Net-zero future: How the oil and gas sector is evolving

O&G majors are generally more ambitious in their renewable energy policies but all are falling short of limiting global average temperatures

Despite the big strides made in terms of net-zero pledges in the oil and gas (O&G) sector, all fall short of limiting the adverse impact of climate change to 2 degrees Celsius, according to a report.

In Energy Transition: The evolving role of oil and gas companies in a net-zero future, written by law firm CMS and Capital Economics, 10 out of the 15 oil majors had announced net-zero emissions commitments by the end of 2020, but only five are on track with their pledges and all are not limiting their climate change impact to meet the 2 degree Celsius global warming limit.

The report said: “Overall, the European O&G majors are generally more ambitious thanks to a combination of comprehensive energy policies outlined by their own governments, fewer natural endowments of oil and natural gas, and greater concern by European publics about the impact of climate change. But in terms of stretch strategies, no major fossil fuel energy company has aligned its emissions pathway with limiting the global average temperature increase to 2 degrees C.

“Eni, Royal Dutch Shell and Total come close to reaching that target, but in aggregate the groups’ current pledges leave the world on target for a 3.2C rise.”

Looking at the transition strategies adopted by the majors, the analysis said strategies focused on reducing the footprint of their own operations, looking into nature-based solutions, digitalisation, ESG considerations and diversifying the business portfolio.

Some other routes to decarbonisation could include M&A, particularly within the clean energy market, and venture capital-type investments, which would allow participation in new start-ups focused on renewables. This was demonstrated by Petronas, which invested in a solar energy company.

Energy investment

The report also noted a “striking” jump in investment into the energy transition – 3.6% of capex in 2020 compared with 2.9% in 2019. This, it said, means a “solid increase” across the sample of 15 companies as a whole of 34%.

Furthermore, capex investment was “hit hard” by the pandemic but renewable power was least affected.

“It is very clear that most O&G majors are moving in the same direction, investing more in renewables and planning to reduce emissions over the next decade,” the report said.

It analysed the outlook for investment under two scenarios; 1) existing policies continues and the level of investment in renewables remains constant, and 2) there is a rapid energy transition and the current levels of investment gradually increase over time.

Under scenario 1, demand for renewable energy increases by 1.5% a year, and O&G majors’ investment in renewables stays at 2.7% of global investment in renewables up to 2030.

However, under scenario 2 demand for renewable energy increases by 5% a year, and the O&G majors’ investment in renewables rises to 5.2% of the global total in 2030. This, the report forecast, means the increase in investment jumps threefold over the next decade to reach $28bn a year by 2030.

Fund interest

CMS and Capital Economics also flagged the higher inflows into ESG funds and said there is “scope here for companies to gain an advantage over competitors” as several O&G companies have “good” ESG scores led by Ryal Dutch Shell with 87.9, while Repsol, BP, Total and Eni also measure well.

“Of the three elements in ESG, the most important for the oil majors is the “E” – environmental issues,” said CMS’s associate in the O&G team Norman Wisely. “Companies are increasingly analysed according to their compliance with ESG concerns, and to some extent they compete with each other on those criteria,” added CMS’s Charlie Denham, also an associate in the O&G team.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...