By: Cristiano Rizzi, Managing Director & Partner at Boston Consulting Group (BCG) and Simon Birkebaek, Partner at Boston Consulting Group (BCG)
As the world looks forward to a post-pandemic future, governments are focusing on developing policy measures centered on saving lives and protecting people’s livelihoods. And given the gravity of this crisis, additional measures will be needed for businesses as well—particularly during the recovery phase.
Globally, central banks and governments have already unveiled an estimated US$11 trillion of stimulus packages to mitigate the economic ramifications as a result of the pandemic. Interestingly, an unpredicted side-effect of the pandemic is a temporary decrease in greenhouse gas emissions. However, as economies pick up the pace again, it is likely that the emission levels may return to pre-pandemic levels. With the stimulus packages, governments have an opportunity to contribute to solving two issues at once by stimulating the economy with measures that also reduce emissions.
A green recovery will enable economic, consumer, and environmental benefits in the Middle East. Countries in the region have developed plans which involve establishing policies and investing in programs to accelerate sustainable development alongside economic growth.
For instance, the UAE Green Agenda 2015-2030 is the overarching framework of actionable Green Economy initiatives, The National Climate Change Plan of the UAE 2017-2050, which is aligned to the UAE Green Agenda. It aims to create innovative solutions that involve the private sector in controlling gas emissions while maintaining economic growth, adapting to climate change, and promoting economic diversification. It targets the generation of 27 per cent of energy from clean sources by 2021, further reinforced by the UAE Energy Plan 2050 that aims for 50 per cent clean sources in the national energy mix and 40 per cent improvement in energy efficiency by 2050.
The Kingdom of Saudi Arabia has also implemented several policies to comprehensively reduce its greenhouse gas emissions. Its green energy investments represent a key pillar of the Saudi leadership’s Vision 2030 strategy, the National Renewable Energy Plan. This is designed to stimulate renewable energy development to deliver long term economic diversification and economic stability by reducing domestic fossil fuel consumption.
The thinking behind these decisions is logical and are good starting points for a sustainable future. Major oil-producing countries have an opportunity to boost the diversification and future-proofing of their economies by investing in low-carbon opportunities, for example, in energy efficiency programs, renewables, and potentially also green hydrogen. There are significant benefits to stimulating the economy by bringing forward the deployment of these initiatives. Green hydrogen, produced with electricity from renewable generation, is an example that has the potential to develop and sustain thousands of high-skilled green jobs in the region.
While these are good starting points, it does, however, pose a challenge for the oil and gas industry, to not only both engage and adapt to changing policy and investment landscape, but also to evolve in ways which go beyond offering support but also contribute to efforts to decarbonise the energy system.
A Pertinent Response
The oil and gas exporting companies of the Middle East are faced with challenging marketing conditions. First, the long-term demand outlook is increasingly uncertain, as the economic crisis caused by COVID-19 and the significant advances and investments in renewables may mean that the world is passing the peak demand for fossil fuels. Second, the green stimulus packages deployed across the globe have the potential to change the demand composition of oil and gas products. For instance, while the EU’s Green deal emphasizes hydrogen, energy efficiency, and low-carbon vehicle support, Asian stimulus packages are heavily focused on electric vehicles (EV) that can reduce the demand for diesel and gasoline. And lastly, these challenges are compounded by the accompanying drop in oil prices.
Thus, in light of governments’ policies in response to COVID-19, energy companies may need to reconsider their assumptions about the pace of energy transitions and how they respond to it. There are three key steps for oil and gas companies to take to tackle the new realities of a post-COVID-19 environment:
1. Carefully consider the potential that energy transitions might increase in pace, as countries revise their economic planning expectations to reflect demand shifts brought about by the pandemic. This may have substantial implications for some companies, impacting strategies, portfolios, and investment decisions.
2. Revisit capital allocation processes in new demand scenarios. For instance, many refining capacity investments assume downstream oil market growth in Asia. Although petrochemicals demand will likely remain strong in this region, energy companies must address the risk of weaker demand for ground fuels due to increased uptake of EVs. Meanwhile, if natural gas usage in power generation is less robust than expected (e.g., due to increased share of renewables), the importance of marketing liquefied natural gas (LNG) directly to industrial and utility customers will rise. However, such a marketing effort represents a more complicated and capital-intensive business model than LNG sellers are accustomed to. As a result, oil and gas companies’ capital allocation plans should identify risks as well as new opportunities.
3. Oil and gas companies need to take a nimble and flexible approach to investment in low-carbon-energy technologies if they are to adapt to the new environment. Increased public sector R&D investments could alter the development pathway of different low-carbon energy technologies. Determining which technologies to provide seed money for will be critical for energy companies navigating a rapidly shifting future.
As oil and gas companies face a more challenging landscape, companies, and investors that participate in power value chains may identify new opportunities. COVID-19 stimulus spending and policy reforms could advance markets for renewables and batteries, and automakers, already anticipating a period of more rapid EV adoption, may find that the market matures even more quickly than they expected.
At the same time, low-carbon opportunities closer to the core business of oil and gas companies could also see increasing growth. Particularly green hydrogen, advanced biofuels, carbon capture, and storage would have the potential for becoming substantial new business opportunities.
The oil and gas industry needs to meet the growing global demand for energy while balancing their response to these uncertainties. However, increasing scrutiny and pressure from investors, regulators, and citizens about their role in climate change will force the industry to redefine their future role and how they will adapt to a lower-carbon economy. Leveraging the capabilities of the industry could bring positive change. Using relevant expertise in technology deployment and supply chain management, the industry can scale up emerging technologies and deploy new business models that can position companies as allies in the crisis rather than adversaries. In doing so, companies can go beyond making the case of oil and gas long term value in a time of rapid energy transition.
This feature first appeared in the November issue of Pipeline Magazine