Climate change measures enforced by the Paris Agreement will significantly impact oil and gas operations in the coming years. Therefore, to reduce emissions and minimize losses in the long-term, oil and gas companies need to be mindful of strong governance and social practices, which are vital for energy transition, according to a recent report by research and consulting firm GlobalData.

In its report titled ‘ESG in Oil and Gas—Thematic Research’, GlobalData suggests oil and gas companies adopt measures such as carbon pricing by altering processes across the value chain. The study also reveals that technological innovation and increased consumer mindfulness will make sustainable alternatives to hydrocarbon-intensive products more and more attractive. For example, in transport, which is 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,” said George Monaghan, oil and gas analyst at GlobalData.

“While there are many options for products, with renewable energy being the most popular, companies will only succeed if they invest while demand is there to capitalize on already strong cashflows by the time demand falls. Companies that wait until hydrocarbon revenues dry up will have insufficient cash to fund a transition.”

The report said companies will also need effective governance to steer themselves through the disruption over the next three or four decades. The balancing act necessary for companies to meet net-zero objectives while retaining scale demands deft leadership. For example, companies must sustain sufficient cashflows to handle demand volatility, overhaul their asset portfolios, make astute investments and satisfy sustainability-minded stakeholders, all while providing stable dividends.

Monaghan commented, “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.”

The report shows emission reduction strategies available to oil and gas companies can be divided into two broad approaches: change the process and change the product. (Figure 1). It is easy but unwise to underestimate the effectiveness of the ‘change the process’ approach, which involves multiple small changes that are capable of delivering significant emission reductions. At the same time, meeting 2040 or 2050 net-zero goals and dealing with the increasing unavailability of hydrocarbon reserves will require companies to change the product.

GlobalData
Figure 1: Emission reduction strategies for oil and gas companies

“Scope 1 and 2 emissions represent the majority of emissions for which the oil and gas industry is responsible. These emissions can be reduced by altering value chain practices,” Monaghan explained. “Since the end product is unchanged, this ‘change the process’ approach requires less R&D and infrastructural investment. It promises short- and mid-term returns.”

He continued, “However, other emissions are inextricable from oil and gas, particularly those produced by end-user combustion of the hydrocarbons (termed scope 3). Technological innovations may reduce the carbon content of the end-product, but practically, so long as the end-product is oil and gas, the company producing it will be responsible for significant scope emissions. To eliminate these emissions, companies must transition to a new end-product. This is the ‘change the product’ approach.”