Representatives of the 197 countries that are parties to the United Nations Framework Convention on Climate Change world will gather in Glasgow for the 26th meeting of the Conference of the Parties, or COP26 as it is better known.
They arrive at the meeting informed by the IPCC Sixth Assessment that human activity, principally the burning of fossil fuels, has led to global warming of 1.1oC, with changes to the climate seen in every region on earth. The IPCC states that limiting warming to 1.5oC is still possible, but only if we make strong, rapid, and sustained reductions to emissions now.
Agreements made in Glasgow will have a significant impact on the climate for generations to come. The emissions targets set will define the changes required to the world energy system and have direct consequences to oil and gas companies.
In this paper, we set out our insights on the challenges that climate change and the world response present to the oil and gas industry and make recommendations on how companies can analyse their physical and transition risks, mitigate their operational emissions, and create low-carbon businesses, such that they can thrive through the energy transition.
Key findings from the report include:
- Energy producers can make similar returns from renewables as they have made from oil and gas, with less risk. We believe the focus of energy companies should be on establishing a leading position in power generation as the most lucrative part of the low-carbon power value chain, as upstream is in the oil and gas value chain. We estimate the market size of this to be c.$240bn on a net profit basis in the US and Europe alone.
- Leading generation-focused global power companies are currently focusing on renewable energy and are achieving comparable financial performance to oil and gas investments, at c.10% ROACE. Therefore, we believe oil and gas companies can profitably enter this market.
- Establishing a renewables business can not only be profitable to oil and gas in the near term, but also provide a critical foundation to being a major player in the rapidly emerging green hydrogen fuel and electric vehicle markets. Given the scale of generation required and the time needed to take projects from development to operation, energy companies must start now.
For more information on Baringa's work in this area, please contact:
Johan Nell, Energy & Resources sector
Andrew Mercer, Energy & Resources sector