Through turmoil and transformation, the oil and gas industry keeps its sights on decarbonization
Much of the oil and gas industry appears to be prioritizing decarbonization above everything else this year, with a record two thirds of senior oil and gas professionals reporting that their organization is actively adapting to a less carbon-intensive energy mix. This is according to Turmoil and Transformation, DNV GL’s latest research assessing the oil and gas industry’s sentiment, confidence, and priorities for the year ahead.
When asked whether their organization was actively adapting to a less carbon-intensive energy mix, respondents from Europe and Asia Pacific were much more likely to agree
In one way, this isn’t so surprising. Pressure has been mounting on the sector to address the climate change crisis, and this is coming from all sides: from society and governments, from investors, and also from people within the industry. However, with a pandemic and oil market crash in 2020, leading to a significant fall in confidence for industry growth and to reinvigorated cost-cutting, an increased focus and commitment to decarbonization was far from certain.
The immediate effects of the pandemic were a 13% drop in oil demand and an 8% fall in energy-related emissions in 2020. This is according to DNV GL’s Energy Transition Outlook, an independent forecast of the world’s energy system to mid-century. The view from the oil and gas industry suggests the events of the past 12 months could also lead to a reshaping of the sector. This outlook rests on whether this downturn is fundamentally different from those of the past.
Is this market downturn different?
The oil and gas industry is moving through its third major downturn in 12 years. During previous downturns, the conventional wisdom held that price crashes are part of the normal cycle of oil and gas markets. Without revolution or reinvention, harsh droughts gave way to rich harvests.
During the last downturn from 2014, the industry cut costs and waited for oil demand to rise, then renewed investment in oil and gas. This time, signs are that the industry has instead mobilized to forge its own future as it recovers from deep market turmoil. The sector may invest to transform rather than cut its way out of the present crisis.
Six in ten industry professionals expect their organization to maintain or increase CAPEX in the year ahead – down 10 percentage points from last year – but much higher than the level recorded following the last downturn. However, most telling is where this investment is heading.
Turmoil and Transformation finds that much of the industry is doubling down on transformative green investments this year. Roughly half the industry plans to increase investment in renewables and in green or decarbonized gas in 2021. In contrast, just a fifth expect to increase investment in oil projects. Natural gas remains steady, with a little over one in three expecting their organization to increase investment in the year ahead.
When asked where their organization will place greater priority in the next five years, more respondents pointed to renewables than decarbonizing fossil fuels/operations
The stronger investment outlook for gas compared to oil goes beyond upticks in demand: there is also transformation at work. Gas will increasingly be traded across the world’s oceans in the form of LNG, driving a surge in CAPEX, which DNV GL expects to peak at around USD 250bn for both 2024 and 2025. The result? LNG may become – or already be – the fuel driving the most capital-intensive projects in the industry, taking the place of oil.
Shifts in capital are reshaping the industry
The idea that things are not going back to the way they were before is a thread running throughout our outlook for the industry. A significant difference is the shift in capital away from fossil fuels. Investors are reassessing the risks of financing oil and gas projects, and governments are pouring billions into green recovery strategies. The financial markets – through the effects of the Covid-19 pandemic – have seen what peak oil demand could look like, and are increasingly factoring in changing sentiment in society towards a decarbonized future.
One of the features of the oil and gas industry’s response to COVID-19 was the tens of billions of dollars of book value that evaporated in asset write-downs. Much of this related to projects with high cost – expensive in operations, emissions, or both. Our Energy Transition Outlook 2020 forecasts an increasing pivot away from oil and towards gas. We predict that natural gas will grow its share of primary energy supply from 26% in 2018 to 29% in 2050. Over the same period, we expect oil’s share to fall from 29% to 16%.
Shifting priorities for investment are also raising expectations for the industry to reshape this year, with increased consolidation and more demergers, divestments, and spin-offs. Companies are starting to take bets on their roles in the energy transition, as they respond to mounting pressure to decarbonize.
Net-zero and the growing urgency to decarbonize
Multiple energy and decarbonization transformations will dominate the industry agenda in 2021. During 2018 and 2019 there was renewed momentum building around policies and technologies to support decarbonization of fossil fuels, renewable energy, energy storage and energy efficiency.
Without the turmoil in 2020, it may still have been a year when that momentum increased. However, the pandemic appears to have – directly and/or indirectly – turbo-charged the level of interest and intent in these areas.
Net-zero climate policies began to proliferate in 2020, from Europe to China, and onto the table in the US. These policies are accelerating the realization that the energy transition must go beyond energy efficiency and rapid growth in renewables. Fossil fuels will still be needed to supply half of the world’s energy in 2050, according to DNV GL’s Energy Transition Outlook, with natural gas the world’s largest energy source from the mid-2020s.
Decarbonization has moved from something on the horizon to an immediate priority, and this is already changing the direction of the oil and gas industry. Interestingly, our research finds that expanding activity in the renewables market is a significantly bigger priority for organizations in the oil and gas industry than decarbonizing fossil fuels and operations.
Capital, costs, returns – financial factors are the primary barriers to both investing in renewables and to decarbonizing fossil fuels and operations. However, the drivers are different. Oil and gas companies are investing in renewables because they have shifted their long-term strategy and see current business opportunities. Meanwhile, climate targets, government policy and regulations drive companies to decarbonize fossil fuels and operations.
Transitioning faster to a deeply decarbonized energy system
Our forecasts show that world emissions will remain stubbornly high until the mid-2030s and that deep decarbonization of the world’s energy system is still 15 years away.
The technologies needed to accelerate the energy transition are available today, but they need to scale, and sooner. Two thirds of senior oil and gas professionals believe hydrogen will be a significant part of the energy mix by 2030, and a third say their organization is actively entering the hydrogen market. On carbon capture and storage (CCS), almost seven in ten say the technology will be a significant commercial opportunity for the oil and gas industry by 2030.
However, these expectations from the industry go beyond our latest forecasts for the world’s energy system. We see that hydrogen and CCS will be a catalyst for deep decarbonization, removing carbon from fossil fuels – before or after combustion – to reach hard-to-abate sectors, but based on the current outlook we don’t expect these technologies to scale until after 2035, and to only really get going in the 2040s.
Stakeholders are pushing hard to advance this timeline, recognizing that significant progress will need to be made this decade to reach the targets of the Paris Agreement. Public energy policies are key: they don’t just set out the path for the world and the oil and gas industry to decarbonize, but also decide how quickly it heads down that path.
The quicker that government incentivizes industry to adopt technology, such through a competitive carbon price, the quicker the industry takes the technology down the cost-learning curve for it to become independently financially viable.
Forming partnerships between governments and industry will be crucial, working together to make hydrogen and CCS safe, effective, and commercially viable will give the oil and gas industry the certainty it needs to manage new risks and accelerate its transformation towards a low-carbon future.
Turmoil and Transformation is an industry benchmark study by DNV GL on the outlook for the oil and gas industry in 2021. The research assesses industry sentiment, confidence, and priorities for the year ahead, and provides expert analysis of the key challenges and opportunities facing the sector. It is based on a global survey of more than 1,000 senior industry professionals and executives, along with in-depth interviews with a range of experts, business leaders, and analysts.
DNV GL’s Energy Transition Outlook 2020, provides an independent forecast of developments in the world energy mix to 2050. In a dedicated oil and gas report, DNV GL presents the outlook for decarbonizing the oil and gas industry.
Brice Le Gallo
Regional Director, Asia Pacific, Energy Systems