Sector / Oil and Gas
- Climate intelligence
- Trend analysis
What is behind the portfolio diversification observed in some companies in the oil and gas (O&G) sector? How are companies positioned and what are the main dilemmas faced? Within the scope of Petrobras’ strategic planning process for the 2021-2025 period, Catavento was invited to contribute, through a presentation to the company’s leadership, with its vision on the transformations in the energy transition scenario and the different possible positions of O&G companies.
Among the main guidelines that guide diversification are the uncertainties regarding the future demand for O&G, in the face of greater climate restrictions and transition to a low carbon economy , in addition to greater pressure from investors. Regarding this last point, it should be noted that the number of shareholder resolutions related to climate for O&G companies increased by 63% in the 2015-2019 period, compared to the previous four years . In such resolutions, investors demand transparency regarding climate risks, portfolio resilience to a 2°C scenario and goals aligned with the Paris Agreement. In addition, it is possible to notice a change in the perception of risk in the O&G sector, observed through the increase in the cost of capital and the rates of return required for project approval .
In this context, O&G companies seek to adapt and respond to growing pressures in different ways. The adopted strategy varies according to some determining factors, such as (i) geographic region of operation and type of interaction with local governments; (ii) degree of exposure to investors and final consumers; (iii) perception of transition or market risks and (iv) type of expertise developed and consolidated. In this sense, most companies seek to reduce their emissions and promote efficiency in operations, while the effective portfolio diversification for new forms of energy in a more forceful way tends to be concentrated in European players. There are also companies that seek to integrate new renewables into existing operations, seeking both to reduce emissions and eventually reduce costs, as in the case of North American IOCs, which are among the largest corporate buyers of renewable energy. Finally, there are those companies that choose to remain focused on O&G, leveraging on cost competitiveness and carbon efficiency.
The strategic choice, in the end, must take into account the expected increase in demand for energy, notably in Asian countries, a key factor to support the expected economic growth and social development. It must also be taken into account, however, that the profile of this energy demand is constantly evolving, with the ever stronger trend of prioritizing low carbon sources.
Therefore, should O&G companies position themselves as energy companies, with a wide range of sources in their portfolio, appropriating businesses with a higher expected CAGR (renewables)? Or should they prioritize the existing window of opportunity at O&G, focusing on the business with consolidated expertise and accepting decreasing growth rates?
Such a non-trivial choice still faces the challenge of dealing with the most appropriate timing for diversification. If O&G companies migrate to new energies “ahead of time”, they must deal with the need to develop new skills and competencies, in addition to the relevant challenge of maintaining adequate levels of shareholder return . If they are slow to respond, on the other hand, they may suffer to attract and retain talent, as well as being subject to the risk of rising capital costs and increasing pressure from ESG investors.
Through its presentation, based on analytical rigor and synthesis capacity, Catavento sought to provide Petrobras leadership with inputs that enrich the company’s strategic reflections in a challenging and inspiring moment of changes in the energy sector.
Sources and links:
 IEA. The Oil and Gas Industry in Energy Transitions”, 2020
 CMS Law, Capital Economics. “Oil & Gas Energy Transition – Evolution or Revolution – the role of O&G companies”, 2020
 Oxford Institute for Energy Studies. “Energy Transition, Uncertainty, and the Implications of Change in the Risk Preferences of Fossil Fuels Investors”, 2019
 Wood Mackenzie. “How serious are oil and gas companies about the energy transition?”, 2019
Petrobras is a publicly-held corporation that operates in an integrated and specialized manner in the oil, natural gas and energy industry. The company is present in the exploration and production, refining, marketing, transportation, petrochemical, derivatives distribution, natural gas, electricity, gas-chemistry and biofuels segments.
Source: Petrobras website