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August 31, 2021updated 03 Nov 2021 3:45pm

Energy majors must embrace diversification and innovation to deliver net zero

Reaching net zero requires business transformation and tech on a huge scale. What are the priorities and pain points for energy majors reconfiguring business models?

By lead monitor

Last year, Europe’s three leading oil majors announced the intent to become ‘net zero’ by 2050, both by tackling their own emissions and by helping their customers decarbonise.

Although their business models vary, all plan on investing in renewable energy assets. BP says it will achieve 50 gigawatts (GW) of renewable energy capacity by 2030, while Total is striving for 25GW of capacity by 2025. Shell, which is positioning itself more as an intermediary between green power producers and customers, has said its spending on low-carbon energy will reach 25% of overall expenditure by 2025.

(Photo by ArtJazz/Shutterstock)

The case for doing so is clear. Directly and indirectly, the oil and gas sector is responsible for 42% of global greenhouse gas emissions, according to the International Energy Agency (IEA). This means the sector has a critical role to play in meeting the Paris Agreement’s goals.

With the UN COP26 climate summit on the horizon, such discussions are gathering momentum, and governments are stepping up their commitments.

The UN’s Intergovernmental Panel on Climate Change (IPCC) further added to the sense of urgency on 9 August, delivering what UN secretary-general António Guterres described as “a code red for humanity”. Human behaviour was “unequivocally” causing climate change, the IPCC’s report declared, and without immediate, rapid action to cut greenhouse emissions at a level that significantly exceeds current commitments, the Earth would pass the 1.5°C warming threshold within the next two decades.

Beyond the ethical imperative to act, it heaped added commercial pressure on oil majors, a significant proportion of whose investors were already voicing anxiety about the ways that climate change might affect these companies’ valuations.

While the case for action is unequivocal, the transition is unlikely to be straightforward for power producers that have relied on oil and gas since the outset. As Glen Wheatley, vice-president consulting services at CGI, explains, it can be tricky to reconcile net-zero goals with the world’s growing energy demands.

“Everybody wants lots of energy, and everybody wants their energy to be clean,” he says. “That can be tough for the energy suppliers because you need to increase supply, but there is pressure to do that in a green way. The pressure for rapid change, in an industry that has been stable for decades and decades, is incredible.”

Oil majors create a path forwards

As he sees it, the oil majors are approaching this conundrum in two main ways. Firstly, they are looking at ways to ‘green up’ fossil fuels – making them more sustainable through strategies like carbon capture and more efficient production methods.

“You can’t fix energy poverty without fossil fuels, so you have to do that – that’s going to last for decades,” says Wheatley. “At the same time, there is the absolute need to increase supply with sustainable products. Electric vehicles can be a relatively simple start on this journey, before asking how you can decarbonise planes, ships, large trucks and commercial vehicles.”

He thinks the oil majors’ business models will need to become more nuanced, as they move away from a simple template of extracting oil out of the ground and selling it. To cite just one example, transportation is becoming much more service-centric and the competition to get products to the customer is more varied.

“In the past, consumers were almost obliged to go to a petrol station for fuel, whereas now they might plug the car into their house,” he says. “So how do the oil majors resist losing that market share and how do they offer services in a way that addresses the demand for a sustainable product?”

While the rate of change is different in different parts of the world – with Europe broadly ahead of the curve – the trajectory is clear. Before too long, business-to-business activities will be transacted through a net-zero lens, and government bodies will decline to contract with polluting companies. Once this happens, the cultural change at organisations will accelerate at quite some pace.

The pandemic, too, has served as a ‘short sharp shock’, causing fossil fuel consumption to plummet and driving oil prices to record lows. This has forced oil companies to confront these questions more seriously than they might have done pre-Covid.

“Aspects of the economy will start to grow again, but the pandemic has given us a lens on what the future might look like,” says Wheatley. “I don’t think it’s a coincidence that we’re seeing a lot of activity in terms of marketing, messaging and targets.”

In the meantime, energy companies have challenges on their hands – not least determining how customers are actually measuring their carbon emissions. How do you track your emissions, for instance, if you’re a business for which employees primarily work from home? And what kind of data needs to be collected when you’re implementing a carbon offset? Wheatley thinks we need to come up with some innovative answers.

“In the payments space, one of the ways to measure carbon is to follow the transaction back along the trade chain and see what carbon it has picked up along the way,” he says. “At the moment, when you pay for a cup, you’re paying for the materials and the things in the cup. But in the future, you can imagine there’ll also be a carbon payment attached to that cup that reflects how efficiently it was produced.”

The second area that energy companies will also need to consider is to think beyond the individual customer and look at the energy demands of whole cities. With half the world’s population now living in cities (projected to rise to 70% by 2050), smart cities are a key point of focus for CGI.

“We’ve been doing some work with local government sectors in a number of major cities, to talk about where the opportunities lie to enable a smart city,” says Steve Evans, vice-president of emerging technologies at CGI. “This would improve citizen experience and de facto reduce its operating costs, as well as making cities more dynamic in terms of the flow of people and goods and services, and using less energy.”

Wheatley thinks that the oil and gas majors actually have an edge on newer renewables companies, in that they have the purchasing power to make sizeable investments and move the energy transition forward. While it won’t be as straightforward as just replacing their existing systems with new ones, they do have scope to reduce their emissions in an intelligent, gradated way.

“How do you take all your systems and start to overlay some method of understanding the carbon footprint?” he says. “How do you take your products and turn them into compelling offerings, so that customers can see and feel the sustainable benefits they’re offering? Where CGI has got a lot of experience is taking control of that information and extracting insight out of it. We have some great examples of how that can be done iteratively as well – it doesn’t have to be a big bang approach.”

He points out that while a lot of this movement towards sustainability is voluntary, that won’t be the case forever. In a few years time, zero-emissions targets won’t just be perceived as good for marketing and credentials – they will determine whether a company can stay in business.

“Increasingly, entirely fossil fuel-based organisations will be less favoured by the marketplace, and you can see that affecting share prices,” he says. “I can also imagine a future where a company’s annual report will absolutely need a carbon element as part of an audited submission. To be ahead of that game will be vital.”

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