Under pressure from investors, policymakers and the general public, the oil and gas industry is stepping up its efforts to transition to a more sustainable model. This is having a considerable impact on the business, according to the 261 energy executives who participated in the L.E.K. Consulting 2021 Energy Transition Study. Among the key themes of this year’s study, one insight is that capital budget allocation for energy transition initiatives will more than double by 2030 (see Figure 1).
Let’s break it down.
Majors are on track to lead the transition. On average, survey respondents from major exploration and production (E&P) companies say that 9.6% of their current investment budget is allocated specifically to energy transition capabilities and initiatives. They expect that share to top 25% by 2030. Shell, a leading example, has pledged to become a net-zero emissions energy business by 2050, and its recent exit from the Permian is a major step toward its goal. The majors are expecting to move more quickly than others due to heightened investor and public scrutiny — Exxon’s proxy fight and the landmark Dutch climate ruling against Shell are evidence of this — but the group has the scale and engineering expertise to play and win in several areas of the energy transition. On the other hand, the majors’ size could slow down their ability to adapt, and they might also face cultural friction between the hydrocarbon and new energy transition businesses.
Other E&P companies aren’t far behind. This group represents national oil companies (NOCs) along with independent upstream firms. They’re looking at 22% of their investment budgets going toward the energy transition, on average, which is roughly double the share they’re allocating today. Upstream companies generally aren’t pivoting the same way as other industry segments due to a common belief that traditional oil and gas will be a considerable part of the energy mix going forward. Even so, Marathon and Diamondback have pledged to cut their greenhouse gas emissions in half by the middle of this decade, and NOCs, like ADNOC, frequently cite energy transition as an opportunity to diversify and develop their economies.
Midstream and downstream respondents are more of a mix. The average energy transition budget is expected to jump from 8.4% to 18.4% between now and 2030. Refining companies lead the group, with plans to allocate budget to carbon capture storage and alternative fuels. San Antonio-based Valero, for one, has committed more than half of its capital investments to renewable fuels — and that’s just for this year. Phillips 66 in its Emerging Energy portfolio is similarly making moves across renewable fuels, hydrogen, carbon capture and battery technology. By contrast, midstream companies noted in the 2021 Energy Transition Study that they plan to spend less than all other segments despite the potential to serve carbon and hydrogen markets via their existing pipeline infrastructure or pipeline development expertise.
Oil-field services and equipment (OFS&E) is plowing ahead despite challenges. Respondents in this group anticipate their energy transition budget to more than double by 2030, amounting to about 21% of overall investment spend. Access to capital is a stumbling block. Nonetheless, many OFS&E companies are reinventing themselves and switching from high carbon to low carbon energy services. Schlumberger is one, having recently appointed several new executives to lead its energy transition units. Many others in the OFS&E sector are not pursuing new energy areas as quickly, citing capability mismatches, high valuation multiples in energy transition segments, and the expectation that oil and gas will retain a high share of the global energy mix for decades. This group is instead focused on decarbonization solutions in core oil and gas operations.
Investors and financial entities are actively looking at opportunities. On average, financials expect to put about 16% of their investment budget toward energy transition opportunities by 2030, versus less than 8% today. Study participants say it’s all about the story. They note there’s an investor aversion to hydrocarbon opportunities. But capital won’t fully shift away from traditional oil and gas, and some think energy transition valuations are too high. The focus, respondents indicate, will be on a strong environmental narrative to garner investment support.
Oil and gas companies are taking different approaches to energy transition, depending on the segment. But they’re all being driven by similar forces: investor focus, emissions reduction, policy shift, public opinion and technology.
So what specific solutions does the industry plan to invest in? We’ll explore that question in our next article on the 2021 Energy Transition Study.
Industrial Distribution: Opportunities for Differentiation and Growth
Video / Webinar
Industrial Equipment & Technology
Top Priorities and Strategic Imperatives for U.S. Manufacturers