The oil and gas companies are witnessing an increase in social and environmental pressure to transition to renewable energy, primarily on the back of rising GHG emissions. This said, the road to transition is far from simple to navigate –there are several associated risks facing different parts of the industry that require a range of responses. Most challenges revolve around the following concerns – the rising demand from a growing population, some of whom remain without access to energy till date. Second is the growing need for energy to fuel the expanding global economy. And third, the need to reduce emissions related to energy in line with the global climate targets set by the Paris Agreement, which mandates to hold the rise in global temperatures to “well below 2°C … and pursuing efforts to limit it to 1.5°C” in order to meet the stated objectives of achieving universal energy access and cleaner air.
In the light of this, it can safely be said that no oil and gas company will remain unaffected by the need to transition to clean or renewable energy. However, the road to transition is far from smooth. This is because shifting towards renewable energy in order to meet net-zero targets requires a complete transition from fossil based fuel to renewables such as solar energy or hydrogen power.
This is easier said than done. Discussed below are just two of the challenges that the oil and gas companies are facing while navigating their energy transition journey.
Balancing act: One of the biggest challenges facing the oil and gas industry in their energy transition journey is the need to balance short term returns with the long-term license they need to operate. With rising environmental concerns and awareness, consumers today are demanding energy services and, at the same time, reduction in emissions. While the companies have been efficient in delivering the fuel that is primarily igniting growth, the question is now to walk the tight rope, meeting increased demand with reduced emissions. As a result, the traditional operating models are under pressure, requiring oil and gas companies to diversify into renewable energy. Climate change is a reality and the world is already witnessing its impact. The solution to this pressing need to address climate change lies to a large extent in transitioning to lower-carbon energy systems which, in turn, require fundamental shift in how renewable energy is produced and used across the globe.
The evolving business environment: Besides, oil and gas companies, focussed on fossil-based energy need to compete in an environment of increasing compliance and regulations. The stringent carbon-reduction targets set by the Paris Agreement and defined in the sustainable development goals are having a great impact on investment decisions regarding the uncertainties associated with activities such ashydrogen production and development, electric-vehicle (EV) chargingand offshore generation, among others. As a result, operating models for new and legacy models are undergoing change, requiring oil and gas companies to constantly evolve their business models in tune with the evolving environment.
The future of renewable energy
McKinsey’s Global Energy Perspective Report 2022 finds that while fossil fuels such as oil and natural gas will continue to enjoy a large share of the energy mix even by 2050,the trend towards a gradual and significant shift towards renewable energy will continue to grow. As countries worldwide register their commitment to the Paris Agreement, oil and gas companies, both domestic and international, can play a significant role in transitioning world economies to renewable energy. This is primarily because of the global scale of their operations, their large balance sheets and cash positions, the risk appetite of their investors, and the long-term relationships they enjoy with their energy stakeholders and customers. However, transitioning to green energy would require oil and gas companies to develop customer-centric models, improve their risk-exposure and energy management practices, diversify their energy portfolios and pursue new capabilities.
Some of the oil and gas companies have diversified into the power sector, investing in renewables generation by solar and wind project development,and supporting solar-component manufacturing.Several private international oil companies and state-owned national oil companies worldwide have shown their commitment to investing in energy efficiency and renewable-energy solutions. While the success of these investments has been mixed there is no denying that with growing customer demand for renewable energy and the regulatory incentives for decarbonizing, capital markets are giving greater priority to companies that are redefining their business operations and models towards renewables. Powered by our unique capabilities relating to upstream oil and gas projects, GET Global Group is diversifying into solar energy helping its clients transition to renewables in tune with the needs of the society, environment and the planet.
