The energy transition in 2020: What is the view from the oil and gas industry?

Already in the first few weeks of 2020, the Australian wildfires have vividly reiterated the threat of global warming and the need for the world to transition to lower-carbon energy use. On the policy side, the EU and several countries began the year by setting net-zero carbon targets. Globally, pressure is growing on everyone – and particularly the oil and gas industry – to act now to decarbonize.

But how does this look from inside the industry? This week, DNV GL published its outlook for 2020, based on a survey of more than 1,030 senior oil and gas professionals on their confidence, sentiment and priorities for the year ahead.

Since the 2014 oil price crash, our annual industry research has been dominated by cost-cutting, efficiencies, skills challenges, and balancing investment. But 2020 marks an inflection point, as a now lean and resilient industry places the energy transition centre stage - to rise to the long-term challenges of a lower-carbon energy future.

As it enters the new decade, the industry intends to put its money where its mouth is. Some 71% of senior oil and gas professionals expect to maintain or increase spending on decarbonization this year, a sharp rise from 54% 2019. In doing this, the sector could be reaching critical mass in its contribution to the transition – to provide a secure supply of affordable, decarbonized energy.

Significantly, we found that oil and gas companies are pursuing multiple routes to reducing carbon emissions, including diversifying into renewable energy, decarbonizing oil and gas production, and increasing investment in decarbonized gas such as hydrogen.

Plans to increase investment in renewable energy sources are up from 34% in 2019 to 44% in 2020, and the industry’s intentions to increase investment in the hydrogen economy have more than doubled in a year. 42% of respondents said they would boost spending in this area for 2020, up from 20% for 2019. 

More and more people in our sector are realizing that we cannot sit and wait for the perfect solution to jump to a completely decarbonized energy system. The industry will emit too much carbon in the meantime. We must start working on decarbonizing the oil and gas sector with the technologies we have already – such as carbon capture and storage (CCS) – in order to meet national and international climate goals.

Compared to 2019 (56%), more senior industry professionals (62%) now believe that the oil and gas industry should drive CCS adoption forwards immediately, and not wait for government policies and incentives to stimulate its large-scale uptake. For my view on what it would take for CCS to be adopted at scale, see my earlier post.

It’s particularly striking that the industry’s rallying efforts to invest in the energy transition come at a time when confidence in the industry’s growth has in fact weakened. While two thirds of senior oil and gas professionals are confident of industry growth in 2020, this is down 10 percentage points from the 76% recorded in 2019.

Societal and political pressure to tackle climate change has clearly had a significant bearing on the industry’s decision to boost spending on decarbonization this year, despite the ongoing volatility of traditional oil and gas markets. But there is more to it than that.

Two-thirds (66%) of respondents to our survey said that most of their cost-efficiency initiatives since the 2014 oil price crash have become permanent changes. And nearly half (46%) of respondents to our survey said their companies would still achieve acceptable profits if the oil price were to average less than USD 50 per barrel. This is a large proportion, given that only one of the past 15 years (2016) saw annual average prices under USD 50 a barrel.

The lean profile that the industry has developed is now allowing companies to focus once again on longer-term strategies, rather than short-term firefighting. As Eirik Wærness, Equinor’s Chief Economist said when we interviewed him for our report: “If you look at dividend policies and share buybacks, it shows there's ample cash in the industry. This gives us room to manoeuvre, to look further ahead than when we were in a cash-strapped position.”

Five years ago, the oil and gas industry regarded the energy transition as a transformation on the horizon. Today, it seems, the ability to make good margin on a barrel of oil could be a significant contributor to the speed at which the world moves away from an oil-dominated energy mix. 

Download New Directions, Complex Choices: The outlook for the oil and gas industry in 2020