Role of National Oil Companies in energy transition: no more business as usual?

National Oil Companies (NOCs) are key players in global oil and gas (O&G) industry. According to Wood Mackenzie, they dominate the O&G sector by producing 50% of liquids and 48% of natural gas in 2021. NOCs also invest 40% of capital into the sector. But high levels of oil and gas production result in high greenhouse gas emissions. That is why NOCs must play a role in the global effort to decarbonize – will 2021 become a game-changing year?

For many NOCs, the main goal is to maximize oil and gas output and generate revenue for the government shareholders. NOCs are real cash engines for oil-dependent economies. And some countries, like Nigeria, Iraq, Kuwait, Libya, Venezuela, are reliant on oil revenues for more than 90% of government income. So, global strategies to reduce emissions pose a significant threat. Since an increasing number of countries sets numerous net-zero carbon emissions targets, NOCs face profound challenges in addressing the global energy transition and adapting their revenue streams. Today, NOCs are under increasing pressure to present their Sustainability roadmaps as well as to demonstrate low-carbon initiatives. The financing of their future projects may well depend on how they respond to the energy transition and transparency of their communications.

NOCs are still lagging when it comes to setting the emissions reduction targets, with only 3 players having set the net-zero ambitions: PetroChina, Petronas and Sinopec. Many others have less ambitious, short-term targets and some, including Saudi Aramco, Abu Dhabi National Oil Company (ADNOC), Qatar Petroleum (QP) and Gazprom, are yet to set any solid corporate targets. Additionally, several NOCs have future oil and gas production growth targets which will make any emissions reductions challenging. However, the effort to diversify made by some NOCs should not be ignored. Colombia’s Ecopetrol, for example, has recently signed a $3.6 billion deal to acquire electricity transmission company “Interconexion Electrica”. While oil and gas continue to be company’s core business, Ecopetrol will cut carbon emissions and invest in renewable energy.

There is no single model for success.

Several factors define how NOCs respond to the energy transition, including their own carbon footprint, government climate goals, NOCs’ financial resources and access to capital, as well as the ability of NOCs to adapt and acquire new skills in renewable energy. NOCs may pursue very different business models depending on what their governments want.

Last year, European O&G Majors announced emissions reduction and carbon neutrality targets. So, are NOCs next? Increasing stakeholder and investor pressure, the growing marketability of low-carbon products and the physical impact of climate change are all motivating forces pushing NOCs to diversify.

Emissions reduction targets could evolve into lucrative business opportunities for NOCs. So-called “green LNG”, carbon capture utilization and storage (CCUS), as well as reducing natural gas flaring are all under active consideration by several companies. Setting a net-zero target may not be achievable or desirable for all players, but other easier steps to decarbonize could be taken:

  • Improvement of energy efficiency, methane leaks reduction, switching to renewable sources for power and biofuels for heat generation, or using low-carbon hydrogen in refining businesses.
  • Focus on low-cost and low-emission production by maximizing oil and gas output from existing fields, rather than exploring for new reserves.
  • Oil and gas companies are hoping to switch to hydrogen in the future. Swapping hydrogen for e.g. natural gas could prolong the life of existing gas infrastructure; some producers could sell H2 natural gas while keeping the CO2 for re-injection or other purposes.
  • Development of new technology. Investing in R&D and establishing strong relationships with emerging-technology providers will help NOCs to both acquire and reduce the cost of green technology solutions.
  • Transparency: NOCs should publicly disclose their emissions data to maintain their social license to operate at home and internationally, and to communicate their improvements in emissions reduction that they are already making.

There is an obvious gap between NOCs and Majors when it comes to decarbonization efforts. The ownership structures of NOCs and the unique role they play in meeting government objectives allow them to focus on producing oil and gas while demand remains strong. But they can’t ignore the climate change imperative. NOCs will need to improve their operational efficiency and achieve the lowest emissions possible to compete in the coming years. The sustainability strategies of NOCs will depend on their own financial viability and on what states want from them. Analyzing state energy needs and economic priorities can help to understand which NOCs will successfully pull off their own energy transition, which will adapt fast and become more resilient, and which NOCs will be left behind.

More information and in-depth NOCs analysis & their role in energy transition (by category of player) will be communicated in the upcoming blog.

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