Oil and gas players face pressure on their traditional business models. Sustainable power value chains provide an opportunity to diversify and play a vital role in the industry's transition.
Humanity is already coping with the repercussions of climate change and taking action across all sectors of the economy. As part of these efforts, the transition to a lower-carbon energy system necessitates urgent and fundamental changes in the production and consumption of energy worldwide. Such changes necessitate smart responses from enterprises.
Oil and gas companies, whose fossil-based products have been integral to the energy supply landscape for decades, are no exception. They must navigate an environment where increasingly stringent carbon-reduction targets influence investment decisions and where and how to support activities like offshore generation, electric vehicle (EV) charging, and hydrogen production and development are highly uncertain. As a result, operating models for new and established businesses are rapidly evolving.
According to McKinsey's Global Energy Perspective 2022, fossil fuels such as oil and natural gas will persist to account for a significant portion of the energy mix in 2050, partly due to their affordability and supply security combination.
The energy transition provides a significant opportunity for oil and gas companies. This is due to their global scope, investors' risk tolerance, large balance sheets and cash reserves, and longstanding relationships with energy customers and stakeholders.
A global shift in energy production and consumption
As the world transitions to net-zero emissions, replacing fossil-based electricity and heat with renewable energy and hydrogen power is necessary while balancing the demand for affordable energy. Projections for 2030 and 2050 illustrate how this shift could also advance the electrification of industry, transportation, and construction and introduce new sustainable fuel and hydrogen for industrial processes and transport.
It is common for oil and gas companies to enter the power industry. Several decades ago, private international oil companies (IOCs) and state-owned national oil companies (NOCs) began investing in cleaner energies. In the early 1980s, the first significant oil firm invested in renewable energy generation by funding the manufacturing of solar components and developing solar and wind projects. In the 2000s, another large oil firm developed a renewables and energy solutions division and invested over $5 billion in various business models, including renewables generation, power retail, distributed generation, energy services, and electric vehicle charging.
One of the world's largest NOCs recently declared its goal of becoming carbon neutral by 2050 and make substantial investments in renewable energy. Others have pledged billions of dollars over the next few years to create a renewable-energy business and launch a $500 million fund to invest in energy efficiency and solutions.
The performance of these investments has varied. Still, there are indications that the momentum will remain the same as customer demand for cleaner energy increases and governmental incentives to decarbonize rise. The capital markets place a more excellent value on enterprises that are fundamentally connected with the energy transition across sectors, such as makers of liquid fuels, power, and equipment. In contrast, the valuations of the big oil and gas corporations with the most significant investments in low-carbon markets have yet to increase significantly.
Numerous oil and gas firms are well-positioned to become industry leaders during the energy transition. This is not only due to their global scale, the risk tolerance of their investors, their large balance sheet and cash positions, and their longstanding relationships with energy customers and stakeholders, but also their unique capabilities in offshore projects and hydrogen and hydrogen sustainable-fuel production and transportation.
In these four sectors of the energy revolution, oil and gas companies may provide distinctive value propositions.
Development of projects abroad Oil and gas companies with substantial experience in large-scale projects can plan and construct integrated projects that include renewable energy generation, hydrogen production, and heat creation. In addition, some project bidders include heat and hydrogen investments in their proposals.
Production and transportation of Hydrogen: Oil and gas firms have historically utilized hydrogen production in refining and chemical processes. In addition, current skills in gas storage and transportation apply to hydrogen generation and transport due to their chemical similarities; both hydrogen and natural gas are combustible gases that must be stored under pressure and maintained with care.
Charging EVs: Retailers, refiners, and producers can leverage their brands, customer relationships, real estate, and fuel stations near roads and highways to provide fast-charging services for EVs.
Decarbonization approaches: Under pressure to decarbonize, oil and gas corporations have developed technical solutions and know-how applicable to other industries. Oil and gas firms can leverage these to provide decarbonization solutions, such as renewable energy generation, energy retail, batteries, and carbon collection, utilization, and storage (CCUS). In addition, because the industry now relies on fossil fuels and has established links with its suppliers, its representatives should be present during the creation of the transition road.
