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Perspectives

Addressing the challenge of decarbonization

An oil and gas perspective

The oil and gas sector is confronted with the biggest task in society—addressing climate change. In addition to transforming their own business models, oil and gas companies are also being called upon to rebuild the world’s energy infrastructure while helping to drive down value-chain emissions. What pathways can companies take, and how can they address the challenge to decarbonize in an economically viable manner?

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Shifting risk profiles

The impacts of climate change are already being felt
physically and financially. Governments are setting new policies, investors are
seeking clarity on risk and opportunity, technology costs are declining, and
community expectations are evolving. The result is alterations in products and
services, lost asset values, and market dislocation and a changing risk profile
for oil and gas businesses, even as new opportunities emerge in developing
industries. Physical risk is growing as the frequency of extreme weather events
increases. Whether these risks are driven by immediate events (heatwaves,
floods, or storms) or are longer term, companies need to consider adaptation
strategies that minimize the impact of the changing climate on a business
through operational or supply chain disruptions. At the same time, they must
use forward-looking tools, such as scenario analysis, to adapt operations and
business models before a crisis occurs.

Addressing the challenge of decarbonization

Technologies becoming cost competitive

The cost competitiveness of clean technologies today is vastly different from only a few years ago. Declining costs are particularly evident in renewables. To name one example, solar photovoltaics have decreased in price by 80% since 2008. There is relatively low friction for substituting of electricity generation with renewable power as the cost of storage declines, thus hastening the speed of transition.

Adaptation strategies are evolving

Adaptation strategies often involve continuing carbon mitigation and investing in carbon capture, utilization, and storage (CCUS) technologies, along with developing new revenue streams to hedge against uncertainty. Many oil and gas companies are already reducing upstream emissions and pivoting into rapidly growing new markets. Others are moving away from carbon-intensive fuel sources and toward biofuels and other renewable energy production. To enhance efficiency, many of these new investments use existing infrastructure and market positioning across supply, distribution, and retail activities. In Europe, for example, some companies are leveraging existing gas stations for biofuels, fast-charging, and hydrogen refueling. Electricity generation is the most significant area of investment to date and has initially taken the form of wind and solar investments; however, traditional oil and gas companies are increasingly using their vast engineering and project-management capabilities in the development of green hydrogen.

A roadmap

The decarbonization life cycle stretches across every aspect of an organization’s operations and value chain. Deloitte’s Decarbonization SolutionsTM roadmap provides a high-level guide to the deep tactical and transformational changes that are often required across structure, operations, relationships, and culture. Companies can use it to assess their progress toward a comprehensive decarbonization strategy and plan out the next steps and future activities required. The roadmap has seven main sections, beginning with compiling emissions data and forecasting, to assessing climate risk, all the way through tangible activities for the short, medium, and long term.

Starting the journey

The road to decarbonization is not going to be easy and will require significant trade-offs and difficult decisions. It is of critical strategic and financial performance and should be at the top of the board and executive agenda for any company that is serious about surviving the transition. For companies that are nimble and thoughtful, decarbonization is going to enable a new phase of growth and value creation. For those that delay, the risks are mounting and their survival is not guaranteed.

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