The Energy & Resources (E&R) sector is the single largest source of greenhouse gas emissions (GHG) worldwide, of which, oil & gas companies have a significant share. The oil and gas industry has also been viewed as a laggard on climate action so far. As these companies have their core business models based on producing and processing hydrocarbons, they are generally considered, slower to change. Especially, national oil companies that account for over half of global production; are poorly positioned towards the changing global energy dynamics, as per the World Energy Outlook report by IEA.
In this article, we have tried to capture the transformational phase of the O&G sector as they play a critical role in the fight towards climate issues. For this industry, it is not just about lowering carbon emissions, but also about bringing an overarching transition in the way it has been operating for years.
Challenges so far and the road ahead
O&G companies are treading a challenging path with the world increasingly shifting towards clean energy. Their public image has been at stake ever since the fight against climate change has taken momentum. They are under consistent pressure from investors and stakeholders demanding clarity on their business strategies in a world that is seeking to limit the increase in global temperatures to well below 2°C.
While some of the world’s leading O&G companies have been working significantly over the years to prepare for a lower-carbon economy, an array of challenges have made their course trickier. Few of the constraints include:
Capital Expenditure – Today, O&G companies need to take stringent measures to reduce their environmental impact while demonstrating their long-term business viability. However, as per a report by IEA, these organisations have made investments accounting to less than 1% of their total capital expenditure, in low-carbon activities. There has been some momentum in re-directing investments towards renewable developments but it needs to be scaled-up to a greater extent. Specifically, an investment boost is required in cogeneration, flare reduction, energy efficiency, biofuels, carbon capture and storage, and forestry.
Complex physical structure– The real challenge of this sector also lies in its physical complexities. The widely distributed terminals – reservoirs, deep wells, cross country pipeline networks, complex refining processes, make integration a challenge. This widely spread structure results into information lags, silos leading to operational inefficiencies.
The ongoing pandemic – Adding to its already challenging journey, the pandemic disease has created an even more arduous task for the industry. Demand and prices have fallen to the lowest in decades, while the bottom lines are shrinking at a rapid pace. As a result, the budgets initially allotted for remodelling of business strategies towards environmental needs, are now being directed for building business resilience, employee safety or mere survival. However, since the focus towards net-zero remains unmoved across countries and companies, the pandemic is a short term roadblock.
Strategies and actions that have worked so far
The good news is that several companies are voluntarily treading the transition to a green economy at an unprecedented pace. In a holistic approach, they are adopting means to transform not only how they operate, but also what they offer. A few companies leading the initiative include Shell, Repsol, Equinor, Total, and BP. Acting as the flagbearers, these companies are motivating other players in the industry while setting new benchmarks. They are developing robust investment plans to diversify businesses, and long-term energy intensity targets to reduce emissions.
Adapting to changing policies and business environment- In a consistent drive towards decarbonisation; diversification, broadening and remodeling of business strategies have taken centre stage. Companies are now moving towards newer areas of businesses. They are stepping up research and development while shifting the focus towards EV charging and batteries. Also, natural gas, in particular, has the potential to remain an integral component for decades to come. It will be the core of a low-carbon economy based on policy mechanisms and technologies.
Revolutionary move towards Net-Zero – Over 175 organisations spread across more than 20 countries have pledged to become Net-Zero by 2050. Organisations are working aggressively towards investments and finances to bolster their transition. They are working on methodologies to track their carbon footprint and consistently enhancing their technology know-how.
In a nutshell, the shift is happening now. Several collaborative efforts and initiatives resulting from customers, employees, and communities are moving the needle towards sustainability, slowly but steadily.
The crucial role of Industry 4.0 in the transition
Oil and Gas industry has had the opportunity to redefine its boundaries through digitization for several years. However, there are enough reports that indicate how the industry had been sluggish in its adaptability. Large companies remained way behind in leveraging the opportunities laid by data analytics and technology in a meaningful way. Although now a series of external forces such as commodity demand, energy price volatilities, growing focus on EVs, technological advances and environmental efforts, are aiding the sector to evolve faster.
Digitisation for a holistic shift
Akin to any other transformational journey, successful digital implementation also calls for collaboration between industry leaders, communities and policy-makers. All key stakeholders must engage in a focused manner to integrate the advancements of the digital era like Cloud Computing, Big Data, Analytics and IIoT.
Cost of sensors are falling, and the Industrial Internet of Things (IIoT) is emerging rapidly. As a result, there are volumes of data that companies can access. Big data, cloud computing, and analytics are propelling innovation at all levels improving business agility and by breaking down silos. These technologies are facilitating the integration of structured and unstructured data from disparate sections and generating real-time insights.
Further advancements in the technology space
Innovation has consistently buoyed the digital landscape. Identifying the newest technology and its strategic deployment provides the right boost to achieving goals. A few of them that has had widespread ratification include Blockchain, Digital Twins and Artificial Intelligence.
- Blockchain – A Deloitte report states that Oil & Gas companies can improve trade accuracy and back office efficiency by leveraging blockchain. It can substantially bring down manual steps and increase transaction speed. Blockchain has proven itself in fostering sustainability by improving sourcing methods and recycling practices. As blockchain brings transparency, investors and stakeholders can be assured of environmental commitments by an organisation.
- Digital twin becomes a must-have technology for the O&G industry, considering their physical complexities. It renders support in engineering and testing systems and saves significant human labour onsite. A digital twin can be used for complete engineering and then simulated testing of the control system.
- Artificial intelligence (AI) on the other hand boosts decision making using real-time data. The leading Oil & Gas companies are already integrating AI in multiple areas ranging from operations to virtual assistants.
Key takeaways from the O&G industry’s energy transition
Sustainability is at the core of every business strategy and investment decision. O&G companies need to have stringent investment plans to leverage technologies that mark a notable shift towards integrating renewables and reducing carbon footprints. For instance, BP recently announced its ambition to become net-zero by 2050, along with a new strategy, pivoting from “an international oil company focused on producing resources to an integrated energy company focused on delivering solutions for customers.”
Hence, here are the four major takeaways from an industry that is on a historic transitional path:
- Operational Efficiency – the name of the game
- Leverage digitisation – in its full capacity
- Be the positive agent for change – induce agility and adaptability
- Integrate – at all levels for a holistic success
The demand for oil and gas will continue in decades to come. The task at hand for the producers is to be able to deliver as efficiently as possible while being cautious of the environmental impact.