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July 16, 2021updated 19 Jul 2021 8:02am

ESG is an opportunity for oil and gas companies

Oil and gas companies will need effective governance to steer themselves as conventional hydrocarbon activity becomes less and less viable.

By GlobalData Thematic Research

GlobalData’s latest thematic report, ‘ESG in Oil and Gas’ details the ways environmental, social and governance concerns both threaten and provide opportunities to oil and gas companies.

Climate change measures will fundamentally alter the industry

The measures the Paris Agreement signee governments will take to discourage emissions and ensure the success of net-zero goals will render conventional oil and gas activity less and less viable.

In the next decade, wherein hydrocarbon demand will not fall significantly, oil and gas companies should minimise losses to emissions-discouraging measures such as carbon pricing by altering processes across the value chain to reduce emissions.

In subsequent decades hydrocarbon demand will fall. Technological innovation and increased consumer mindfulness will make sustainable alternatives to hydrocarbon-intensive products more and more attractive. For example, in transport, historically the largest hydrocarbon-demanding sector, conventional cars will be displaced almost entirely by electric vehicles (EVs). Though some demand will remain, survival for most current oil and gas companies will mean transitioning to a new product. There are many options for products (renewable energy will be the most popular), but success in any requires that companies invest soon so that cash flows are already strong by the time demand falls. Companies that wait until hydrocarbon revenues dry up will have insufficient cash to fund a transition.

Strong governance and social practices are vital for the transition

Oil and gas companies will need effective governance to steer themselves through the existential disruption that the next three or four decades will bring. The balancing act necessary for companies to meet net-zero objectives while retaining scale demands deft leadership: companies must sustain sufficient cash flows to handle demand volatility, overhaul their asset portfolios, make astute investments and satisfy sustainability-minded stakeholders, all while providing stable dividends.

As millennials come to dominate the consumer base and workforce and begin to assert their preferences, companies that fail to maintain good social practices (toward workers and affected local communities) will struggle to attract and retain customers and employees.

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