Examining low-carbon strategies in upstream oil and gas

What does a lower carbon energy world mean for upstream oil and gas operators? Chris DeLucia, an expert in our upstream companies and transactions team, joins our Upstream in Perspective podcast to share highlights on how E&P companies are responding and planning for a low-carbon future. Here's an excerpt of the podcast.

Jessica Nelson:

The world appears to be moving toward a lower carbon energy landscape. How has this transition impacted the strategies of the world's oil and gas operators?

Chris DeLucia:

The response to the low carbon question really depends on the type of company we're looking at. Broadly speaking, for those upstream oil and gas companies that have opted to engage in this topic, the response has generally involved things like increased disclosure via annual sustainability reports, participation in industry partnerships (things like IPIECA), and efforts to improve operational best practices, which includes things like reducing venting and flaring.

However, for the independents, low carbon strategies have not really gone beyond those elements, just given that they compete really as pure play oil and gas companies. They don't really have scope for more direct involvement in the low carbon sector. But for the global integrated oil companies, and with them we're really talking about the majors here, for those companies it's really a different story given that they maintain more diversified portfolios beyond just the upstream segment.

As a result for this group of companies, there has been more of a strategic element to how these companies think about the low carbon segment in terms of introducing new businesses into their portfolios. And that's also because this group of companies tends to be more focused on returns as opposed to growth, which means that they need to be more holistic in terms of how they view the energy market.

We've also seen an increased emphasis on natural gas production, particularly outside of the U.S. Now that partly reflects the fact that many of the discoveries made in recent years have been gas-based, and that includes things in areas like the Eastern Mediterranean and East Africa. However, this shift also reflects the emphasis that these companies are placing on lower carbon sources of production within their portfolios.

Jessica Nelson:

So which operators are taking the most aggressive steps to this transition? And, can you explain a little bit about what they've been doing?

Chris DeLucia:

We've seen some considerable differentiation among the global integrated companies in terms of their approach to the energy transition. The European companies within that peer group have been the most aggressive in building up their low carbon portfolios. Although, some of these companies have been more aggressive than others. One way that many of these companies have increased their presence here is through M&A. Total has been the most active on this front, spending nearly five billion on acquisitions within the low carbon segment since 2010. And that includes things like buying a majority stake in solar manufacturer SunPower, acquiring Saft Group, a battery manufacturing company, and Direct Energie, a power generation and distribution company.

Outside of Total, other notable transactions have included BP within the electric vehicle charging and the solar segment. Also, Shell, ENI and Repsol within the low carbon power distribution segment.

Aside from M&A, we've seen companies develop internal capabilities within the low carbon space as well. This includes things like Ecuador within offshore wind, where the company is really looking to leverage its expertise in offshore oil and gas development.

Lastly, these companies are also outlining specific spending targets within the low carbon segment where they are dedicating a growing share of spending. Total recently outlined plans to spend one to two billion per year through the near term on the segment. And that equates to about ten percent of their corporate capex budget during that time.

Repsol is another company that has outlined pretty material spending plans for the sector, with low carbon spending expected to account for nearly one fifth of their near-term capex. But for most of the other European companies, we generally see them spending about three to five percent of their corporate budgets on the low carbon segment through the near term.

We've seen a bit of a different approach from the U.S.-based majors, which are also choosing to engage in the sector but in a different format. So, for one, these companies have opted to remain focused on their traditional area of expertise within the oil and gas space, instead choosing to improve the efficiency of these operations and reduce emissions that way.

In addition, the spending that they are doing in the low carbon space tends to be via more indirect formats. So that includes things like research and development spending and venture capital investments, as opposed to the direct investments in the sector that some of their European peers are making.

Hear challenges facing the upstream oil and gas market and additional insights in the full episode of Upstream in Perspective. Or, learn more about our companies and transactions service.

Posted 25 October 2018

This is an excerpt from Upstream in Perspective and has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.