Infrastructure Energy & MaterialsMay 14, 2021

Reinventing energy companies in the age of decarbonization

The energy and materials industry faces a delicate balancing act: reducing its own carbon footprint while meeting growing energy demand and reinventing itself for a lower carbon future.
Avatar Dan Headrick

A decade ago, it would have been a challenge to find oil-and-gas and mining companies that prioritized decarbonization and included renewable energy in their long-term strategic objectives. Today, however, many of those companies are committing to reducing their carbon footprint.

BP says it wants to reduce its greenhouse gas emissions to zero by 2050. Royal Dutch Shell, France’s Total and Norway’s Equinor are diverting massive amounts of capital into renewable energy. Under pressure from its shareholders, ExxonMobil Corporation in March announced a US$3 billion (€2.5 billion) investment by 2025 in carbon-capture technology, and Vancouver-based Teck Resources, which mines copper, coal and zinc, announced plans to be carbon-neutral by 2050.

“Many oil-and-gas majors are already in a good position to get into offshore wind markets,” said Shalom Divekar, senior research analyst for Energy and Power at MarketsandMarkets Research. “They are already present in that space. In terms of next steps, it’s going to be interesting to see what role they want to play in the larger renewable energy space – acquire wind farms, for example, or build new technologies.”

The shift reflects the industry’s new reality. The accelerating rush to decarbonize risks weakening the industry’s old business models and eliminate its customers. Meanwhile, investors are stepping back just when energy and materials companies most need capital to reinvent themselves.

The trick now? To succeed at a difficult balancing act: serving a world that still depends on them for power, transportation and minerals in a cleaner way, while repositioning themselves for the day when their old business models are no longer welcome in a world destined to run on renewables.

To make the transition, oil and gas companies are “critically important” Eric Toone, technical lead for Breakthrough Energy Ventures, a sustainability-focused investment firm founded by Bill Gates, said in a recent Fortune interview “because those are some of the only people on Earth that understand how you build things at scale.”

Using carbon know-how to decarbonize

The oil-and-gas industry accounts for more than 40% of all human-made greenhouse-gas (GHG) emissions. About 40% of that total comes from the industry’s own operations – for example, flaring excess gas from oil wells and undetected methane leaks from pipelines; the rest comes from the burning of fuel in power plants, factories and transportation.

Reducing those emissions are the single most effective way the industry can reduce its  environmental impact in a meaningful way and offers an opportunity for the industry to demonstrate positive progress on its legacy operations while continuing to build a clean-energy future, as McKinsey & Company outlines in its report “The future is now: How oil and gas companies can decarbonize.”

Modern digital technology, McKinsey found, plays a critical role to improve energy efficiency. For example, the report notes that digitally monitoring for leaks at compression stations in upstream (production) operations, and in mid-stream crude transport could allow operators to repair leaks quickly, minimizing losses. Digital monitoring of pipelines and equipment in refineries could do the same for downstream operations.

Such preventive measures are so effective, McKinsey reports, that one onshore oil-and-gas producer found that about 40% of its emission-preventing activities had a net present value at current oil-and-gas prices.

Exploration never stops

On the innovation front, companies have launched wide-ranging initiatives, from power import and electrification to renewable micro-grids, integrated energy storage, facility monitoring and control, remote operation and digital transformation of design and operations. These efforts reflect the difficulty of the low-carbon transition, a lesson that the entire movement is realizing.

“We see companies focusing on monitoring and control, power generation and transmission and distribution automation. For now, a major threat to transition is lack of investments. That’s the biggest restraining power right now.”

Shalom Divekar
Senior research analyst for Energy and Power, MarketsandMarkets Research

“You can’t reduce carbon emissions simply by doing less,” said Leon Saunders Calvert, head of research and portfolio management at London Stock Exchange Group and leader of Refinitiv’s sustainable investing research business. “We’ve learned a very important lesson, which is what you require is more technology, not less; more capital, not less; and mass mobilization of that capital toward decarbonization outcomes.”

Traditional oil-and-gas companies are responding by doing more and trying more, though the industry’s new shape has yet to reveal itself.  

Oil-and-gas companies are developing new business models and next-generation technologies 10 to 15 years out. They include onshore wind, offshore wind, bladeless turbines, hydrogen, flow batteries, electrolysis technology, biomass and fuel cells. But they face obstacles, analysts say. “We see companies focusing on monitoring and control, power generation and transmission and distribution automation,” Divekar said. “For now, a major threat to transition is lack of investments. That’s the biggest restraining power right now.” 

Nevertheless, experiments with new technologies not only help the industry prepare for tomorrow, but they also address the sustainability challenge laid out by Larry Fink, CEO of BlackRock, one of the world’s largest investment firms, in his 2021 annual letter to the world’s CEOs:

“As the transition accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders – with customers, policymakers, employees and shareholders – by inspiring confidence that they can navigate this global transformation.”

Natural resource companies – from oil-and-gas to mining – seem to have received the message.

Discover how Kairos Power accelerates clean energy development with next-gen nuclear technology

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