Energy transition: Why now is the time for a new narrative

When it comes to Energy Transition, there are people who believe that the energy system can be transformed globally to "zero-carbon" within a decade. What it takes in their view is willpower and desire by the politicians, companies and financial institutions to force this transition, abetted by heavy regulation and mandating where future investments go.

Then there are the realities of the world's energy system.

The general premise today is that the transition to zero carbon energy sources should be accelerated to mitigate the impact of global warming and the associated changes in our climate. But energy transition is not something that suddenly just happens. The global energy system is in a state of continuous transition. Consider two current examples that were not foreseen a decade ago: The growth in shale oil supply in the US and more than tenfold increase in Solar PV deployments over the last decade. Nevertheless, there is a belief that the energy sector and in particular oil and gas companies are resisting the change and that is translating into rising anger on the part of a portion of the public.

In contrast, those who focus in on the realities of today's energy system recognize that any forced and abrupt transition is economically and technologically infeasible and will result in a major toll on countries, companies and consumers, as well as potentially lead to political and social turmoil. This more evolutionary perspective anticipates first a gradual but then accelerating change over next two to three decades with a continued role for fossil-fuels beyond 2050, which will involve capturing and sequestering emitted carbon. This viewpoint also highlights the need to provide access to affordable, reliable and secure energy to billions of people in developing countries who need energy to get out of poverty and improve health.

In the cacophony of voices, the oil and gas industry has been unable and unsuccessful in creating a coherent narrative and find its way into a constructive dialogue. The shifts in policies and public opinion accentuate the urgency of doing so.

Certainly, over the last few years, oil and gas companies have moved forward to engage on climate. In their sustainability statements, they are reporting more environmental, social and governance (ESG) and climate change-related metrics, including greenhouse gas (GHG) emissions. Out of the fifty oil and gas companies included in IHS Markit's company climate reporting dataset, forty-two have published scope 1 and 2 emissions data and about half have reported scope 3 emissions¹. Twenty-four have set emission reduction targets and twenty-seven use an internal carbon price in their decision making.

Many oil and gas companies are now proactively developing and implementing strategies to mitigate emissions from their operations and from their products. According to IHS Markit data, 9 out of 10 companies tracked are investing in renewables and low-carbon projects and assets and adding low-carbon business lines². Several companies have geared up venture arms and are directly investing in "cleantech" startups to accelerate that process. However, there is a wide spectrum of views within companies on the scale and pace of change that is commercially feasible today³. Due to these differences, the industry efforts are fragmented. There is an opportunity for a more coherent narrative about the role oil and gas sector can play and will be playing to reduce GHG emissions, while also assuring the energy supplies that modern economies require.

As is the case with any large global industry, the oil and gas industry speaks with many voices - IOCs and NOCs, US and non-US, independents and large companies, producing national oil companies and marketing national oil companies, upstream and downstream companies, service companies, pipeline companies and more. Each company or sub-group has different priorities and pressures. Not surprisingly, there are different views on key issues, such as:

• The need for a carbon-price, how to phase it in and the impact on various parts of the oil/gas value chain
• Policies on a variety of issues, e.g., regulating methane emissions, low carbon fuel standards, biofuels mandates and more
• The need for standardized reporting of ESG performance and emissions
• Companies' position on how to tackle scope 3 emissions
• Future forecasts and expectations for technological transition, e.g., electric vehicles, future pace of scale-up of wind and solar, feasibility of "electrification of everything"

As with any industry where companies have diverse strategies, portfolios and political contexts in which they operate, one would expect different views. However, lack of a coherent narrative has now become a significant drawback in terms of contributing constructively to the global dialogue and indeed poses major risks.

Given the diversity of the industry and the stakeholders, how would one go about developing such a narrative? What would be the element of a meaningful narrative that focus in on the realities of the global energy system? IHS Markit believes that there are a few basic building blocks that can be the foundation:

1. Develop consistent and transparent metrics and reporting standards for environmental performance for the sector. A recent analysis by IHS Markit indicates that in comparing reported emissions data for ten companies, we found nine different definitions and methodologies⁴.
2. Work proactively with financial sector and regulators to agree on consistent and transparent metrics and methodologies for ESG reporting. Financial regulators are moving full speed on ESG front without much engagement and systematic input from the oil and gas industry. Indeed, the relative absence of the industry is a major concern.
3. Seek an ambitious industry wide target for methane emissions that is agreed by all operators. Lack of such a target could potentially put future development of unconventional gas resources at a significant risk.
4. Come to a consensus on a meaningful price on carbon. In addition, engage proactively to communicate important climate and energy policies in major markets. Good recent examples are the US National Petroleum Council's work on carbon capture use and storage, and on infrastructure.
5. Leverage next generation of employees in the industry to engage with their counterparts outside the industry.
6. Seek to work through the Scope 3 emissions issue.

These are just a few examples - not an exhaustive list.

This question of creating a realistic understanding of the energy transition is something that IHS Markit has been focused on, bringing together groups with different opinions and perspectives to develop creative and sound outcomes. We apply our deep expertise in both energy and financial markets. IHS Markit leverages technology and data science to deliver the insights and data that will help converge thinking so that the tangible progress can be made to a sustainable transition in the global energy system.

Atul Arya is Senior Vice President of Energy at IHS Markit.

Posted 16 April 2020

Footnotes:

1. "Oil and gas company climate indicators highlight consensus on risks, divergence in response", IHS Markit Report, January 2019

2. "IHS Markit Energy and Climate Scenarios company climate reference dataset—Select oil and gas companies", October 2019

3. "Can low-carbon be profitable? Understanding the value proposition of alternative businesses for oil and gas companies", IHS Markit Report, June 2019

4. "Comparison of GHG emissions across oil and gas companies infeasible because of differing methodologies", IHS Markit Report, November 2019.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.