June 25, 2021
That’s the top question our oil and gas clients ask us.
Pressure for oil and gas companies to address climate change has ratcheted up on numerous fronts (e.g., investors, lenders, customers, employers and their own employees) for some time now. On top of this, the recently released International Energy Agency (IEA) Roadmap to Net Zero by 2050, which outlines ambitious scenarios to achieve greenhouse gas emissions (GHG) reductions, is likely to further intensify corporate conversations among these stakeholders around climate risk and the investment needed to capture opportunities in a low-carbon economy. In the United States, electricity and transportation alone accounted for over half of GHG emissions in 2019, according to the Environmental Protection Agency. A key recommendation of the report includes achieving close to 90% of electricity generation by 2050 from renewable sources, largely wind and solar (but also nuclear). US renewable sources, including wind and solar, represented about 8% of US energy supply in 2020. It also recommends ramping up decarbonization investment to $5 trillion a year by 2030. The IEA, however, acknowledges that its scenario relies heavily (in later years) on achieving reductions from technologies that are still in prototype or not yet capable of delivering at scale.
The IEA scenario outlines what industries and governments need to do to achieve net zero in three decades. But the resounding question is how? To capture value through ESG (environmental, social and governance), it’s important for oil and gas companies to move beyond theory and forge tangible, practical and doable plans that they can execute. Success hinges on embedding ESG principles into strategy and operations to prepare for the future—whatever that may usher in.
To help oil and gas companies gain a clear understanding of the sources and intensity of their GHG emissions, PwC UK and Microsoft recently released a report as part of the new Transform to Net Zero Initiative. Regardless of the level of your organization’s ambition, all approaches to GHG reduction begin with the following three initial building blocks:
1. Establish a baseline (and reduction target) for GHG emissions
Often called a GHG inventory, a baseline is typically a one-year assessment that’s used to track progress in reductions over time. All oil and gas companies will eventually need to formalize, institutionalize and verify their ESG monitoring and reporting around Scope 1, 2 and 3 emissions. In fact, 70% of the sector’s CFOs are already making ESG data coordination across their organization a priority, according to a March 2021 PwC Pulse survey. Doing so, in a net zero environment, will only make them more competitive now and in the future. It is likely that many organizations making net zero pledges might have underestimated the rigor, precision and importance demanded of Scope 3 reporting. Looking forward, it will likely be standard practice for customers to prioritize suppliers who can give them a GHG verified emissions calculation for their Scope 3 reporting, such as Environmental Product Disclosures for products and services. Oilfield services and upstream companies will therefore need to establish the GHG footprint of their products and services which, in turn, will be integral to customers’ supplier enablement programs. Currently, GHG information is being requested from customers’ procurement as “nice to have” information; in the future, it will be required for every molecule and barrel of oil. The more ambitious a company’s reduction goal, the more broadly and deeply efforts are made to identify emission sources across its value chain. Reduction targets drive companies to find ways to make changes across geographies, product lines, the supply chain, downstream in logistics, product use or end-of-life. A value chain-wide GHG footprint is essential to baseline impact and to translate the net zero implications into business-specific parameters. The assessment should have an executive sponsor and audience, but it can be driven by the sustainability function, whose team members are familiar with these assessments.
Energy companies are already making efforts to use digital technologies to enhance their ESG capabilities; a recent PwC survey found, for example, that 54% of energy and utility executives are leveraging cloud to improve ESG reporting, and 63% are doing so to improve their ESG strategy.
2. Assign responsibility for oversight
Transitioning to a low-carbon economy will impact companies in different ways. Achieving net zero emission goals while attaining positive returns on overall transformation initiatives will require strong governance, starting from the top. Companies can begin by consulting publicly available sources of information for effective climate governance. The FSB Task Force on Climate Related Financial Disclosures (TCFD) and WEF Climate Governance Principles and Guiding Questions may help build an understanding of the key issues. As a company matures, senior leaders should reevaluate any existing incentives that may hinder progress and consider creating incentives that assist management in delivering on milestones and targets.
3. Building net zero strategies could redefine traditional growth strategies
Leading decarbonization commitments share certain attributes. They are science-based. They take responsibility for tackling value chain emissions including those of suppliers, products, services and investments. They also explicitly recognize that net zero requires a reshaping of corporate strategy and, in turn, a company’s operating and financial model. And they allocate substantial funding for skills, innovation and R&D. It will be important to assess market dynamics to help ensure that both upside opportunities and downside risks are captured–to understand net zero implications on business growth and where reshaping or reinvention is needed. Those who lead the transition are expected to move from defense to offense sooner and lead the creation of new markets.
For many oil and gas companies, creating net zero strategies could ultimately mean their business models. For example, how strongly will they commit to betting their future on their core hydrocarbon business—but hedge bets through carbon capture and sequestration technologies to create carbon offsets? Or, will they expand into renewables (wind, solar, geothermal) and become agnostic energy producers, playing in two sandboxes (producing both hydrocarbon molecules and electrons)? That path has already been forged by some in the sector in Europe and elsewhere (e.g., TotalEnergies, Eni, BP and Royal Dutch Shell). Such a shift could dramatically change strategies across myriad fronts, including those surrounding M&A, divestitures, operations and financials.
While most oil and gas companies are not missing the significance of this moment, many lack a firm understanding of precisely how they will be able to carry out that mandate on “day one.” Hopefully, PwC’s nine building blocks can serve as a blueprint for how companies can begin. Pledging emission reduction goals is one thing, but, for many oil and gas companies, achieving them will likely be much harder. What’s important is to have a well-considered plan—and stick to it.
The stakes are high. It’s clear that those companies that commit to reducing emissions while also delivering reliable energy and returns will most likely outperform those who do not.