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PE Live: Energy transition only mildly impacted by low oil prices

While low demand and prices for oil and gas have pushed the transition down the list of priorities for many companies, the impact is likely to be only short-term

Oil and gas companies are maintaining their commitments to the energy transition during the recent period of low prices even if short-term financial pressures mean investment decisions are being delayed, a panel of expert speakers agreed on a PE Live webcast on the transition last week. 

Ahead of the discussion, professional services firm Deloitte conducted research into how executives regard the transition. It defined the transition as anything that moves away from hydrocarbon dependence across the economy, and for oil and gas specifically towards a greater reliance on cleaner energy sources. “Basically, a low-carbon future,” says Stanley E Porter, vice chairman, US energy, resources and industrials leader, Deloitte. 

The research identified six channels to track the progress: decarbonising energy sources; increasing operational energy efficiency; identifying new investment priorities; deploying new technologies; adjusting new policy mandates; and managing consumer stakeholder expectations.

“Overall, we see a commitment to this low-carbon future,” he says. Over 89pc of all respondents, and 92pc in oil and gas specifically, remain committed to a low carbon future.

“As we have entered into this pandemic, we see two [channels] specifically progressing while the other four are 'on pause'. Those two are decarbonisation and energy efficiency.”

Question of timing

As the energy transition inevitably requires capex, it is perhaps unsurprising that some aspects have been paused; it appears more out of necessity than a deliberate change in policy.

“It is a question of timing,” says Anne Lapierre, partner, global head of energy at law firm Norton Rose Fulbright. “For the time being, prices are very low so oil and gas companies are facing difficulties in terms of cash flows.”

Shale oil and gas companies, in Texas and elsewhere, look most vulnerable, she says. “It is reasonable to forecast that a large proportion of them will be subject, in the very near future, to bankruptcy proceedings because of their lack of cash. The first thing that is going to happen is probably a concentration of the market.”

"Overall, we see a commitment to this low-carbon future" Porter, Deloitte

Facing such difficulties, the transition is unlikely to be a priority for shale companies in the short term. “Prices are so low that it is probably much easier to stick to the current fuels than transition to the next generation, which for the time being are not economic,” she adds.

This is not necessarily a problem for other market players to transition to a zero-carbon business “so long as there are long-term measures in place in terms of financing, support and regulatory frameworks; the EU Green Deal will be no doubt a key support to transition acceleration”.

The shift in strategy is not universal, of course, with different companies taking different approaches depending on which sectors they occupy in the market.  

“Clearly, if you are totally focused on oil at the moment, you can see more of an imperative to look at the impact of the transition on your business, maybe less so If you are a low cost producer,” says Allan Baker, head of energy advisory & project finance (Emea) at French bank Societe Generale.

“But one thing is clear across all companies. Unlike maybe in the past, the energy transition and its impact on their business, both directly and downstream for their clients or customers, is making them change the way they look at the investments.”

He says companies are looking more intently at how quickly the energy transition could impact each individual part of their business. Baker says they are asking themselves questions such as “Is it right to deploy capital into those [carbon-intensive] areas of business or should they rebalance that business?” 

He adds that they are looking at existing products and deciding whether or not to divest from areas that are valuable today but may not be necessarily be so in the future with the impact of the energy transition scenarios.

A recording of PE Live: Is the energy transition accelerating? can be heard here.

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