OPINION: Oil and gas companies are starting to convince their critics that they are serious about energy transition.
Several European majors have begun investing heavily in renewables and when BP last week fleshed out plans that include a 40% cut in oil and gas production, the customary chorus of complaints was quieter than usual.
Investors, on the other hand, were being asked to assume that the energy transition will occur at a brisk pace consistent with two of the three scenarios adopted in BP’s 2020 Energy Outlook.
BP’s business plan is intended to prepare the company for a wider range of circumstances, including a third scenario that would see the world consuming close to 100 million barrels per day of oil well into the 2040s.
A decision to abandon the decades-long quest for hydrocarbons could deal a body blow to any oil company if the pace and depth of the transition has been seriously overestimated.
In fact, assuming a benign transition, there are no signs that the oil and gas industry is about to disappear.
BP’s own three scenarios estimate that between $10 trillion and $30 trillion will have to be invested by the oil and gas industry to meet future demand.
Oil companies are already retrenching towards their best assets and will no doubt rise to the task of harnessing technological advancements to harvest higher returns from fewer oil and gas assets.
Stranded assets risk drives political will
Oil-producing regions will face a similar choice and, for some, there is a whiff of the last-chance saloon.
Perhaps this explains why Uganda and Tanzania recently put four years of wrangling behind them to back a bi-national heavy oil pipeline that will provide Total and China National Offshore Oil Corporation with an export route from the Tilenga and Kingfisher fields.
A gas sector reform making its way through Brazil's Congress offers the potential to create an investment boom in an under-developed market with scope for enormous growth across a broad value chain.
The tensions generated by elections in Guyana and Suriname relate in no small measure to the high-quality oil discoveries emerging in a region that has suddenly found itself attracting attention from Washington and Beijing.
Gas is key as transition fuel
BP’s latest Energy Outlook sees a growing demand for gas in the earlier phase of transition, due in particular to Asian efforts to replace coal as the primary source of energy.
The supermajor's own liquefied natural gas volumes are seen growing from 15 million tonnes per annum to 25 million tpa by 2025, and to more than 30 million tpa by 2030.
Shell is hatching its own strategy overhaul for energy transition yet it is still chasing oil and gas prospects, as evidenced by its recent move to renew drilling off Alaska.
A shift towards “deglobalisation" could rekindle demand for domestically produced fossil fuels — including, for example, coal in China and India.
In fact, hydrocarbons remain stubbornly present in most energy transition scenarios, partly because the growth in wind and solar energy peaks and tails due to the intermittent nature of supply.
Gas fits the bill as a reliable anchor, with scope for dramatically reducing carbon emissions by using gas to produce "blue hydrogen" and capturing the carbon.
Carbon prices will also be a key factor in developing this mature phase of energy transition. How these issues play out will depend on the future choices of consumers and governments.
Taken in this context, BP, Equinor, Eni, Repsol and others deserve some credit for hatching investment plans that reflect a more optimistic vision of mankind’s capacity to clean up its act.
(This is an Upstream opinion article.)