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Negotiating the ongoing energy transition

Dec 29, 2019
3 min read
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Tom Ellacott, Senior Vice President at Wood Mackenzie, looks at how companies should plan for the future

 

If you look at international oil companies (IOCs) and how they are responding to the energy transition, it’s all about making your portfolios resilient, ensuring the economics work at low prices, so companies are being very disciplined when they sanction new projects.

There’s a lot of work going into embracing new ways of thinking, in working to lower the cost base and also unlock new barrels, so we are starting to see a shift away from traditional methods such as exploration, towards looking at your existing portfolio and where the potential is.

Future-proofing existing operations and your legacy business is a big focus. And companies are also re-engineering their portfolios. In upstream they are using a mix of exploration, asset sales and acquisitions to really move their portfolios as low down the cost curve as possible. This is all part of the process of improving portfolio resilience. We are also seeing some movement into other sectors which fit with the energy transition story, like petrochems, retail and renewables.

If you look at what’s happened with wind and solar, the cost has come down to an extent where they are starting to compete with oil and gas. The challenge if you are an oil company is, first of firstly, on the value side where the returns from renewables projects are quite a bit lower than those you would typically get in the upstream sector, especially from development projects.

The industry consensus is still that oil demand will increase, albeit slowly, over the next couple of decades. If you believe that outlook, there are plenty of opportunities in oil and gas. But it is a question of pace, how quickly do you move your portfolios into the new energy sector given all the uncertainty on the horizon?

At the moment, all companies are pushing new energy harder, but it’s still a period where they are making fairly small-scale investments. It’s really about learning how they can unlock value in the longer term and giving them a whole series of options they can develop and so pull the trigger on larger-scale investments when there’s a bit more certainty around about how the sector is going to evolve and shape up.

But the pressure has really ratcheted up over the last two or three years.

In the last year pressure has been intensifying from the investor community and from climate change groups. We don’t see that changing, it’s going to carry on increasing which will be a key factor in driving change across the industry. If your investor base is demanding change that is a very good catalyst for it actually happening.

Everyone is needing to think about the energy transition and what it means for their long-term strategy. There is uncertainty as to how quickly the energy transition is going to happen which could have a huge impact on oil demand growth.

If there is a more rapid transition, you have to ensure that the projects you are investing in now are resilient to lower prices. There is as huge range of uncertainty and one of the key areas is global policy decision making. If that becomes more coordinated it could really help to accelerate the energy transition.

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