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Reid Morrison leads PwC's Global Energy Advisory practice
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US oil and gas sector weighs transition options

Carbon capture and hydrogen high on agenda, but good returns from hydrocarbons still a priority

Reid Morrison is a principal in the Houston office of PwC US, a member of the PwC professional services network of firms, and leads the Global Energy Advisory practice. He began his career in the energy industry, gaining experience in the US and internationally in roles spanning both the upstream and downstream at oil majors, NOCs and independents. Morrison’s industry experience also includes biofuels, renewables and trading. In the consulting sector, Morrison has more than 25 years’ experience of helping clients improve their operational and commercial performance. Morrison spoke with Transition Economist about the opportunities and challenges facing the US oil and gas sector as it starts its energy transition journey.

The European oil majors have been very vocal about their transition strategies in the last year. Where are the US oil companies in the transition?

Morrison: One of the interesting things that was a catalyst for the European companies is that they have a very constructive engagement and dialogue with the different stakeholders like governments and NGOs.

They just seem to be more inclined to have those conversations. The relationship between the regulators and the industry is robust and they have historically paid more attention to it. And part of this energy transition is going to require cooperation and collaboration.

"US companies are looking at this a little bit more conservatively because it is limited to greenfield development opportunities where there are already a lot of competitors"

I give credit to the European majors that they are engaging with the government and the regulators much more proactively. That is a key ingredient.

US oil companies are beginning to really evaluate the scenarios, look at the options and have conversations with the different stakeholders, including regulators and government officials at federal and state level. And they are finding that the tone of the conversation is more constructive than maybe they presumed.

What will the US oil sector’s transition strategy look like, and where will the main emphasis be in terms of technology?

Morrison: It is going to have three dimensions. One is the core business of safely and cleanly producing energy that generates good returns—that is the first priority.

And second is the new technologies around carbon capture, hydrogen and other things that require deep science and engineering capability, the ability to execute capital projects at scale and a strong balance sheet, and being able to attract investors and connect the dots. The US should be a leader in this.

And then, third, we turn to wind, solar and other renewables. US companies are looking at this a little bit more conservatively because it is limited to greenfield development opportunities where there are already a lot of competitors. You have a group of companies which are maybe non-traditional competitors, which are now competing for the role of energy provider and building the solar and wind resources and then having the virtual power-purchase agreement to back up the financial commitments. You look at the oil and gas companies and evaluate the playing field, which looks crowded and requires some capabilities that they do not historically have.

What role is shareholder pressure and ESG playing in terms of shaping US oil companies’ net-zero strategy?

Morrison: It is front and centre as a top issue but second to returns.. The first question is: with the positive free cash flow, is your plan to return capital to shareholders via dividends and share buybacks or are you going to use it for growth?

We surveyed the institutional investor community and asked what it wants out of oil investments, what they think is important. And there is still a disconnect. The institutional investor wants a dividend that is dependable and in the 5pc+ range, while the oil and gas industry is still thinking a 2pc dividend will attract investors.

And then the second question is: what is your sustainability strategy? And that's where you're starting to see this move from being a corporate reputation discussion to a licence to operate discussion.

"The institutional investor wants a dividend that is dependable and in the 5pc+ range, while the oil and gas industry is still thinking a 2pc dividend will attract investors"

How are investors evaluating the oil and gas companies’ ESG strategies?

Morrison: There are some distortions in this space when you get into the discussions about which standards companies should use and whether stakeholders can trust the disclosure that you have and why we are not all using the same standards and metrics. Then you have probably got the recipe for some distortion because investors are asking the same questions

One of the things that all parties are just starting to realise is that we have got standards that appear to be competing with themselves. And investors and stakeholders as a consequence are almost defaulting to greenhouse gas emissions as the one metric that has been around for a long time—we can understand it and therefore we can use that as the primary metric. I do not think it is robust enough to tell the whole ESG story based on a single metric. It is based on an ISO Standard so it is solid, but it is not comprehensive when you are thinking about sustainability and the broader purpose of ESG.

What do you think the answer to this is? Is there a particular index or measure that you advise your oil and gas clients to look at or adopt?

Morrison: The  recipe for this has three elements: One is transparency—which standards are you choosing to use and why? Then there is the development of a framework for what the industry believes is a proper way to evaluate each dimension of ESG. And then the third is the recognition that complaining about this earns you no credit. It is a field of study that is in its early days so there is going to be an evolution. Do not take the fact that there is not a single standard right now as a reason to be grumpy, take it as a sign of maturity of this whole space that ten years ago was not even in most people's lexicon.

In Europe, there is discussion over the responsibility that oil and gas companies take for emissions across the supply chain and into the demand side. How is that discussion playing out in the US?

Morrison: It is definitely up for discussion, and the tone of those discussions has a bit of an edge to it. If we default to cradle-to-grave and if all the stakeholders say we are sorry, oil and gas, that is your problem, then there is going to be a consequence on the cost of energy for which the end user will ultimately pay a higher price.. And the thing that is so interesting is technology is available to capture those emissions at the refinery or at the tailpipe of a car—you have to look at the incremental cost that has not been factored in.

How important will carbon offsets be to the oil and gas industry?

Morrison: The oil and gas industry has an opportunity to be the provider of the verified high quality CO₂ offsets that companies can put onto their balance sheet and use in their disclosures. Once they turn the machine on and start capturing CO2, they will build a bank of CO offsets to use at their own disposal to reduce their emissions and sell the rest.

And that is why I think the industry’s strengths play in their favour as there will be a demand for all the carbon offsets it produces. The industry should be one of the main providers of offsets because the buyers will seek quality, verified offsets.

What impact on the oil and gas companies has the Biden administration had so far?

Morrison: It has altered the discussion around the energy transition in a positive way though that may sound counterintuitive. There is a new set of leaders coming in with a new set of objectives.  Now that these government leaders are in their roles and have the full set of facts, the campaign slogans have faded and the real discussions are starting.  All parties are going to have a hand in this and the tone and the nature of the dialogue is more respectful and constructive than people had expected it to be.

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