlikely to be hindered by legislation. Strategic priorities, performance, and compliance levels are largely dependent on the whims of the national leadership.
In many NOC parent countries, free speech rights are not total, and government dissidence is criminal. Market pressure is the only force that can encourage NOCs to take sustainable action. Sustainability must be profitable, and hydrocarbon demand must decline.
Competition for clean energy assets making it very hard for small players to become sustainable
Oil and gas companies want to add renewable energy projects to their portfolio. The competition is driving prices up. Smaller operators do not have the capital to compete with supermajors for projects. Consequently, the energy mix of smaller operators is less sustainable, and they will be punished most by the demand transition and impending regulation.
This is an edited extract from the ESG (Environmental, Social, and Governance) in Oil and Gas – Thematic Research report produced by GlobalData Thematic Research.