As oil and gas companies respond to the current economic discontinuities, they must choose where and how to compete as the world transitions to a low-carbon future
The COVID-19 crisis has resulted in a material near- term drop in global energy demand, at one point leading to a 30 percent reduction. Yet this is not the biggest threat the oil and gas industry faces.
The recent crisis has proved just how vulnerable the global economy remains to systemic risks, one of the most important of which is climate change. Long before COVID-19, pressure was building to shift the energy system away from one dominated by hydrocarbons toward one in which low-carbon sources play the lead role. The events of the past year, as a recent report by the International Renewable Energy Agency shows, have “sharpened investors’ interest in sustainable and resilient assets, including renewables.” Investors are increasingly seeking out positions that reduce their exposure to climate change as well as the risk of stranded assets. According to analyses conducted by the Wall Street Journal, in the first three quarters of 2020 alone, oil and gas companies in North America and Europe wrote down asset values of $145 billion, roughly equivalent to 10 percent of their market value. Climate Action 100+, an investors initiative that aims to ensure major companies take necessary actions on climate issues, has more than 500 signatories which, combined, account for more than $50 trillion in assets under management. 4 Likewise, many governments are making sustainable investments a keystone of their economic stimulus strategies. And in an unprecedented global decision, Denmark has cancelled all upcoming North Sea licensing rounds in anticipation of ending oil and gas production in the North Sea by 2050.5 Given these dynamics, this is a moment for oil and gas companies to make thoughtful choices: both to improve their economic and reputational resilience, and to consider whether and how to reposition themselves to take advantage of the accelerating low-carbon winds of change.
While the exact pace and path of the energy transition is unknown, the end destination—a low- carbon energy system—is no longer in doubt. The challenge for today’s oil and gas CEOs is how to adapt to a low-carbon era—where to place their bets and how to evolve their companies. Exploring the three foundational questions outlined above will hopefully put them on course.
This article was originally published on the McKinsey & Company’s website.