Five ways GCC energy companies can maximize profitability and ensure sustainability

Meaningful sustainability strategies are essential as global investors pay more attention to emissions.

In brief

• GCC energy groups have not yet faced the same compulsion to cut their emissions as the listed majors in Europe and North America, but that doesn’t mean they are immune to the trend.
• They will have to reframe their business models to reduce carbon risk. That includes pivoting toward renewables and investing in carbon capture and storage (CCS).
• Energy companies must overhaul how they collect and disclose emissions data to gain access to finance and maintain export competitiveness.
• Strong sustainability agendas can underpin outward-facing campaigns to retain a social license.

Oil and gas majors are under growing scrutiny from investors to reduce planet-warming carbon emissions. They want energy giants to clean up their operations and improve climate-related disclosures, as they believe it can reduce risk and boost returns in the future.

National oil companies (NOCs) in the GCC have not yet come under the same pressure as listed groups in Europe and North America.1 However, they are not immune to those global trends. Environmental, social and governance (ESG) strategies, and prioritizing carbon reduction, will be decisive to their future viability, if they are to secure access to finance and foreign export markets. How can energy companies in the region boost sustainability, while unlocking value for shareholders?

1) Integrate sustainability commitments into core business strategy

Energy companies will have to show tangible commitments to sustainability as investors move away from polluting assets. Whereas firms in other sectors might address climate risk by decarbonizing transport fleets, or finding cleaner sources of electricity, hydrocarbon giants face a more fundamental transition. To prove that they support the low-carbon economy, and are resilient to the effects of climate change, they must integrate sustainability into their core businesses.

GCC energy groups are beginning to pivot toward renewables. There was a 69% compound annual growth rate in installed renewables capacity in the region between 2015 and 2020, as costs fell and technology advanced—albeit from a low base.2 CCS is another important aspect of their climate strategy. Companies investing in CCS may find an opportunity to use the technology across other energy-intensive sectors such as heavy industry and manufacturing.3

2) Address the data dilemma: provide thorough, credible reporting

Though GCC energy companies are setting ambitious targets for carbon neutrality, they must still turn promises into action. That requires a better understanding of their carbon footprint. Most rely on basic systems of accounting established five or more years ago. Yet pressure from investors, and new regulatory measures including the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) are forcing disclosures on a new level of magnitude.

As demands for accountability grow, GCC energy groups will have to declare and certify emissions for individual products, throughout their value chains. This will require them to invest in far more sophisticated data systems than are now in place. They will have to work out how to capture that data, then analyze it with more advanced analytics and artificial intelligence (AI) techniques, to understand how it affects their value chain and their product portfolio.

3) Develop industry-wide standards

Global progress on emissions reduction is difficult to measure because disclosures are often inconsistent, with groups relying on different metrics and baselines to track their cuts. Common and consistent reporting is urgently needed, so that like-for-like performances can be compared. GCC energy giants could work together, and with independent reporting groups, to set disclosure standards for the industry. A clearer framework for measuring emissions across the value chain–upstream, midstream and downstream would reassure investors and shore up access to foreign export markets.

4) Lead the decarbonization agenda

Given the pivotal role of oil and gas in GCC economies and the dominance of their NOCs, there is an opportunity for energy giants to spearhead the decarbonization agenda in partnership with governments. GCC energy groups should also look to future-proof their operations by preempting market changes.

This opportunity includes working with suppliers to address their emissions. Some in the supply chain and distribution network may lack the knowledge to reduce emissions, this can be overcome by providing education and technical support. Setting decarbonization procurement standards for suppliers is a direct way to upgrade a company’s decarbonization profile.

Companies with retail operations should consider how to shore up revenue as electric vehicles (EVs) replace gas-powered cars, that might include installing charging stations, and establishing joint ventures (JVs) with car manufacturers, to encourage people to buy EVs. By spurring shifts in consumer behavior, energy groups stand to benefit from those changes, rather than being left behind.

5) Own the narrative: build outward-looking campaigns

There are reputational as well as commercial risks in failing to decarbonize, so GCC energy companies should prioritize external campaigns to sustain their social license. Some NOCs are already taking steps to establish themselves as national champions, by driving the ESG agenda forward. Reporting more openly on their sustainability credentials, and taking action to cut emissions, will help groups weather the impact of the clean energy transition.

Tracking and reporting on carbon emissions is going to become a social license: investors and individual citizens are going to look to it to see how companies are performing. Profitability, investment and the social contract are coming together for all organizations in the energy marketplace.