03.10.2021 | Opinion Piece | By: Aidan Joy, Director and Energy Transition Lead
In this piece, which is intended as a snapshot of a very fast-moving situation, we will:
- summarise the variety of Energy Transition strategies being pursued by different types and sizes of companies; and
- look to the future to speculate how the situation may evolve, particularly as it relates to Carnrite’s clients.
We will return to this snapshot in the future order to assess the pace and direction of change of the business environment.
Carnrite, from its offices in Houston and in London, advises companies in all segments of the energy value chain and in other industrial sectors on key issues such as strategy, cash flow optimization, digitalization, and the Energy Transition.
ALTHOUGH THE DEFINITION OF “ENERGY TRANSITION” IS STILL EVOLVING, THE CONCEPT IS GATHERING MOMENTUM, AT LEAST IN THE DEVELOPED WORLD, AND OIL AND GAS COMPANIES ARE RESPONDING IN VERY DIFFERENT WAYS TO IT.
A Bit of History
Oil and gas companies and oil and gas industry service providers have had a tough few years. In 2014 Saudi Arabia commenced a price war on the unconventional sector in the USA by increasing production, bringing to a sudden end almost 10 years of higher-than-average oil prices. Historically low prices prevailed in the years that followed. In early 2020, the combination of major producer nation misalignment – this time between Saudi Arabia and Russia – together with the onset of COVID, sent prices falling quickly once again.
Given the financial stresses that these events imposed, it’s perhaps not surprising that the Energy Transition, in a sense, found the oil and gas industry unprepared. With the UK legislating in June 2019 for Net Zero by 2050, and comparable rhetoric in many other developed nations, the industry is finding itself in uncharted territory.
The Current State of Play
The Energy Transition means different things to different stakeholders. This is certainly true within the energy industry, and that difference in perception is in turn giving rise to different responses from different energy industry participants. In the graph below we have plotted for each company group the approximate sizes of the companies in that group versus the degree to which their business focus is moving away from oil and gas and towards renewables. To add perspective, some of the pure-play renewables companies are plotted below. An example of one of these would be Danish company Ørsted, which changed its name from DONG Energy following its “strategic transformation from black to green energy” and the divestment of its oil and gas assets in 2017; the company now specialises in wind energy.
As far as the oil and gas companies are concerned, the movement into investment in renewables is dominated by the European Majors / IOCs shown in the centre of the plot above. This movement is taking place for several reasons:
- those companies can afford to do it, whereas at times of low oil prices smaller industry participants cannot
- they have downstream and retail customers, so they see the need to do it for PR reasons
- they want to understand the technology and the costs and benefits of renewables so that they can participate increasingly in that industry if circumstances are favourable
- in order to ensure that Western governments don’t impose a “price on carbon” that the Majors / IOCs can’t afford to pay
- to retain their licenses to operate (more broadly).
Interestingly, within this group of companies, there is anecdotal evidence of emerging tensions between corporate GHG reduction strategies on the one hand and operational pressures at regional and field levels on the other.
What about other types of oil and gas companies and their service providers?
It will be interesting to see whether, with the recent change of government in the USA, the major US oil and gas companies will increasingly move toward the right-hand side of the graph above – or at least state their intentions to do so.
Smaller E&P companies and large parts of the oilfield services sector have minimal human or financial capital to apply to Energy Transition-related activities whilst they struggle to survive during a prolonged period of low oil prices and reduced oil and gas industry activity levels.
Around the world, the National Oil Companies (NOCs) are largely taking a “watching brief,” with several of the NOCs based in the Middle East possibly excepted.
One undeniable current phenomenon is that over the last few years renewables have outperformed stock markets generally, while oil and gas companies have underperformed, as shown in the graph below. Similarly, debt and equity markets for oil and gas companies have been challenged, limiting access to capital for many industry participants. These challenges may be prolonged and exacerbated for those unable or unwilling to demonstrate coherent Energy Transition strategies and actions.
Examples are therefore emerging of oil and gas sector companies emphasising their renewable business credentials. In Norway, Aker Solutions spun off its wind development and carbon capture technology businesses in 2020 to its shareholders in two separate companies to be admitted to the Oslo Stock Exchange. In the UK, Serica Energy is trailblazing low-emissions operating practices on its North Sea platforms. And in the USA Carnrite is working with a Gulf of Mexico operator on the potential to use ocean currents passing its platforms as a source of renewable energy.
Looking Forward
Even the European Majors / IOCs will only go so far with renewables investments in the absence of carbon taxes or cap-and-trade schemes. Otherwise, their renewables projects will show very different investment profiles to their oil and gas projects, which in turn risks sending mixed messages to investors. But for the present, those companies’ enthusiasm for renewable energy investments seems unstoppable.
Along with this enthusiasm goes the business need to quantify emissions and to divest emissions-intensive oil and gas assets. But such assets have value, so buyers will emerge and a market will develop. Indeed buyers focussed on such assets, possibly funded by non-Western sources of capital, may become increasingly familiar, in the same way that smaller companies have acquired portfolios of late-life producing assets from the majors in many of the world’s oil and gas provinces, developing expertise in mature field management.
In many instances, renewable investments will place the IOCs in competition with a new class of fast-moving companies purpose-built to compete in these emerging markets. To compete and win, oil and gas companies will need to radically streamline their ways of working and accelerate their decision-making.
Carnrite has been advising energy industry participants worldwide on key strategic, operational, and organizational issues since 1991. We follow Energy Transition strategies, developments and issues closely from our London and Houston offices in order to support our energy industry clients with relevant, up-to-date, actionable advice
We will continue looking at different Energy Transition issues in greater detail in future posts. Be sure to follow us on LinkedIn if you have not already done so, and check the website frequently so you don’t miss any Carnrite Insights.
About the Author
Aidan Joy joined The Carnrite Group’s UK business in September 2020 after over 30 years of experience in the international oil industry. He worked as a geologist during the growth years of the North Sea, mainly in the UK sector, progressing to the role of Subsurface Manager for Kerr-McGee, at the time a very active E&P company. In 2000 he moved onto the strategy, commercial and finance side of the business, and between 2004 and 2019 he was based first in Perth, Australia, then in Calgary, Canada.
During this time, Aidan worked for several operating oil and gas companies on a very wide variety of upstream and midstream ventures and deals. In addition, he represented Apache on the Board of Directors of APPEA, the Australian Petroleum Production & Exploration Association.
Since 2016 Aidan has worked as a business consultant for the international energy industry in the USA, Canada, and the UK. In recent years he has increasingly specialized in projects related to organizational structure and the Energy Transition. He currently serves as Vice President of the Petroleum Exploration Society of Great Britain (PESGB) and as co-Chair of the PESGB’s “Exploring the Energy Transition” Special Interest Group.
Aidan graduated from Imperial College, London with a B.Sc. In Geology. He lives in SE England with his wife and three sons.