OPINION: Emerging role of oil companies in a ‘net zero’ world
Change in climate conditions and increasing awareness about environment sensitivity raise complex questions to oil and gas industry about their role in the future energy economy.
By Nikhil Moghe
New Delhi: India is in a developing stage, and its economic engine has yet to achieve full steam. Even then, at present India is the third largest consumer of energy in the world and its energy consumption is poised to increase further. According to IEA World Energy Balances, India is heavily reliant on coal (44.3 per cent) and oil (25.2 per cent) 1 for its energy requirement which are also major sources of carbon emissions and energy imports in the country. In effect, the country needs to tackle the dual problem of energy emissions and import dependency in a future, where its energy demand is expected to more than double by 2040 2 , according to New Policies Scenario, IEA World Energy Outlook 2018.
As the third decade of the 21st century begins, the world has been taken over by a sense of urgency on climate change. And as it is becoming more visible, oil and gas industry is facing the heat. There is increased societal and market pressure on these companies to either cease their investments or diversify away from fossil fuel to clean technologies. This pressure is also evident from the fact that oil and gas companies are witnessing reduced market capitalisation over the past few years. This increasing pressure for stringent measures around governance, disclosures, targets on emissions, risk and preparedness, continues to drive decarbonisation efforts and ambitions of oil and gas industry globally.
In an increasingly accelerated atmosphere for global energy transition, major oil & gas companies need to make a strategic shift towards cleaner energy solutions to shield from not just financial risks arising from falling crude oil prices in the wake of demand crash from COVID-19 pandemic but also from policy regimes on carbon emissions. Multitude of factors are responsible for determining the type of emissions reduction initiatives a company can take such as policies & regulations, asset mix, etc. Such as the EU’s new green deal which is at the center of European COVID-19 recovery package, imposes stricter regulations around oil & gas operations to monitor and disclose Scope [1 and 2] and emissions  .
Emerging economies have been setting ambitious climate change targets. India also aims to reduce its GDP’s emissions intensity by 25 per cent from 2005 levels by 2030 . This green transition will require major oil & gas companies to take steps such as decommissioning certain business operations and reevaluating business operation practices.
The investment by oil and gas companies in low-carbon businesses is still relatively less as percentage of overall capital expenditure. Going forward, a much more significant share of capital allocation would be required for low-carbon technologies. The oil and gas companies also need to focus on investing in low-carbon hydrogen, biogas and 2nd generation and 3rd generation biofuels, which can take benefit of network efficiencies, increase asset utilisation, and deliver energy with similar benefits of hydrocarbons but without net-carbon emissions.
This process of energy transition is quite complex. It would be prudent for the industry and the stakeholders to design core principles around the energy transition theme that would make this journey smoother. The oil & gas companies need to –
1 Redefine company strategy roadmap towards clean energy
2 Reuse existing assets with low carbon retro fitments wherever possible
3 Reduce investments in carbon-intensive assets
4 Restructure organisation to accommodate clean energy system
5 Replace current assets with carbon-neutral technologies.
The R5 framework – Redefine, Reuse, Reduce, Restructure and Replace can help develop a synchronous strategy in multi-direction channel. Instead of just introducing carbon offset initiatives, the oil & gas companies can future proof their business by focusing on diversified decarbonisation pathways. A well-planned roadmap would help companies to deploy their capital efficiently, develop technology to the maturity stage and take advantage of network efficiencies from existing and upcoming infrastructure.
Change in climate conditions and increasing awareness about environment sensitivity raise complex questions to oil and gas industry about their role in the future energy economy. The industry can answer these questions by either looking at short-term profits as an “oil and gas” company or embracing a steep and tough road to diversification as an “energy” company for long-term growth and business sustainability.
[The author is Partner – Energy, Natural Resources and Chemicals, KPMG in India]