Companies are approaching the energy transition differently but optimizing a portfolio can be an essential part of their strategy.
By: Wafa Jafri, Partner, Energy and Mobility Deal Strategy, KPMG in the UK; Adrian Scholtz, ENR Global Deal Advisory Leader, KPMG in the UK; Chris Wren, Director, Energy Transition Advisory, KPMG in the US
Oil and gas companies will be essential in the global effort to reduce carbon emissions and transition to a cleaner energy future and that energy transition cannot happen without the active participation of the oil and gas sector. The role of a balanced portfolio is a crucial part of the overall strategy in the transition to cleaner energy.
With that belief in mind, the main question becomes what the oil and gas sector can do to deliver meaningful and sustainable progress on energy transition.
At a recent industry conference in Calgary, Canada, the CEOs of Saudi Aramco and Exxon Mobil expressed their support for the global transition to cleaner forms of energy, but they also agreed that oil will play a major role in this transition for decades to come to ensure security of supply and resilience.
“There seems to be wishful thinking that we’re going to flip a switch and we’ll go from where we’re at today to where it will be tomorrow,” said Exxon CEO Darren Woods. “No matter where demand gets to, if we don’t maintain some level of investment in the industry, you end up running short of supply, which leads to high prices.”
Alberta Premier Danielle Smith, whose province hosted the conference, added that energy must remain affordable and reliable. She also provided what may be a summary of the view held by many conference participants. “We are transitioning away from emissions,” Smith said, “we are not transitioning away from oil and natural gas.”
It is tempting to categorize the oil and gas sector neatly into those companies proactively embracing the energy transition and those that are seemingly rooted in traditional practices. However, today’s oil and gas companies can best be described as energy companies, each with various levels of commitments and investments in energy transition.
Some oil and gas companies are swiftly pivoting toward becoming sustainable energy providers. They are channeling significant amounts of capital and corporate resources into renewable energy and low-carbon technologies, underscoring a vision for a future that leans toward a future of lower-carbon energy sources. Many of these companies have already pledged to achieve net zero Scope 3 emissions by 2050. These companies are not just adapting to change but often driving it, leveraging their expansive scale and expertise for innovative breakthroughs. Their key challenge is to discern exactly where and when to invest while gauging the appropriate scale of these investments.
Other oil and gas companies are harnessing their current capabilities and focusing on adjacent energy transition technologies. Fossil fuels are still at the foundation of their business model, but these companies are also expanding into wind and solar, hydrogen as a green fuel, retail electricity, biofuels, and carbon capture technologies. In some cases, they are forging partnerships with emerging green tech startups. By keeping a finger on the pulse of multiple energy technologies, these companies are well positioned to effectively pivot in response to emerging technologies, regulatory shifts, and market demands in a rapidly evolving energy landscape.
Even with a variety of responses to the energy transition, a clear majority (78 percent) of ENRC CEOs in the 2023 KPMG CEO Outlook say they have fully embedded environmental, social, and governance (ESG) policies into their business to create value.[2] Significantly, in an industry that has not always put emphasis on the customer, 22 percent of CEOs in the survey believe that ESG will have the greatest impact on their customer relationships over the next three years.
Adoption of ESG strategy over the next three years
The variety in strategies is also reflected in the M&A market globally where both the O&G and Renewables sectors are showing robust deals activities. The global deals market for renewables has grown 76% between 2020 and 2022, and continue to be robust in 2023, dropping only 5% while the overall M&A market saw a 34% decrease in deal value (2023 Q1 to Q3).[3]
By embracing this spectrum-wide viewpoint, there can be a more layered understanding of the energy sector, helping the world to recognize that corporate strategies stem from myriad considerations ranging from inherent operational strengths to market projections, stakeholder aspirations, and geopolitical dynamics. As a result, there can be more constructive dialogue about how best to support and accelerate the collective push toward net zero.
The deep knowledge, experience, and capital resources of oil and gas companies can be leveraged to help accelerate the transition to sustainable energy. Here are several key opportunities for these companies:
At events like COP28, oil and gas companies can showcase their initiatives and the role they can play in helping the world achieve its transition to sustainable energy. KPMG energy specialists can work with you to set your ambition, develop your roadmap and help you execute your strategy as you reorient your organization to succeed in the new energy environment. Support areas include the following:
1 “Big Oil Shows Support for Energy Transition But on Its Terms,” Bloomberg, September 18, 2023
2 “2023 Global CEO Outlook survey results analysis, Energy and natural resources (ENR) sector, KPMG International, October 2023
3 KPMG Analysis from Pitchbook and CapIQ data, extracted November 10, 2023
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