Transition leaders more optimistic on profits
Confidence in hitting financial targets is correlated with investment in efficiency and decarbonisation, finds DNV GL report
Firms in the oil and gas sector that are investing in the energy transition are more optimistic about their ability to achieve their financial targets for 2020 than those that remain focused on traditional business, according to a report from standards agency DNV GL.
DNV GL surveyed more than 1000 senior oil and gas professionals for its New directions, complex choices report. While confidence about industry growth remains high at 66pc, it has fallen sharply from 76pc in 2019. However, despite challenging price and economic conditions, it remains well above the nadir of 32pc in 2017.
“When we asked about their beliefs for this year, those that are most positive about their own success are also the ones that are most forward-leaning with respect to decarbonisation and digitalisation,” Liv Hovem, CEO of oil and gas at DNV GL, told Petroleum Economist.
“They spend more money on innovation and are doing better. That is an interesting correlation. Those that see themselves as successful are the ones who are working most to change and maybe have a more innovative culture.”
Less than half of respondents, 46pc, expect that more large, capital-intensive projects will be approved this year than last, down from 67pc in 2019.
“Investment is going into projects that have a much shorter return on capital so we do not see as many of those mega long-term investment projects as we did before the downturn,” says Hovem. “I think it is a permanent change.”
“Those that are most positive about their own success are also the ones that are most forward-leaning with respect to decarbonisation and digitalisation” Hovem, DNV GL
However, across the value chain, the exception was that oil and gas professionals expect a boost in long-term investment related to the energy transition. A solid majority, 60pc, reported that their organisation is actively adopting a less-carbon intensive energy mix, up from 51pc last year and 44pc two years ago.
Indeed, among the biggest changes found in this year’s research relates to investment in decarbonisation, which the report describes as “taking centre stage” and suggests the industry is “moving through an inflection point”.
This year, 71pc expect to increase or maintain investment in decarbonisation, up from 54pc in 2019. 44pc of oil and gas companies’ plan to increase investment in renewables, up from 34pc. Of these oil and gas companies that are looking to outside their core sector, 63pc expect to increase investment in offshore wind, up from 40pc.
The percentage that is planning to invest in decarbonised gas such as green hydrogen (using renewables to power electrolysis) or the currently cheaper blue hydrogen (utilising steam methane reforming combined with carbon capture and storage, CCS), more than doubled to 42pc, from 20pc in 2019.
While suitable as a long-term complement to renewables and for use in industrial processes, hydrogen, which accounts for less than 1pc of the energy mix, must be scaled up before it becomes cost-competitive, according to the report. 62pc of respondents say that the oil and gas industry should drive CCS immediately rather than wait for government initiatives, up from 56pc. However, 73pc say, understandably, they would only invest if it makes financial sense.
71pc expect to increase or maintain investment in decarbonisation
“It is important to get going on investments in, for example, carbon capture. The more facilities and plants that are put into reality, the quicker the costs of technology will go down,” says Hovem. “We estimate that for every time capacity doubles, the cost goes down 13pc to 15pc. If 60 more CCS plants are built, the cost will reduce 30pc, which again makes it more attractive. It is about starting this journey of reducing costs. We're seeing exactly the same for floating offshore wind.”
The report says that the change in investment intentions represents a “historic shift” in attitudes in the industry. Not surprisingly, the trend is much stronger in Europe, where 62pc are actively adapting to a low-carbon mix, than the US, where 47pc are adapting. In Asia, economic development and energy security goals often trump environmental ones.
“The oil majors that are more vocal about the climate and energy transition are mainly the European and the non-American ones… but for carbon capture, it is the American industry that has gone the furthest in utilising the technology,” says Hovem. “There is a little bit of a mixed picture, but overall Europe-based oil majors are maybe a step ahead.”