8 minute read 21 Apr 2023

Five ways oil and gas can lead the race to decarbonization

Authors
Saulius Adomaitis

EY Global Oil & Gas Leader

Guides oil and gas companies through transformation

Sanjeev Gupta

Asia-Pacific Oil & Gas Leader; Asean Resources Market Segment, EY

Energy sector thought leader. Working with clients on transformation, digital journey and navigating uncertainty around changing business models. Loves travel, cricket and tennis. Father of two.

Contributors
8 minute read 21 Apr 2023

The traditional strengths of the oil and gas sector could help fund and fast-track new energy solutions – if companies act now.

In brief

  • While decarbonization is the long-term goal, security of supply is a critical imperative.
  • In Southeast Asia, renewable energy use is growing, but oil and gas still represents a significant portion of all energy consumption.
  • Oil and gas has a significant role to play both in energy delivery today and in enabling the energy transition for tomorrow.

As the global energy complex decarbonizes, is it inevitable that oil and gas companies (which account for over half of CO2 emissions) will gradually disappear? Will they become relics of a bygone era when we were unaware of how the burning of fossil fuels would affect the climate? Will they be less nimble and innovative than their emerging competitors?

Not so fast. 

Beyond the current crisis, in which security of supply has become a top priority, the oil and gas sector can, must and will play a role in solving the climate crisis. Therefore, it is essential that the sector not only survives but also thrives.

The competencies and market reach necessary to bring about a rapid and complete transition to low carbon energy are found everywhere in today’s oil and gas companies. Keeping those companies profitable and harnessing their strengths could serve to hasten clean energy’s arrival.

Capital, capabilities and the confidence to scale clean energy solutions

We’ve seen a remarkable shift in perspectives around the outlook for oil and gas. Talk of the end of oil has been replaced by a recognition of the sector’s importance in the here and now as well as the role it will play as the energy market transforms.  Oil accounts for 36.5% of energy consumption in Southeast Asia.1 Further, major industries remain dependent on oil and gas, with no viable substitutes in the near term.

Energy consumption

36.5%

of Southeast Asia’s energy consumption is currently supplied by oil.

But beyond this, we see a growing acknowledgment that the very ingredients needed to ensure a successful energy transition – plentiful capital, technical expertise and experience in complex operations and markets – are abundant within the oil and gas sector. Instead of falling afoul of the decarbonization agenda, what if oil and gas companies could use their capital and capabilities to lead it?

Woman running in front of pack in marathon

We believe there are five ways oil and gas companies are primed to accelerate the development and commercialization of the renewable technologies that will drive the energy transition.

1. Capital strength

Investment opportunities in Southeast Asia — including renewable power, transmission, biofuels, energy efficiency, hydrogen and electromobility — could amount to over US$6 trillion cumulatively by 2050.2 The region aims for renewable energy to account for 23% of its primary energy supply by 2025, and this would require an investment of US$27 billion every year.3

The oil and gas sector’s deep experience of raising capital, even in the most competitive of markets, as well as its ability to maintain robust balance sheets and consistent returns, means it is well equipped to fund innovative new energy businesses.

Funding Southeast Asia’s energy transition

US$27b

An investment of US$27b is required every year for renewable energy to account for 23% of the region’s primary energy supply by 2025.

2. Market intelligence

Renewable energy markets continue to develop at pace. As technology advances and clean energy options grow, making choices about the best fuel source for each initiative will become more complex. The oil and gas sector has long harnessed market intelligence to direct the right energy to the right place at the right time at the right price.

3. Supply chain excellence

Around the world, renewable energy projects are growing in size and scale. Bringing these projects to fruition will require orchestrating complex ecosystems of suppliers, partners and assets. Oil and gas companies’ deep experience in managing complicated global supply chains, optimizing assets and mastering the logistics of deliveries will be especially valuable in a more complex, connected renewable energy market.

4. Cost optimization through technology

Decarbonization remains a priority for the energy industry, but tough economic conditions, including soaring inflation and higher supply chain costs, make it harder to deliver large-scale clean energy projects on budget. Oil and gas companies have a track record of using technology to reduce costs at scale – digital technologies have improved unconventional oil and gas productivity by a factor of 81 (pdf) over the past decade. This ability to continually apply digitally driven innovation can help ease profitability pressures, which are likely to intensify as competition increases between molecules and electrons, and between fossil and green energy.

Productivity improvement

81x

Digital technologies have improved unconventional oil and gas productivity by a factor of 81 over the past decade.

5. Risk management

Deploying the amount of capital necessary to make a difference for the planet is fraught with the possibility of cost overruns and delays. Oil and gas companies are highly skilled in identifying and mitigating risks inherent in large projects as well as those that come from operating in multiple jurisdictions and in a highly volatile market.

Building readiness for a different energy future

This combination of capital and capabilities creates a resilience that will define the winners in a more uncertain energy future. Resilient companies don’t just weather tough conditions — they continue to innovate despite them. Oil and gas companies have long honed the ability to adapt and flex quickly as markets fluctuate. Now, whatever future path they embark on (including some possible scenarios detailed below), organizations will need to become even more innovative and agile.

Different visions: How oil and gas companies may evolve

  • Core energy: committed to building on their existing business

    IOCs and independents see a gradual transition paced by the speed with which delivery and consumption infrastructure can be replaced. These companies will focus on decarbonizing operations and developing low-carbon alternatives (biofuels and hydrogen for instance) with similar logistics. They’re likely to stay the course, continuing to focus on oil and gas and succeeding through achieving the most efficient operating model with the smallest carbon footprint.

  • Integrated energy: see a rapid end to the hydrocarbon era

    These are oil and gas companies that see a rapid end to the hydrocarbon era, a complete re-engineering of the energy complex and emergence of technologies that bear little resemblance to today’s energy mix. 

    Investments will focus on creating companies that aren’t much like the companies that exist today because these companies will be reshaping for a future that is very different from today. They are reducing hydrocarbon production, instead investing in alternative forms of energy and supporting technologies and infrastructure.

  • National champions: act to reflect the needs of their government

    Government-owned companies in oil- and gas-rich states produce much of the world’s oil.

    These companies will focus on maximizing the value of the resources they’ve been given stewardship of as well as maximizing the revenue they can provide to fund a wide range of government programs. Transition investments will focus on creating jobs and preserving revenue streams. Such companies will continue to produce enough oil to meet state revenue and employment goals but will begin to rebalance portfolios toward low-carbon energy.

    In total, major oil-producing countries in Southeast Asia — Indonesia, Malaysia, Thailand, Vietnam and Brunei — produced approximately 1.96 million barrels of oil a day (about 2% of the world’s daily oil production) in 2021.4

    State-owned oil companies from these oil-producing Southeast Asian countries will continue to focus on their role to achieve long-term national energy security while investing in decarbonization through digitization. These companies will also continue to invest in emission control measures and low-carbon energy to support their countries’ carbon emission reduction targets. Developing oil and gas infrastructure will be key. In addition, Southeast Asian oil and gas companies are partnering with players from other industries — such as alternative fuel, renewable energy and hydrogen — to diversify and expand into new energy businesses.

Male athletes running to the finish line

For most organizations, however, there is still a need to address critical gaps in skills, technology and talent, some of which are legacies of historic underinvestment in the sector. Oil and gas companies that plan to transition into new energy companies will need to consider the capabilities they need to make the move successfully. For example, many will need to improve customer centricity to better understand new customer segments and make smarter decisions around which markets offer the greatest opportunities to redeploy capital and people. Additionally, maintaining profitability amid a transforming energy market will require oil and gas companies to focus on the following priorities.

To transition into new energy businesses, oil and gas companies must consider the capabilities needed for successful transformation, such as improved customer centricity.

Building digital carbon capabilities

The ability to collect, process and report carbon emissions data will be the most important enabler for success in a decarbonizing world. Oil and gas companies will have to operate differently than they do today. Reducing operational emissions is the first step, and we see several oil and gas majors making good progress, with initial efforts to reduce carbon intensity focused on the wellhead and refinery.

Southeast Asian oil companies are working toward reducing their scope 1 and 2 greenhouse gas emissions. For instance, a Malaysian state-owned oil company reported that its scope 1 and 2 greenhouse gas emissions totaled 45.2 million tCO2e in 2021, down 20% from 56.5 million tCO2e in 2017.5

In time though, the ability to generate and leverage real-time, highly granular data will become increasingly important, both to keep pace with evolving regulatory requirements and to meet the higher expectations of investors, customers and other stakeholders. Carbon credits will become the tradable output from decarbonization investments and a significant opportunity for companies with the right skills, technology, culture, data and market awareness.

Digitizing operations

Keeping companies profitable while they transition into new energy businesses will require a sharper focus on costs. Digital technologies offer potential for vast productivity improvements by speeding up processes, cutting downtime, reducing the use of materials and eliminating mistakes. Recently, we’ve seen an operator leverage technology to integrate multiple applications and data sources to reduce well planning time from an average of 12 months to two. The most competitive and successful oil and gas companies will be those that accelerate the digitization trend: adopting new tools and techniques — including the Industrial Internet of Things, analytics, big data and robotic process automation — to transform operations from the wellbore to the back office.

Creating an intelligent enterprise

Oil and gas companies are awash with data that describes how the many parts of the company are operating and performing. But in most organizations, such data is siloed across the company, which makes it helpful to optimize individual departments, but almost impossible to get a single, comprehensible picture of the business. Adopting the systems and skills to create a more connected, agile and intelligent enterprise can unlock the true value of data to guide better decisions around capital allocation, recruitment and incentivization.

Transforming the back office

As companies reshape for a different future, focusing talent and resources on improving core competencies can help guide successful transformation. For most oil and gas companies, these core competencies revolve around extracting the maximum value from the hydrocarbon. Non-core functions, such as tax and finance, cybersecurity, payroll, and compliance, while critical, do not directly improve extraction and production of resources. We see more of the sector’s leading companies moving toward a next-generation back-office experience. This involves working with managed services partners who combine best practices, top talent and leading technology to truly transform the back office, allowing leaders to focus on the core business.

Planning for growth and transition

While the hydrocarbon era will end eventually, no one knows how quickly. Now is the time for oil and gas companies to consider their own strategies to transition when the time comes and grow sustainably in the meantime. This means determining their role in addressing immediate challenges to energy supply security. Oil and gas economics are as favorable as they have been for some time, and capital is abundant. Companies face a trade-off between continuing the core business while prices are good and pursuing new energy opportunities that may offer lower returns now, but the potential to create more value in the longer-term. Some companies will use cash from legacy businesses to fund alternatives, while others will divest those businesses. As companies rebalance, we may see assets in the hands of private companies that are less subject to the pressures that come with raising capital in the public markets.

Right time to seize the opportunity of an evolving sector

The oil and gas sector is at a crossroads. Conflict and volatility have dramatically improved the short-term outlook for incumbents, and prices and returns remain high for legacy businesses. But the imperative to plan for a new future is more urgent than ever. Despite the current crisis, the pace of the energy transition is accelerating. Oil and gas companies are better positioned than many in the energy sector to lead the race to decarbonization, but only if they act now to build the readiness to succeed in a very different future.

  • Show article references#Hide article references

    1. Outlook on ASEAN Energy 2023, ASEAN Centre for Energy, 2023.
    2. “ASEAN Can Cover Two-Thirds of Energy Demand with Renewables,” International Renewable Energy Agency website, irena.org/News/pressreleases/2022/Sep/ASEAN-Can-Cover-Two-Thirds-of-Energy-Demand-with-Renewables, accessed 23 March 2023.
    3. Vakulchuk, Roman, Overland, Indra et al., “ASEAN’s energy transition: how to attract more investment in renewable energy,” Springer, 14 November 2022.
    4. bp Statistical Review of World Energy 2022, BP p.l.c., 2022.
    5. “Sustainability Performance Data,” PETRONAS website, petronas.com/sustainability/sustainability-performance-data, accessed 23 March 2023.

Summary

Recent geopolitical events have created uncertainty in the global energy market, shining a light on the critical role oil and gas has in the global economy. While the role it plays today has come into sharp focus, what may be less obvious is the role it could play in the energy transition. Oil and gas companies have the scale, scope, expertise and experience to lead the race to decarbonization. 

About this article

Authors
Saulius Adomaitis

EY Global Oil & Gas Leader

Guides oil and gas companies through transformation

Sanjeev Gupta

Asia-Pacific Oil & Gas Leader; Asean Resources Market Segment, EY

Energy sector thought leader. Working with clients on transformation, digital journey and navigating uncertainty around changing business models. Loves travel, cricket and tennis. Father of two.

Contributors