ESG Trends in Oil and Gas

The oil and gas industry will require effective governance to navigate the existential disruptions of the next three to four decades.

Research has identified the below key macroeconomic trends impacting the Environmental, Social, and Governance (ESG) theme in Oil And Gas.

Carbon taxation

Carbon pricing will be a significant catalyst for oil and gas activity. Nations, particularly signatories of the Paris Agreement, will seek to meet emissions targets by increasing prices. Oil and gas companies should be wary of the climate goals of countries in which they operate and anticipate that rising carbon prices will render continued hydrocarbon activity there unprofitable. Carbon pricing initiatives on a global scale will compel businesses to decarbonize their products and processes.

Discouraging the use of fossil fuels

In addition to carbon pricing, governments are implementing additional measures to discourage emissions. For instance, some governments give renewable energy grid priority, while others reduce fossil fuel subsidies.

The Paris Convention on Climate Change

The Paris Agreement is an international climate change agreement. Its objective is to limit global warming so that temperatures do not rise by more than 2 degrees Celsius above pre-industrial levels. Meeting the goal requires a substantial reduction in global greenhouse gas (GHG) emissions; consequently, the majority of signatory nations have set net-zero emissions targets for 2040 or 2050. Governments will implement measures to discourage emissions and ensure targets are met, which will have a negative effect on the economic viability of conventional oil and gas activity.

Covid-19

Covid-19 and the subsequent oil price crash exacerbated the industry's profitability issues. Some nations have seen record-breaking percentages of energy demand met by renewable energies and have committed to putting green initiatives at the forefront of their fiscal responses to the pandemic. As economies rebuild following the pandemic, numerous governments aim for a green recovery. The EU has allocated thirty percent of its economic stimulus package to green and digital transitions.

Role of India and China

China and India are the leading contributors to the expansion of the global energy demand. China's total power generation, which is already the largest in the world, is projected to double by 2050, while India's is anticipated to increase even more rapidly. Currently, their energy mix is significantly heavier in hydrocarbons than that of Western nations. To meet demand while adhering to commitments to reduce GHG emissions, low-carbon technologies are required.

China is currently the world leader in the production of wind turbine components and photovoltaic (PV) cells, and its target for renewable energy generation by 2030 is more aggressive than the EU's. India has set an even more ambitious goal of 450 GW of renewable capacity by 2030.

China encourages renewable energy

China aims to achieve net-zero emissions by 2060. Its government aims to increase the proportion of renewable energy to at least 40 percent by 2030. China's tax measures include a 50 percent VAT reduction for wind power generation. Some local governments have also exempted businesses that produce renewable energy from taxation. The Chinese Ministry of Finance has set renewable energy subsidies for 2021 at $921 million.

US encourages use of renewable energy

Federal tax credits, such as the Production Tax Credit and the Investment Tax Credit, are the primary incentives offered in the United States to encourage investment in renewable energy projects. Many states have also implemented a renewable portfolio standard (RPS) programme mandating that utilities purchase between 10 and 20 percent of their electricity from renewable sources using renewable energy certificates (RECs).

EU will pursue ambitious carbon reduction objectives

The EU's goals include generating at least 32 percent of its energy from renewable sources by 2030 and becoming carbon neutral by 2050. Previously, the EU used feed-in tariffs (FiT) to increase the competitiveness of renewables, but auctions are replacing FiT in some countries. Renewable energy auctions reduce costs as competing developers outbid one another.

The remaining allure of oil expansion projects

Although net-zero goals have been established and demand declines are anticipated, oil and gas companies remain interested in production growth. The six super majors (Shell, Chevron, Shell, BP, Total, and Eni) are investing heavily in new production and infrastructure. By 2025, they are expected to contribute more than four million barrels per day (mmbd) of oil production, compared to their entitlement of two mmbd.

Overall, despite the decline in production from existing conventional fields (estimated at 5% per year by 2025), upcoming developments are expected to result in a substantial increase in global oil production over the next few years.

In the coming years, companies will increase their investment in short-cycle, high-return projects as they seek to secure cash flow before carbon taxes render such projects unfeasible.

Demand for hydrocarbons

Demand for hydrocarbons will not disappear in the foreseeable future. Transportation, electricity generation, and industry are the three largest users of hydrocarbons. Even though electric vehicles (EV) will become the dominant mode of transportation, the current electric engine technology is inadequate for large ships, aircraft, and rockets. Several technological advances are required before this can change.

The transition of the power sector must negotiate the reluctance of emerging economies to forego the easy growth offered by fossil fuels, the relative unreliability and weakness of renewable energy, and the continued allure of fossil fuel products. The industrial sector must manage society's continued reliance on plastic products.

Events in May 2021

In a series of surprising events that occurred in May 2021, oil and gas majors were informed by their own boards and the courts that their climate change goals were insufficiently ambitious. The shareholders of ExxonMobil removed the majority of the company's board and installed new directors with the directive to aggressively pursue lower emissions.

Chevron investors defied executives by establishing the first emissions target for the company. Shell, which had targeted a 20% reduction in greenhouse gas emissions by 2030, was ordered by a Dutch court to achieve a 45% reduction in the same period. The decision has been hailed as a landmark, precedent-setting victory for ESG, and similar decisions are now anticipated.

Greenwashing and covert advocacy

Greenwashing refers to the practise of oil and gas companies feigning concern for the environment in order to evade public criticism while continuing their profitable but environmentally damaging activities. Accusations of greenwashing are public relations disasters because they suggest not only environmental negligence but also dishonesty. Activists are most wary of offsetting initiatives, advertisements, and top-line executive statements, as none of these commit companies to operational change and all tend to generate positive press.

Aggression from Big Tech

Big Tech is moving away from the oil and gas sector. Groups like Amazon Employees for Climate Justice are able to exert pressure on cloud providers who serve the oil and gas industry. Google has pledged to cease developing custom artificial intelligence (AI) for the industry by May 2020.

The resilience of National oil company (NOC)

NOCs are shielded from a number of the pressures faced by international oil companies. Governments manage NOCs, so they are less susceptible to public social pressure and less likely to be hindered by legislation. Strategic priorities, levels of performance and compliance largely depend on the whims of the national leadership.

In many Noc parent nations, the right to free speech is not absolute, and government dissent is punishable by law. The only force that can motivate NOCs to take sustainable action is market pressure. Sustainability must be profitable, and the demand for fossil fuels must decrease.

Extreme competition for clean energy assets makes it challenging for small players to achieve sustainability.

Oil and gas firms wish to incorporate renewable energy projects into their portfolios. The competitive market is driving up prices. Smaller operators lack the financial resources necessary to compete with super majors for projects. Consequently, the energy mix of smaller operators is less sustainable, and they will be punished the most by the impending demand transition and regulation.