The evolving role of oil and gas in the energy transition

In the first part of our three-part article series, we start our conversation about the role of Canadian oil and gas in the global energy transition.

Despite recent events, the role of oil and gas globally continues to change—and the industry will need to transform as it prepares for the world of tomorrow.

At a glance

  • 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.

Before we collectively began to experience the effects of what would become known as the COVID-19 pandemic, there were clear sides being taken in heated debates about the future of oil and gas in the world’s energy mix.

Society was pulling into two opposing camps. One was focused on keeping carbon-based sources of energy in the ground, to be replaced by a massive, global build-out of renewable energy projects. And the other was aligned behind a view that changes in consumer behaviour and demands would change how oil and gas are used, but demand for fossil fuels would be sustained, given the rate of population growth and continued demand for energy security.

While these two positions continue to exist, we’ve seen these debates recede from view as the energy landscape has undergone unprecedented changes, and companies are now focused on what daily activities must look like in today’s low-growth world. But the world is still on course for an energy transition—and now is the time for organizations to position themselves to take advantage of some of the opportunities we expect to see as we move out of the bottom of the cycle.

The world is still on course for an energy transition—and now is the time for organizations to position themselves to take advantage of some of the opportunities we expect to see as we move out of the bottom of the cycle.

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.

Hand pumping gas in car

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.

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.

Supply

It’s clear: even with the recent changes, the world will still need oil and gas—at least for the foreseeable future. So who will supply it?

If Canadian oil and gas companies are to be international suppliers of choice in today’s changing market, then hard work is needed to attract the significant amounts of investment they’ll need in the coming years.

In Canada, even in our recently politically charged environment—which, in the last year, has seen pipeline protests and provincial push-back against a national carbon-pricing plan—there’s some consensus the country must build more infrastructure to meet domestic needs and to provide an export platform to support the recovery and growth of the Canadian economy.

If Canadian oil and gas companies are to be international suppliers of choice in today’s changing market, then hard work is needed to attract the significant amounts of investment they’ll need in the coming years. Canadian companies will continue to make strategic decisions around how to be a responsible steward of assets and how to scale their business to operate effectively in our current low-cycle environment. And to differentiate themselves from global competitors, they’ll have to continue to focus on important differentiators aligned with environmental, social and corporate governance (ESG) measures.

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.

The bottom line

The latest transformation of the energy industry has already begun, driven by concerns about climate change and global realization of the need to drastically reduce carbon emissions while still moving millions of people every year out of energy poverty, as energy demand from all forms is expected to rise.

In response to these concerns and uncertainty around long-term impacts of COVID-19, it’s imperative for businesses to move proactively, taking the lead on ESG principles and preparing as much as possible to emerge as leaders in the energy world of the future.

Explore our Energy Visions series

Finding opportunity for Canada in the global energy transition

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New world. New skills: Preparing your workforce for the energy transition

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Energy Visions 2020: What’s ahead for Canada’s oil and gas industry

Read more

Contact us

Adam Crutchfield

Adam Crutchfield

Partner, National Energy and Alberta Consulting Leader, PwC Canada

Tel: +1 403 509 7397

Jennifer Melnyk

Jennifer Melnyk

Partner, PwC Canada

Tel: 403-509-7324

Jason Bergeron

Jason Bergeron

Partner, Technology Advisory, Digital Energy Lead, PwC Canada

Tel: +1 403 509 7470

Clinton Roberts

Clinton Roberts

Partner, Alberta Deals Leader, PwC Canada

Tel: +1 403 509 7307

Reynold Tetzlaff

Reynold Tetzlaff

Alberta Region Managing Partner, PwC Canada

Tel: +1 403 509 7520

Eugene Quo

Eugene Quo

Partner, PwC Canada

Tel: +1 403 509 6379

Brendan Hobal

Brendan Hobal

Partner, PwC Canada

Tel: +1 780 441 6836

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