Sector / Oil and Gas
- Trend analysis
Clarissa Lins, founding partner of Catavento, was invited to participate in the opening panel of the Petrobras HSE and Climate 2021 Congress, held in November 2021, as a keynote speaker, alongside Bjorn Otto Sverdrup, Senior Vice President for Sustainability at Equinor and Chair of the Executive Committee of the Oil & Gas Climate Initiative (OGCI). The session was moderated by Viviana Coelho, Executive Manager for Climate Change at Petrobras and focused on the energy transition and the climate and ESG challenges for the O&G sector.
Clarissa started her presentation by acknowledging the growing commitments made during COP26 and their potential impacts on the O&G sector, highlighting the global pledge to reduce methane emissions, the announcement of financial institutions with US$130tn under management seeking to align with a zero net scenario in 2050 and countries committing to no longer promote public funding for international fossil fuel activities.
Clarissa then presented data which demonstrate the acknowledgement of the climate crisis by almost 2/3 of the global population , which is reflected in a significant increase in the number of emissions neutrality commitments by companies and countries, already covering over 70% of global CO2 emissions and 80% of GDP .
Despite the urgency and need for changes in the way society produces and uses energy – responsible for more than 74% of global GHG emissions  – the percentage of fossil fuels has remained constant in the global energy matrix since the 1990s . In this sense, there is a need to increase by 4x the volume of investments allocated to clean energy, reaching US$ 4tn by 2030 in a scenario aligned with net zero emissions in 2050, according to the IEA . At the same time, investments in O&G exploration and production could remain stable until 2030, as long as there is an effective reduction in the demand for fossil fuels, something challenging given the dependence of sectors that are hard to decarbonize: fossil fuels still account for 95% and 65% of energy demand in transport and industry, respectively .
Faced with the challenge of transition, it is also worth discussing how much society is willing to bear the costs and potential trade-offs of a low-carbon economy. Nearly half of respondents to a recent Edelman survey are in doubt or unwilling to bear any impacts on travel costs, personal comfort and work safety in carbon-intensive sectors .
In this scenario, a growing number of investors, including via Climate Action 100+ and GFANZ, demand the establishment of goals aligned with science and robust transition strategies by the O&G sector.
Companies are therefore required to excel in emissions management, aiming to reduce operational (scope 1 and 2), value chain (scope 3) and methane emissions. Furthermore, they can adopt different strategic approaches, such as a resilient production in terms of cost and carbon, technological innovation for decarbonization (e.g., CCS), diversification into new energy sources and even divestment of their traditional fossil businesses. Finally, they must not give up a robust climate governance that values climate risk management integrated into strategic planning, qualified climate leaders and transparency in line with best practices, such as the ones presented by the TCFD.
Lastly, Clarissa highlighted that the O&G sector will continue to play an essential role in the coming years in providing affordable and lower-emission energy which will enable socioeconomic development. However, pressures are not likely to ease and the industry must seek resilience while engaging with its customers to monitor and influence demand shifts towards a low-carbon economy.
 UNDP – “People’s Climate Vote”, 2021
 Energy Transitions Commission – “Keeping 1.5°C Alive: Closing the Gap in the 2020s”, 2021; IEA – “World Energy Outlook 2021”, 2021
 IEA – “CO2 emissions from fuel combustion”, 2020
 IEA – “World Energy Outlook”, 2021
 IEA – “World Energy Outlook”, 2021
 IEA – “Net zero by 2050”, 2021
 Edelman Trust Barometer – “Special Report: Climate Change”, 2021
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