Potential ways in which Oil and Gas companies can achieve financial and reputational resilience, and

successfully adapt to a low-carbon energy industry.

Emudiaga Fortune Ahwinahwi

User12516490

Innovation, Sustainability, and Transition in the Oil and Gas Sector

UEL-SG-7005-46491

24 eptember, 2023

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1.0 INTRODUCTION

1.1 Global Energy Need

Energy is vital for human development and adequate energy supply is crucial for addressing

global challenges such as sustainable economic and social development, poverty eradication,

adequate food production and food security, health for all, peace and security. (Johansson et al,

2012).

Scientists defined Energy as the ability to do work. Different forms of energy can be grouped into

two general sources; renewable energy sources and non-renewable energy sources. The sources of

Global Energy are Coal (39%), Renewables (19%), Nuclear (17%), Natural Gas (17%), and Oil

(8%), (Omer, 2012)

1.2 The Oil and Gas Industry

The Oil and Gas industry is responsible for the exploration and production of crude oil and

Natural Gas, transportation, refining, and marketing of refined products like gasoline, diesel,

kerosene, etc. These products are used for transportation, heating, generation of electricity. (Inkpen

& Moffett, 2011). The Oil and Gas industry is such an important industry as Natural Gas and Oil

contribute 17% and 8% to Global energy needs respectively. Though the oil and gas industry is one

of the largest sectors in the world in terms of dollar value, generating an estimated $5 trillion in

global revenue as of 2022(IBISWorld, 2022) it is one of the greatest contributors to environmental

pollution. The Oil and Gas companies are faced with a lot of challenges that are threatening their

financial and reputational resilience. One of the key challenges faced by Oil and Gas Companies is

Environmental concerns. With the increasing focus on sustainability and climate change, oil and gas

companies are under pressure to reduce their environmental impact. They must adopt cleaner

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 technologies, implement stringent safety measures, and find ways to minimize carbon emissions

throughout their operations. However, minimizing environmental emissions while also ensuring

economic growth and maximizing shareholders’ value is not an easy feat for the Oil and Gas

Companies. This essay aims to discuss potential ways these Oil and Gas companies can achieve

financial and reputational resilience while reducing their carbon imprints. In other words this essay

will discuss how Oil and Gas companies can achieve their Economic and ESG Goals (Environment,

Social, and Corporate Governance).

The main driving force for transitioning to a low-carbon industry is the pressing need to combat

climate change and reduce greenhouse gas emissions. Carbon dioxide and other greenhouse gases

contribute to global warming, which in turn leads to various adverse effects on our planet and its

ecosystems. (Omer, 2012). The Kyoto Protocol 1997, the World Summit on Sustainable Development in

Johannesburg 2002, and the Paris Agreement 2015 are all international treaties aimed at environmental

conservation and protection, climate change mitigation, reduction of Greenhouse gas emissions, etc.

These treaties are also driving forces for Oil and Gas Companies to transition to a low-carbon industry.

2.0 SPECIFIC PLANS PROJECTED BY THE OIL AND GAS COMPANIES TO ACHIEVE

FINANCIAL AND ESG GOALS.

According to the Paris Agreement (2015) and other international treaties, the general goal is to limit

global warming to well below 2oC, preferably to 1.5oC, compared to pre-industrial levels. Global temperature

increase of between 1.5 and 4.5oC could lead to potentially catastrophic environmental impacts which include

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sea level rise, increased frequency of extreme weather events, floods, droughts, disease migration from various

places, and possible stalling of the Gulf Stream (Omer 2012). Based on this driving force it has become

imperative for Oil and Gas companies to produce energy sustainably. According to Omer, 2012 Sustainable

energy is the energy that in its production or consumption, has minimal negative impacts on human health and

the environment. Given the need to produce Energy in a sustainable manner Oil and Gas Companies have to

devise and implement strategies that will help them achieve their financial and reputational goals and targets

and at the same time reduce their carbon imprints. The strategies employed by Oil and Gas companies to

achieve these financial and environmental goals are a combination of technology, organizational integration,

investment portfolios, or company operating models. This essay will explain how Oil and Gas companies can

achieve their financial and environmental goals using one or more of technology, organizational integration,

investment portfolios, or company operating models.

2.1 Investment portfolios or company operating models.

One way Oil and Gas companies can achieve their economic goals and reduce the environmental

impacts of their activities (ESG Goals) is through their portfolio selection of Oil and Gas projects. There are

many portfolio selection tools out there that business owners use but for this essay, we will use Markowitz'

Portfolio theory also called the Modern Portfolio Theory (MPT) to analyze how Oil and Gas companies can

diversify their investment portfolios to achieve greater returns at low levels of risk. The modern portfolio theory

(MPT) is a practical method for selecting investments to maximize their overall returns within an acceptable

level of risk. The modern portfolio theory argues that any given investment's risk and return characteristics

should not be viewed alone but should be evaluated by how it affects the company's overall portfolio's risk and

return (Markowitz 1952) That is, Oil and gas companies in diversifying their investments could construct a

portfolio of multiple assets that will result in greater returns without a higher level of risk; economic, social

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and environmental risks. The following are examples of plans and actions taken by Oil and Gas companies in

their investment diversification.

2.1.1 Oil and Gas companies in a bid to diversify their investment engage in a lot of Mergers and

Acquisition (M & A) and Joint Venture with other companies. Examples of such strategic Mergers and

Acquisition and Joint Ventures by oil and gas companies to maximize economic returns while

minimizing carbon emissions are given below.

1. Shell Energy, a subsidiary of Shell, signed an agreement to acquire 100% of Savion, a large utility-scale

solar and energy storage developer in the United States, from Macquarie’s Green Investment Group in

December 2021 (shell sustainability report 2022). Savion specializes in developing solar power and

energy storage projects and currently has more than 18 gigawatts of solar power and battery storage

under development The Savion acquisition boosts Shell's strategy to develop an integrated power

business as it moves to become a net-zero emissions energy business by 2050, in step with society. As

part of this strategy, Shell aims to sell more than 560 terawatt hours of power globally per year by 2030:

twice as much electricity as the company sells today increasing Shell's profitability.

2. Equinor went into a Joint Venture (JV) with Green Investment Group and Equitix to own the

Sheringham Shoal project in 2004. (Equinor 2023) The 317MW Sheringham Shoal Offshore Wind

Farm, located off the coast of North Norfolk in the UK, comprises 88 wind turbines and generates

around 1.1TWh of green energy per annum. This clean energy powers about 280,000 British homes.

Compared to fossil fuels that is a reduction of around 500,000 tonnes of CO² emissions every year.

3. The 50-50 Joint Venture deal between Chevron and Bunge to create renewable fuel in 2022. This 50/50

initiative, intended to create renewable feedstocks, will make use of Bunge's know-how in oilseed

processing and farmer relationships and Chevron's experience in fuel manufacturing and marketing.

(Chevron sustainability report 2022).

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 2.1.2 Oil and Gas Companies Investing in Electric Vehicles.

In a bid to achieve financial and reputational resilience while reducing their carbon imprint, Oil and Gas

Companies have diversified their portfolios and are investing massively in electric Vehicles. The

transportation sector is a major contributor to Greenhouse Gas (GHG) emissions. According to the United

States Environmental Protection Agency EPA 2023, Greenhouse gas (GHG) emissions from the

transportation sector contribute 29% of the US total GHG emissions, making it the largest GHG emission

contributor in the US. Also, according to EPA 2023, the emissions from the Transportation sector account

for 14% of Global Greenhouse Gas Emissions. Diversifying and investing in electricity for transportation,

Oil and Gas will ensure a continuous flow of revenue in the face of dwindling hydrocarbon reserves while

minimizing their operation Carbon emissions. The following are some investments made in this regard by

some O&G companies

1. Shell announced a partnership with Mercedes-Benz in 2021 to offer Electric Vehicles (EV) customers

access to the Shell Recharge network that will operate 30,000 plug-in points in Europe, North America,

and China by 2025. (Autovista24 2022)

2. Also, BP plans to spend about £50 million (€59 million) on a new global battery research and

development center in the UK. The facility will consist of a testing center and an analytical laboratory,

scheduled to open by 2024. (Autovista24 2022)

3. French Oil and Gas Company Total Energies aims to be a major electromobility player by planning to

operate 150,000 charge points by 2025. The company acquired battery maker Saft in 2016 and launched

a pilot plant to build European batteries. The goal is to start producing these components in 2023, with

the oil major initially investing €200 million in the site (Autovista24 2022). The figure below shows the

EV footprint of top Oil and Gas companies in 2021.

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 Figure 1. EV footprint of Oil and Gas Companies in 2021 (Global Data Energy, 2022)

2.1.3 Organizational Integration

As a way to achieve economic and ESG goals, some Oil and Gas Companies have changed their

business operation by integrating their operations. According to James Chen (2021), An integrated oil and

gas company is a business entity that engages in the exploration, production, refinement, and distribution of

oil and gas, as opposed to companies that specialize in just one segment. The difference between Integrated

Oil and Gas Companies and independents is that Integrated companies participate in all segments of the

petroleum value chain while independent companies only play in one segment. By integrating their

operations Oil and Gas companies have better control and improved efficiency. It also provides for various

streams of revenue and diversification.

For example, when an Oil and Gas Company is involved in the refining of Crude oil, it can better employ

Carbon Capture Utilization and Capture Technology (CCUS) to reduce carbon emissions at the refining end.

By doing this, these companies are maximizing economic values and same time reducing their carbon

imprint.

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 Another way O & G companies achieve financial and ESG goals by being integrated players is in the

processing of Natural Gas. Integrated Oil and Gas companies by diversifying have invested in Blue

Hydrogen Technology by converting some of the Natural Gas they produced directly into Clean Blue

energy.

2.2 The Use of Technology by Oil and Gas Companies to Achieve Economic and ESG Goals.

Oil and Gas Companies employ a lot of technology to achieve both their Economic and ESG Goals. In

this essay, we will discuss three of such technologies; Renewable Energy Technologies (RETs),Carbon

Capture Utilization and Storage (CCUS) and Blue Hydrogen Production Technology.

2.2.1 Renewable Energy Technologies (RETs):

Sustainability, according to Omer (2012) is defined as the extent to which progress and

development should meet the needs of the present without compromising the ability of future

generations to meet their own needs. Renewable energy is the most sustainable energy as it ensures

current generations get their energy needs met while also ensuring future generations achieve their own

energy needs. Sunlight is the driving force behind many of the RETs. Renewable Energy Technologies

are technologies that help to produce energy from renewable energy sources. The Main Renewable

energy sources are solar Energy, Wind Energy, Hydraulic energy, Biomass, and Animal Manure. Some

of the investments made by Oil and Gas Companies in Renewable Energy Technologies (RETs).

2.2.1.1 Solar Energy: Two major technologies have been developed to use the energy of the sun;

 Photovoltaic (PV) solar technology, converts the sunlight directly into electricity using panels made of

semiconductor cells.

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  Solar thermal technology, which captures the sun's heat. This heat is used for heating to drive steam

turbines.

By leveraging this technology, Oil and Gas companies create value with little carbon emissions to the

environment. Though Solar Projects are capital intensive, Oil and Gas Companies are continuously through

Research and Development (R&D) reducing these costs. Examples of Oil and Gas Companies that have

invested and deployed Solar Energy Technology to capture value are;

1. Shell acquisition of Nigeria Solar firm Daystar Power, a West African hybrid solar power

solutions provider serving commercial and industrial businesses in a landmark deal marking the

first such acquisition in Africa in 2022 (Shell sustainability-report 2022).

2. Chevron going into a Joint Venture (JV) with Algonquin Power & Utilities Corp in 2020 to

construct solar energy sources to provide electricity to certain assets. The renewable energy

generated by the solar panels will replace the energy chevron gets from the grid during the day,

freeing that up for other uses and decreasing the carbon intensity of chevron operations. Energy

from the solar field is being used to power the Hayhurst New Mexico development area’s field

load (Chevron, 2022).

2.2.1.2 Wind Power:

Wind power or wind energy describes the process by which wind is used to generate mechanical work or

electricity. Wind Energy is been harnessed by the use of Wind turbines which convert the kinetic energy of the

wind that drives a generator generating electricity. A lot of Oil and Gas companies have invested in this

Renewable Energy technology in a bid to capture more value and same time reduce carbon emissions. Some

examples of Wind Projects by Oil and Gas Companies are given below.

1. Ørsted A/S a Danish multinational energy company has divested its hydrocarbon positions to become

the world’s largest developer of offshore wind (McKinsey 2021). It owns and co-owns several Wind

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 farms such as the Block Island Wind Farm an Offshore wind power Project in Rhode Island and Coastal

Virginia offshore wind at Virginia.

2. Dudgeon Offshore Wind Farm. The 402MW Dudgeon offshore wind farm is located in the North Sea

approximately 32km off the coast of North Norfolk, the UK. The project is co-owned by Equinor (35%,

operator), Masdar (35%), and China Resources (Holdings) Company Limited (30%). (Equinor 2023).

Other Oil and Gas Companies have diversified their portfolio and invested heavily in other renewable

energies like hydraulic energy, biomass, and non-renewable energy like nuclear energy.

2.2.2 Carbon Capture Utilization and Storage (CCUS) Technology.

Carbon Capture Utilization and Storage (CCUS) is the capture of CO2, from large point sources like power

generation and industrial facilities that use either fossil fuels or biomass as fuel. The CO 2 is either used on-site

or compressed and transported by pipeline, ship, rail, or truck to be used in a range of applications, or injected

into deep geological formations such as depleted oil and gas reservoirs or saline aquifers. (IEA 2023). CCUS

Technology enables Oil and Gas Companies to retain their Core Operations of Hydrocarbon mining and

refining while ensuring carbon emissions are limited. This way Oil and Gas companies are maximizing

shareholder value while also reducing the environmental impact of their activities hence achieving their ESG

Goals. The following are CCUS projects embarked on by Oil and Gas Companies.

1. Chevron U.S.A. Inc., through its Chevron New Energies division, launched its carbon capture and

storage (CCS) in San Joaquin Valley, California in 2022. By installing CO 2 post-combustion capture

equipment, Chevron aims to reduce its carbon intensity. The project aims to capture the CO2 and store it

thousands of feet underground. (Chevron 2022)

2. BP partnering and investing with UK tech firm C-Capture. The company designs innovative chemical

processes that can remove carbon dioxide emissions from power stations and industrial facilities.

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BP Ventures, along with UK power plant owner Drax and tech commercialization firm IP Group, are signing a

joint venture agreement (JV) to raise $4.6 million in funding so that the firm can further develop its technology.

(BP, 2019).

2.2.3 Blue Hydrogen Production Technology:

Blue hydrogen is produced from natural gas through the process of steam methane reforming (SMR).

SMR mixes natural gas with very hot steam, in the presence of a catalyst, where a chemical reaction creates

hydrogen and carbon monoxide. water is continually added to the mixture converting the carbon monoxide

to carbon dioxide and creating more hydrogen. The carbon dioxide emissions produced are then captured

and stored underground using Carbon Capture, Utilization, and Storage (CCUS) technology leaving nearly

pure hydrogen. (Massarweh et al, 2023). Blue Hydrogen is clean energy as it doesn’t release CO2

emissions. By developing Blue Hydrogen Production Technology Oil and Gas Companies can convert

Most of their natural gas into clean blue hydrogen thereby achieving their financial and ESG Goals.

Below are some Oil and Gas Companies that are investing or have plans to invest in blue hydrogen Technology as

a way to reduce their carbon imprints.

1. ExxonMobil's proposal to build a blue hydrogen production plant on their Baytown refinery and

petrochemical complex. The proposal is predicated on technology that would convert natural gas into hydrogen

while capturing the carbon dioxide emissions released in the process. The effort according to Exxon would

make the Baytown site a major hydrogen producer while helping to lower the refinery’s emissions by “up to 30

percent.” (Kusnetz, 2022).

2. Reliance Industries Limited plan to build a $4 Billion plant that will convert petroleum coke into synthetic

gas to produce blue hydrogen (Bloomberg 2022)

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3.0 CONCLUSION

The oil and Gas industry provides a major source of Global energy as Natural Gas and Oil contribute 17%

and 8% to Global energy needs respectively (Omer, 2012). Though the oil and gas industry is one of the largest

sectors in the world in terms of dollar value it is one of the greatest contributors to environmental pollution.

Thus, the Oil and Gas Companies are currently under pressure to reduce the carbon emissions of their

activities. The Paris agreement (2015) and other international treaties have set environmental targets for this

oil companies to ensure global warming doesn’t exceed 2oC preferably to 1.5oC, compared to pre-industrial

levels. In the wake of the need to combat this climate change, Oil and Gas Companies have devised strategies

to achieve their economic goals and also meet these Environmental, Social and Corporate Governance (ESG)

Targets. Some of the ways to achieve this have been given as;

 Some oil and Gas Companies have invested in Electric vehicles and gone into Joint Venture with other

companies such as Equinor going into a Joint Venture (JV) with Green Investment Group and Equitix to

own the Sheringham Shoal project in 2004.

 Some Oil and Gas Companies have integrated their operations in order to employ Carbon Capture

Utilization and storage at their refining end.

 Some Oil and Gas Companies have invested and developed Renewable Energy technologies to capture

value from solar, wind, biomass, wave and hydropower

 Some Oil and Gas companies have developed blue hydrogen production technologies

By carrying out these strategies, these Oil and Gas companies have positioned themselves to achieve their

financial and reputational goals while reducing their carbon imprints.

However, investment in these low carbon technologies is highly capital intensive but National

Governments and international collaborations have pledge to assist with some sort of stimulus policies to

motivate and encourage Oil companies to successfully migrate. Notable among them is the European Green

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 Deal which proposes €1 trillion in sustainable investments over the next decade (Mckinsey 2021). Also, the

Just Transition Mechanism aims to mobilize at least €100 billion from 2021 to 2027 in financial and

technical assistance to all parties most affected by the transition. National Governments of some countries

have also taken the initiative to drive this decarbonization agenda such as the France government plan to

spend $8Billion on a decarbonized hydrogen economy through 2030. With ongoing Research and

Development in the area of renewable energy, the capital costs of renewable energy will drop and Oil and

Gas Companies will get good returns for their investment as they embark on these low carbon initiatives.

With these strategies outlined, Oil and Gas are better positioned to successfully transition to a low carbon

industry while ensuring they achieve their financial and reputational goals.

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