The oil and gas industry must walk a very fine line, balancing fiscal discipline and progress on ESG issues, while meeting growing demand and shareholder expectations on the heels of the COVID-19 pandemic as commodity prices increases. No matter the ESG strategy that companies choose to take, access to capital will be a critical factor in oil and gas companies’ future success.
Capital providers are increasingly aware of sustainability risk. They are calculating their exposure and analyzing their clients’ emissions both on an absolute and intensity basis to understand how that rolls into an aggregated view from a portfolio perspective. They are also aware of the capital investments needed to truly fund the energy transition, but many are struggling to determine the realistic measure of funding required to meet mid-century and interim emission targets. Balancing the need for that capital with the realistic expectations for decarbonization outcomes will set the financial and regulatory context for the coming decade.
Further, some investors are concerned that a rush to low-carbon technology will cause overvaluation. As a result, capital access for those organizations that actually need to make this transition will be delayed and bumpy.
Amid less third-party investment, capital discipline and operational excellence will remain a high priority for all oil and gas companies. Profitability in legacy businesses will need to fund energy transition investments and keep returns at the corporate level competitive while alternative energy projects find their footing. Digital transformation will lead the way, unlocking efficiencies, cutting costs and enabling new business models. With better data analysis, companies will make better M&A decisions and optimize portfolio risk and returns.