The energy transition: adapting to a changing market landscape

April 1, 2020
The growing concern about carbon dioxide emissions is spurring change in the oil and gas industry.

The growing concern about carbon dioxide emissions is spurring change in the oil and gas industry. While fossil fuel demand is expected to continue growing for years to come, that growth will likely slow as alternatives to oil and gas with potential to reduce carbon increase. There are a wide range of peak-demand projections with some forecasting combined oil, gas, and coal consumption to plateau as early as 2030, while others do not see a peak until well after 2050.

Uncertainty is not new to the industry. But unlike the uncertainty that oil and gas companies have traditionally faced – in commodity prices, technologies, and geopolitics – the energy transition may require changes to longstanding market structures, value chains, and the economic drivers for the oil and gas business.

Many oil and gas companies are responding to this uncertainty by rebalancing their portfolios and shifting investments into greener projects. In the long term, companies may need to grapple with the financial and operational risk posed by stranded assets as declining oil and gas demand could translate into early asset retirement. That risk could be higher for long-lived conventional assets like offshore oil and gas platforms as many deepwater discoveries made in the last few years, if sanctioned, will likely still be producing in the 2040s and 2050s.

As a way of offsetting these risks and addressing stakeholder concerns about sustainability, more companies are investing in different assets today. Oil and gas companies, many of which aspire to be the broad-based energy companies of the future, are figuring out how to produce more oil and gas (and increasingly power) year after year while also being carbon-conscious. These companies have acquired assets outside their core oil and gas production businesses and will likely need to operate a range of assets, develop novel technologies, and enter new markets.

There are at least four concrete steps companies are taking in the near term.

First, companies can identify low-hanging fruit for reducing greenhouse gas emissions, such as eliminating methane leaks from existing infrastructure, reducing economic flaring, and boosting field, plant, and pipeline energy efficiency. For example, US flaring and venting has almost quadrupled in the last decade as oil and gas production has nearly doubled, exceeding two billion cubic feet a day. Reducing flaring to 2010 levels could eliminate more than 30 million tonnes of carbon dioxide emissions per year, equivalent to almost seven million less cars on the road.

Second, while a few have deployed renewables like wind and solar to power pumps and compressors in the field, more companies could follow suit as that could reduce both direct and indirect operational emissions. That could save money in the long run and increase revenue in the short run as oil and gas not consumed on site could be sold. For example, several oil companies are looking to tap into Norway’s low-carbon electric grid to power offshore fields. There are opportunities to electrify more projects both onshore and off, sourcing power from low- and zero-carbon generation.

Third, companies could consider investing in increasing carbon capture, use, and storage technologies to tackle emissions from use of the oil and gas they produce. For example, carbon dioxide enhanced oil recovery could be an avenue to boost production while sequestering carbon, but it remains a niche industry today—though more companies are likely to evaluate such opportunities in future.

Lastly, fresh water use and waste water disposal continue to challenge shale producers. While the energy transition focus has mostly been on carbon emissions, more oil companies are evaluating the economics of water recycling to make their operations more sustainable. Fracking a typical shale well requires more than four million barrels of water, potentially straining local water sources. Recycling and reusing flowback and produced water, rather than injecting it in disposal wells, could mitigate the hydrological impact of oil and gas development. Moreover, investment in water recycling technology could be offset by reducing the costs of freshwater sourcing and the need for disposal, potentially proving cost effective in parched areas and those with limited disposal well capacity.

The energy transition is a long-term trend, but some of the industry has already started taking steps to prepare for this change. Part of that preparation has been the opening of a dialogue between energy producers, their consumers, and their broader stakeholders.

Duane Dickson, Vice Chairman and U.S. Oil, Gas & Chemicals leader, Deloitte LLP

Kate Hardin, Executive Director, Deloitte Research Center for Energy & Industrials, Deloitte Services LP

Thomas Shattuck, Research Manager, Deloitte Research Center for Energy & Industrials, Deloitte Services LP

Courtesy OLT Offshore LNG Toscana
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