The evolving role of oil and gas in the energy transition

• Demand for oil and gas has been significantly disrupted, but it’s starting to recover as economies reopen and people start to move again.

• If Canadian oil and gas companies are to be international suppliers of choice, they have some urgent and important work to do to attract investment.

• Canada’s industry should leverage its leading position in environmental, social and corporate governance (ESG) practices to differentiate itself globally.

Demand

In late 2019, the International Energy Agency’s (IEA’s) global energy demand projections showed global demand for oil and gas continuing to rise. Its projections for if and when demand might peak, however, differed based on the extent and speed of policy changes. Many organizations were working on the assumption that demand for oil and gas would continue to rise in the medium term, largely because of expanding economies in Asia. But it didn’t take long for that view to change as the countries of the world locked down their populations in an effort to slow the spread and control the impact of COVID-19.

These lockdown efforts to curb mobility and social activity had an almost immediate and drastic effect on energy demand. As the IEA has noted, “The Covid-19 pandemic represents the biggest shock to the global energy system in more than seven decades.” In its Global Energy Review 2020, the IEA projects energy demand will fall by 6% in 2020, which is seven times the decline we saw following the 2008 global financial crisis.

There’s no question that demand has been—and will continue to be—affected in the short term. But what we all want to know is how this all might play out in the mid and long term.

As countries have begun lifting restrictions, we’ve started to see energy demand return. But we expect to see some changes in the types of energy being used. And as we head into what various experts anticipate may be a widespread recession, significant parts of the global population may continue to rely on the least expensive fuel that’s most readily available: fossil fuels, with the exception of coal. So in many ways, oil and gas producers might find themselves where they left off—navigating a world pulling into two opposing camps.

Looking ahead, where’s the opportunity? Given the cyclical nature of the industry, we anticipate that within five years we’ll have moved into a period of recovery and growth. By then the current oversupply will likely have been drained. And given the significant curtailment in spending on exploration and development during the intervening years, we’ll likely start to see supply shortages re-emerge.

The ESG advantage

Canada’s industry has the opportunity to leverage its historical industry-leading practices around responsible development to establish practices that will truly set it apart from energy companies worldwide. Even before this crisis, ESG metrics were quickly becoming the new guideposts for investments: investors were looking for stability in addition to solid business plans. And now, given what’s happened in the last few months, we expect investors to show additional interest in organizations that can show they’re prioritizing the health and safety of their employees, communities and supply chains while continuing to focus on longer term climate commitments that were made before the COVID-19 pandemic.

Canadian oil and gas companies are already global leaders on some ESG principles. These include demonstrating high employee health-and-safety standards, a record for empowering and investing in the communities in which they operate, support for reasonable government carbon pricing and a commitment to new technologies to reduce emissions. But the challenge remains around how our industry communicates this story to investors.

It’s not a simple process. As organizations work out the story they want to share with investors, they need to understand the process of defining ESG metrics is dynamic, with rating frameworks and organizations constantly evolving. So it will be crucial to figure out which ESG constructs are of particular interest to investors and then create a made-in-Canada rating system that accurately measures those.

The most clear and present opportunity for Canadian oil and gas companies is to set aside the natural competition that exists between industry players for market share and embrace the table-stakes requirements being introduced as a result of the rise of the ESG movement. Led by the CEOs of our energy industry, we have the unique opportunity to set the path for collective success over the coming decades by embracing the diversification the global energy transition will bring while protecting and enhancing the Canadian economy.