As both innovators and investors, oil and gas (O&G) companies have an important role to play in the clean energy transition. High commodity prices and growing concerns over energy security are accentuating that role, as O&G companies seek to fund strategies that can allow them to fulfill their societal mandate of securing supply in the short term and accelerating the energy transition in the long term.
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Higher O&G cash flows in 2022 may have enabled companies to move the needle on both of these objectives in 2023, but as noted in the Deloitte US 2023 Oil and Gas Industry Outlook, the pace and extent of clean energy investments by O&G companies will largely depend on a number of geopolitical, regulatory, and macroeconomic factors.
There are many factors accelerating the O&G companies’ short and long-term goals. Here are some of them:
- Supportive policies. These have recently been enacted in the US, Europe, and elsewhere. For instance, the United States passed the Infrastructure Investment and Jobs Act; and the Inflation Reduction Act over the past few years. Together, these provide for about US$450 billion for clean energy and related investments. Moreover, the European Commission passed the Fit for 55 climate package and Europe’s REPowerEU plan. Together, the committed provisions for the clean energy transition and emissions reduction in Europe are close to US$322 billion. In addition, hydrogen policies are picking up steam, with more than a dozen countries publishing hydrogen strategies over the past two years.
- The relative price of fuels. Sustained high natural gas prices could make green hydrogen and biomethane more attractive to future investments relative to blue hydrogen. In fact, at some points in the past year, the levelized cost of green hydrogen dropped below natural gas prices in several EU countries.
- Shift toward reducing natural gas emissions. Energy policy in the United States and Europe began to pivot in 2022, following Russia’s invasion of Ukraine. Consequently, momentum has shifted while cleaner alternatives are developed and deployed from phasing out natural gas to reducing natural gas emissions. Increases in natural gas investment are expected in 2023, including investments that help reduce the greenhouse gas intensity of natural gas and related infrastructure.
- Clean hydrogen and carbon capture utilization and storage (CCUS) hub development. These leading technologies for decarbonizing hard-to-abate sectors, such as steel and chemicals, appear to be gaining momentum. Several clean hydrogen projects have recently been announced in Europe, the Middle East, and Australia. Saudi Arabia is planning one of the largest CCUS hubs in the world, while Denmark has awarded its first three permits for full-scale CO2 storage in the North Sea. Some governments have set up special organizations and allocated significant funding to help support these efforts, including the European Innovation Fund, Australia’s CCUS Development Fund, the US Inflation Reduction Act of 2022, and the US Infrastructure Investment and Jobs Act.
O&G companies are also facing many challenges as they move to achieve their short-and-long term goals. Here are some of them:
- Supply chain constraints. The clean energy transition will likely require significant investments in infrastructure (e.g., pipelines, storage, biofuel refineries) and technology (e.g., carbon capture materials, electrolyzers, fuel cells). And with current supply chain issues, securing the materials needed for these is slow and expensive.
- Food versus fuel concerns. The production of biofuels often relies on the production of grains and vegetable oils. Supply chain issues and high commodity costs have generally increased concerns over food inflation, and public opposition could rise to crops being used for fuel rather than food.
- Challenges to new infrastructure. Several US liquefied natural gas projects; CCUS projects in the United States and Australia; and hydrogen projects in Europe are expected to move into the financing and permitting stages in 2023. The speed and ease of permitting the infrastructure could impact how costs and timelines are treated in planning and financing future projects.
- Macroeconomic headwinds. Volatile prices, recessionary fears, and uncertain demand growth may present challenges to long-term planning. However, economic stability coupled with sustainable long-term financing could help guide clean energy decisions.
Pondering the possibilities
It remains to be seen how both the accelerators and the challenges that O&G companies are facing will play out. Regardless, O&G investment in the clean energy transition is expected to continue increasing in 2023. But, what will it take for investments in clean energy to really take off? And what will people in the O&G industry think of this? When 100 US executives and other senior leaders in O&G were asked what factors would enable increased investment in clean energy, about 30% of respondents selected higher demand for low-carbon clean energies, and 24% selected more scalable and economical low-carbon use cases. So, a larger acceleration of clean energy investment may require more time for demand to develop and technologies to mature. It might also require O&G companies to seek joint ventures and alliances in adjacent or even competing sectors to help commercialize new clean energy technologies such as CCUS and clean hydrogen.
As we move further into 2023, the O&G industry is facing some macroeconomic headwinds. But the sector appears to have the necessary tools—in the form of healthy balance sheets, continued capital discipline, policy support, and an innovative mindset—to continue to move forward in fulfilling its dual directive of enhancing supply security and facilitating the clean energy transition.
