The aim of the decarbonisation transition is not to make the oil and gas industry obsolete, in an effort to achieve a low-carbon economy by 2050, , says leading global professional services company Accenture in Africa strategy and consulting senior manager for energy Yu-Feng McConnachie.
“The end game is not to have an energy system that is entirely free of fossil fuels. A recent Accenture study indicates that fossil fuels will still comprise 50% of the global energy system by 2050. Nonetheless, the ultimate objective for the corporate sector is to decarbonise the whole energy system and oil and gas companies have a key role to play in this regard.”
The transition involves “architecting” the various ecosystems, such as suppliers, customers and governments, to bring them to the fore and to get various industry players to participate in the decarbonisation journey, says McConnachie, adding that oil and gas companies will need to focus on their efficiencies and expanding their portfolios to stay on par and add value to the decarbonisation system.
Accenture foresees four main challenges, owing to decarbonisation, with the first being value and volume decoupling.
“This means that where you have large volumes and you expect there to be value, there isn’t necessarily value to be found. Therefore, oil and gas companies need to look at how to diversify their portfolio - what do they need to invest in to ensure they are still relevant and do have value to add, creating resilience within their businesses.”
The second challenge deals with the possibility that not all the oil and gas projects that are either in development or operating will continue or be profitable.
As the oil price did not perform in early 2020, with brent crude dropping to $19/bl by end-March, owing to the Covid-19 pandemic, many of the long-term projects under way would have become financially unviable, leaving organisations to decide whether to continue or abandon these projects, states McConnachie.
Conversely, it is still vital to consider whether infrastructure put in place 100 years ago is still relevant and of use, it might be abandoned if it cannot be repurposed during the transition Investors are also increasingly focusing on carbon when making investment decisions.
“The next challenge involves talent shortages. If you don’t have the people to be able to execute any form of decarbonisation, you are going to have an issue. A study by Texas Tech University, in the US, revealed that, in the last three years, 60% of people surveyed in Texas were not studying engineering related to the oil and gas industry,” says McConnachie.
She says this could be a result of people believing that oil and gas companies are not doing their part to protect the environment. Therefore, going forward, the industry needs to reinvent itself in the eyes of the talent pool to ensure that people want to work for oil and gas organisations.
“You need talent and the innovation to make the decarbonisation journey successful.”
The last challenge involves carbon pricing. Carbon tax is used to deal with carbon emissions. When you buy a new vehicle, a carbon tax is paid on it. But a study by Accenture shows that the current production of oil increases by almost $6/bl owing to carbon taxes, which is acceptable if this cost is split across an organisation’s assets. However, in a future where oil and gas co-exists with a wider energy system, carbon intensive industries will suffer because even a low tax will impact them negatively.
“High-cost high carbon assets could be stranded, resulting in an asset losing economic value before its anticipated useful life,” explains McConnachie.
In addition, as all energy operators deal with engineering, procurement and construction contractors and oil field and equipment services regularly, they are in the best position to incentivise these service providers to decarbonise, although, it is not their responsibility to do so.
“Investors are increasingly looking at how well organisations are dealing with the environment and what kind of impact they are having. Before they make an investment, there are specific guidelines and policies that they refer to. If organisations are not trying to ensure a greener future, investors are not going to make the investment needed to grow an organisation,” explains McConnachie.
Accenture has identified three archetypes that oil and gas companies could adopt on their decarbonisation journey, with the decarbonisation specialist being the first.
This archetype focuses on cleaning the core to improve the efficiency of an organisation’s existing operations to eventually reduce their emissions and increase their efficiencies as far as possible.
“Cleaning the core not only deals with carbon dioxide but also the impact of methane. The concept of circularity also comes into play and looks at what aspects of an organisation can be reused, recycled or reduced. This is not only in terms of waste but also from an equipment perspective,” states McConnachie.
The highest performing organisations need to become decarbonisation specialists, she advances.
Therefore, as an oil and gas operator, “if you are not one of the top performers, this is probably not the area you want to go into”, says McConnachie, stressing that this option requires operators that know how to operate extremely efficiently.
Notably, as regulations are updated, decarbonisation specialists should be able to stay one step ahead so that they never fall behind and become trapped from a regulatory perspective.
The second archetype is the energy major, which pertains to the organisation that is trying to expand its energy system and extend the frontier by developing technologies that are not presently available.
This option is best suited to integrated oil companies and select national oil companies that have the potential to expand their existing energy systems, notes McConnachie, adding that in future these companies will be switching to an electricity-based energy system by either building the capability internally or acquiring it.
“Oil and gas companies’ existing supply position will help them be competitive, in addition to their present brand and retail presence.”
Another focus area for these companies is biofuels as well as hydrogen storage, infrastructure and distribution. To succeed, energy majors need to ensure that enough capital is invested into their area of focus, whether that be on electricity, alternative fuels or new business services.
The third archetype is low-carbon solutions leader, which provides new energy solutions and services to business.
“This is the most radical of the three archetypes. In this instance, you are asking an organisation to strategically depart from their current business model. They are monetising their assets and using their experience and expertise to build a new energy company, unlike what has been seen before,” suggests McConnachie.
These companies need to contemplate what new solutions and services they will offer, which might be in the space of biofuels, hydrogen or wind, for example. This archetype enables organisations to transform quickly, allowing for a transition into a completely different company without the burden of assets, portfolios or any other constraints.
“This option is not just about money. You need to develop capabilities that will allow your company to emerge as an energy company of the future,” advances McConnachie.
Forming a hybrid of the three archetypes may be tempting, but this is not an avenue Accenture recommends.
“We have seen a couple of the integrated oil companies attempt this, but the feeling is that they will not succeed in their attempts. For each one of these archetypes, quite a bit of investment is required and there are specific capabilities that need to be developed, in addition to establishing a business model. Therefore, with the investment required by all the archetypes, an organisation needs to undertake each whole heartedly,” explains McConnachie.
A Winning Formula
Three steps need to be followed to ensure that companies emerge as winners during their decarbonisation transition.
Firstly, McConnachie emphasises the need to commit towards decarbonisation and ensure that it is the foundation of all decision-making. This is followed by deciding on the path the company will take and safeguarding the organisation’s commitment to this path.
“The third step sounds mundane but is required to get a company started on its journey and involves assessing the factors that are influencing the company and making the right adjustments required to guarantee adherence to the path the company has chosen and its success,” she concludes.