1/ What is the oil and gas sector? Let’s get more familiar.
World largest economic force
The Oil and Gas Sector is a gigantic force in global trade, industry research and development, intergovernmental infrastructure that is highly aligned with the demand for its core offerings—crude oil and natural gas. The world economy, if not dependent upon this sector, is highly sensitive to its availability, its price, and its impact on our health (both economic and physical). With over $3 Trillion in annual revenue, it is certainly the largest business sector on the planet. (1)
While the industry is large and complex, it can be broken down into components that, on their own, look much like other industries. The oil and gas sector can be divided into three primary categories: Upstream, Midstream, and Downstream.
A sector divided into three segments
Upstream is known as Exploration and Production (E&P) and is characterized by heavy investment capital that enables firms to discover and drill. This requires scientists, utilization of the latest technologies, expensive equipment, land use agreements/contracts, and a lot of risk.
Midstream: Once the raw materials are discovered and extracted they must be transported. While this segment is considered lower risk than the preceding (upstream) segment, there are still a number of obstacles—mainly regulatory—that make transporting oil and gas a big business. Whether by pipeline, truck or boat, the raw materials are moved closer to their final destination.
Downstream: This is where the raw materials end up—at the refineries. This segment uses both mechanical and chemical processes to turn crude oil into the products desired by the consumer—whether used for fuel, plastics, road building, the refineries are an integral part of making oil more marketable to the public.
What Exactly is a Barrel of Oil?
The Barrel: at 42 US Gallons (158.98 Liters) the barrel (bbl) is the basic unit of measurement across the industry. However, in published reports or in the news you will more likely see a larger version of this unit in the form of Mbbl (One Thousand) or MMbbl (One Million) barrels.
Only a FEW Maintain ALL of the Power
The main actors are… BP, Total, Shell, ExxonMobil
When you arrive at any of these oil and gas giants’ websites, you will read a lot about “the future” or a cleaner environment, or “helping” get to net zero. They certainly hint at climate change and they speak vaguely about energy rather than their mainstay oil. Do they want to continue profiting? Of course. Do they expect any significant changes to their industry? They seem to be planning for something but what does their “exit strategy” look like? Do they even have an exit strategy? What must they overcome to stay profitable? Will market forces control their strategies? Will regulation play a part? Will the low cost of alternatives provide enough incentive for economies to wean themselves from oil-based technologies?
The combined annual revenue of these 4 companies exceeds $1 Trillion USD!
Both market forces and some specific challenges unique to 2020 have created an obstacle for the oil and gas sector. Experts are referring to the oil prices as “Virus Alley” for the current $40–50 USD barrel prices that have become the new normal. While the price for a barrel of oil was at $70 USD at the beginning of 2020, the shutdowns across the globe actually brought prices so low that oil producers were selling at a loss before production could be slowed by “OPEC Plus” (Organization of the Petroleum Exporting Countries).
While hedging oil price fluctuations has always been a successful strategy within the industry, this may no longer work given “deep changes in energy demand.” Some of these changes are market driven—the cost of battery storage has been decreasing which makes alternative energy choices more appealing. Also, regulation plays a part. As the cost of carbon emissions increases, so does the cost of producing oil. These margins are shrinking to the point where any more cost reductions make profitability impossible. (3)
What could once be managed with cost-cutting must now be handled differently. Industry analysts see the solution working only with a more collaborative approach—one that is somewhat at odds with the traditional, highly competitive industry. Regardless, the following recommendations are based on Accenture’s analysis.
Direct citation from the article, “The oil and gas sector must reinvent itself. This is how it could be done” (3):
1. Creation of global networks and hubs: Establishment of regional hubs to facilitate the sharing of offshore logistics, warehousing and surplus inventory to unlock $14 billion annually from higher utilization of infrastructure and reduction of excess inventory.
2. Facilitation and arbitration of global standardization initiatives: Standardization of equipment specifications for procurement of bulk materials and packaging, which is estimated to generate 10% to 20% reduction of capital expenditure on equipment and up to 40% schedule compression, along with other important benefits.
3. Standardization of datasets and digital collaboration platforms: Development of common standards for data architecture and APIs among the oil and gas ecosystem, enabling data exchange and laying the foundation for the implementation of digitalization and data-driven decision making.
4. Alignment on future workforce requirements: Study of the implications of the Fourth Industrial Revolution on the industry, including the identification of upskilling and reskilling needs and opportunities for cross-industry redeployment.
2/ How is the oil and gas sector transforming its model?
The important takeaway is that while a large percentage of advertising and marketing budgets directly address climate change and the “green future” of the industry, these expenditures do not correlate with the amount of money spent on production or upstream exploration. Furthermore, this amount falls significantly short of the money funneled through lobbyists to fight progressive regulations or control the narrative among the public.
What are the Oil Companies Claiming?
The O&G Industry is very sensitive to world politics. Just as a more environment-friendly US President Biden comes to power in the US, Total publicly cuts its ties to the lobbying group American Petroleum Institute (API) as a way to both reinforce its commitment to Net Zero (12) and to lessen the blows of any direct policy reforms from the US. This is a very clever way to hedge regulatory changes and to double down on the goals (below):
- The scientific position: Total believes the link between human activity and climate change is an established fact.
- The Paris Agreement: Total recognizes that the Paris Agreement is a major advance in the fight against climate change and supports the initiatives of the implementing States to fulfill its aims.
- Carbon pricing: Total believes that it is necessary to implement carbon pricing to encourage energy efficiency, support low-carbon technology and develop carbon sinks, all critical to achieve carbon neutrality.
- The role of natural gas: Total considers that natural gas is a key component in the energy transition, specifically as an alternative to coal. The Group supports policies to reduce methane emissions from natural gas production and consumption and, in particular, campaigns to reduce the use of flaring (such as the World Bank’s Zero Routine Flaring by 2030 Initiative).
- The development of renewable energies: Total supports policies, initiatives and technologies to promote growth in renewable energies. The Group also supports the development of sustainable biofuels.
- The development of Carbon Capture, Utilization and Storage (CCUS): Total supports the development of CCUS, which is critical to achieve carbon neutrality by the second half of the century, the aim of the Paris Agreement. (9)
BP claims to be developing low carbon business and wants to ‘reimagine energy for people and the planet.’ They want to achieve Net Zero, but can they? Will they choose these things over profitability? While large businesses certainly have a lot of responsibilities and can perhaps leverage their strength in positive ways, their ultimate purpose is to generate profits for their shareholders. This is both their mission and a legal requirement, despite what their website says.
Are They Really Playing Fairly?
The American Petroleum Institute was formed in 1919 but is currently the central player in working on behalf of oil and gas companies around the world. This centralization effect gives them enormous power and leverage when campaigning against climate-friendly policies. Estimates indicate that upwards of $200M USD is spent annually to fight 2015 Paris Climate Agreement mandates.
Let’s look more carefully at these expenditures. If BP is making only $305 Billion annually (2018), $53m is roughly ⅙ of their revenue! (5) That’s 17%. Why are they putting SO MUCH of their revenue into lobbying? Across many industries a good sales agent might take 20% Is lobbying a similar model and then the only way oil and gas can ‘get signed’ or keep ‘booking gigs’? Wouldn’t this money be best spent somewhere else? Are the beneficiaries of this influx of cash the real reason why the US has backed out of climate agreements in recent years? It’s sad to think that our politicians could so easily sell out for the right price.
3/ Worldwide initiatives for change across the industry
Already heard about the RE100?
Luckily, there are promising solutions on which the oil and gas sector could base their own initiatives. The RE100 is a global corporate leadership initiative started in 2014 with the goal of making ALL electricity generation 100% renewable by 2050 (6) How does this work AND is it working? There are currently nearly 300 participants serving over 140 markets and producing upwards of 280 TWh annually—this equates to the electricity demand from a medium-sized country!
Science Based Targets (SBTi)
One such organization that is actively working to limit emissions within the oil and gas sector is Science Based Targets Initiative Project (SBTi). In short, this initiative is a partnership between the CDP, The UN Global Compact (UNGC) and the World Wide Fund for Nature (WWF) with the critical goal of stopping global warming at 1.5 C. They hope to do this by providing a framework and resources for the private sector that enable participants to meet highly specific, science-based targets unique to the industry. (7)
While the big players within the Oil and Gas Industry claim to want a cleaner industry and publicly commit to meeting the 2050 Net Zero goals, the financial expenditures to lobbying groups acting AGAINST these advancements are significant.
Given a fair, cooperative playground, the industry could achieve its Net Zero Goals by developing both renewable and profitable ways to deliver energy. Is this realistic? Can the industry self-regulate itself and follow the suggestions or will they continue along the same, greedily competitive trajectory? If not, will governments be successful in regulating the industry giants to comply?
The oil and gas sector is a large segment of the world economy. It is complex, robust but highly susceptible to market demand. Greenwashing and grotesque lobbying efforts act to shield the industry from some market forces but low prices are the silver bullet to making the industry look for new ways to realign itself with the current and future realities.
Partnerships have always been integral to keeping prices in check by controlling supply from OPEC. Will the initiatives mentioned above help oil producers maintain a competitive advantage while meeting industry specific targets? Will the targets be enough to offset climate change threats? Will the industry somehow undermine the attempts to regulate (or self-regulate) and stay profitable with less and less supply? What will finally force consumers on all levels to switch to other forms of energy? Will the transition be painful?
- How the Oil and Gas Industry Works https://www.investopedia.com/investing/oil-gas-industry-overview/
- Opinion | The Oil Industry Is Stuck in Virus Alley https://www.wsj.com/articles/the-oil-industry-is-stuck-in-virus-alley-11609270852
- The oil and gas sector must reinvent itself. Here’s one way https://www.weforum.org/agenda/2020/12/how-to-reinvent-the-oil-and-gas-sector/
- Fossil Fuel Lobbyists Are Dominating Climate Policy Battles During COVID-19
- Annual report
- Science based targets
- Total’s exit from API politically motivated: Experts
- Total : Our Vision
- Oils Firms Spend Millions On Climate Lobbying
- BP, Net Zero by 2050
- Les compagnies pétrolières dépensent chaque année 200 millions de dollars en lobbying contre le climat
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