Oil industry needs to prepare for low carbon transition

A new report has strongly indicated how the oil and gas Industry needs to look beyond current issue of low oil prices and really consider the long-term implications of low-carbon energy transition.

Oil and gas companies need to see past the current problems caused by low commodity prices and focus on the wider mega-trends that will reshape the future of the energy industry in the long term, according to a report released today by consultancy giant PwC.

The report argues that while oil and gas will continue to play a "vital" role in any future energy system as global consumer demand for reliable and affordable energy supplies increases, firms must reconsider their portfolios in the face of growing pressure to decarbonise.

Viren Doshi, PwC's strategy oil and gas leader, said it is important for companies to look beyond the challenges caused by current depressed prices and seriously consider the other forces that will shape the future of the industry.

"Global demand for affordable, reliable energy will continue to grow for the foreseeable future, but there is a new longer-term backdrop, as the world transitions to a low carbon system," he said in a statement. "Momentum to replace fossil fuels with cleaner energy sources is building, and oil and gas companies need to consider their futures in this context.

"Time and again, successful operators have demonstrated the ability to respond to challenges by taking a long term view, innovating, adapting and gauging major trends as they define medium-long term investment plans. And we are convinced that they can do so again."

Alongside the low-carbon transition, other changes to market dynamics are noted in the report, including OPEC's efforts to protect its market share and the rise of relatively cheap and plentiful US shale gas.

The report suggests four potential scenarios for companies to use when considering how the oil and gas industries may be affected by future trends. In the scenarios the pace of change and the pressures on oil and gas fluctuate, depending on the level of government intervention and consumer demand for clean energy.

In one scenario, PwC suggests that as governments implement COP21 regulation, incentives and direct investments, demand for energy efficiency and renewable energy will rise, putting further pressure on oil and gas firms to diversify their businesses.

Meanwhile, under a business-as-usual scenario, where the sector continues to evolve with limited government involvement, price volatility continues to present major funding challenges. Operators and service providers are forced to collaborate more to drive efficiency, while gas becomes an essential transition fuel as investors look to de-risk their portfolio.

Other scenarios envision rising consumer demand for cleaner energy sources driving private investment in new clean technologies, or the rise of direct government action against further fossil fuel exploration as countries seek to tackle rising carbon emissions.

Each scenario explores the possible effects the low-carbon transition could have on supply, demand and market dynamics, according to Jan-Willem Velthuijsen, chief economist at PwC.

"While in practice, no single future perspective can be neatly 'ring fenced', this framework enables business to consider various tangible scenarios," he said in a statement. "It allows them to reassess their current strategy and plans, with implications for the operating model, partnering strategy, resourcing and technical capabilities and other areas."

In related news, a report released today by the World Energy Council suggests that the growth of "unconventional gas sources" - including shale gas - is reshaping the global gas market in ways that will be felt for years to come.

Alongside the US, Mexico, Saudi Arabia, South Africa and Poland are all highlighted as having significant shale extraction potential, which could lead to a period of stable, cheap gas supplies, the report finds.

The reports come just days after BP was again criticised by environmental groups following the publication of its latest Energy Outlook report, which predicted that while the renewable energy sector will expand rapidly global carbon emissions will still climb by 20 per cent by 2035.

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