How To Navigate Decarbonization: The Pathway To Energy Transition
By Kent Kaufield, Energy Leader at EY Canada
Less than a year ago, it’s unlikely any forecaster would have predicted that global oil demand would drop below 92 million barrels per day in the next decade or two — let alone in a few months. While the industry is optimistic that global demand for oil will increase in the months ahead, how quickly and by how much is still uncertain.
The previously unthinkable question: “what happens if demand drops by over 10%?” is now front and centre in all future planning exercises. Planning for these types of demand drops — hopefully next time with longer time frames — will now be a standard expectation of key stakeholders in the organization and investment community.
Along with the question of demand comes the question of renewables. While future projections indicate hydrocarbons will continue to be the primary sources of global energy for another generation, the accelerating renewable trajectory will eventually impact growth in oil demand.
This demand uncertainty, increasing renewable competitiveness and growing climate change regulatory and policy frameworks are leading oil and gas companies towards an uptick in decarbonization — and down the pathway to an energy transition.
Let me be clear: decarbonization doesn’t mean shutting down the oil sands. Decarbonization means truly understanding the carbon footprint and having a transparent, thoughtful strategy to reduce it.
Decarbonization is critical to achieving net zero emissions and, in turn, attracting capital investments needed to pursue growth and extraction opportunities. For the oil and gas industry, investments have been made in negative emissions technology — either through CO2 removals or capture and storage projects, as well as investing in carbon offsets. But as companies continue to emit CO2, they’ll have to remove CO2. And the cost of doing both at the same time quickly starts to become unmanageable.
In the absence of an enterprise-wide decarbonization initiative, net zero targets are unlikely to be achieved. Companies will have to consider these three main components when developing a holistic, long-term decarbonization strategy.
1) Strategy: Decarbonization does not begin and end at the operational level, it’s enterprise-wide. All functions, lines of business, suppliers and customers must be included in a decarbonization strategy. Advanced organizations will have an end-to-end decarbonization data capture and reporting process that supports the strategic objectives and reports on key execution metrics required to make decisions and investments to achieve those objectives.
2) Transparency: Capital markets, industry regulators, employees and society are demanding greater transparency in all aspects of organizational climate strategy and execution. It’s only a matter of time before environmental, social and governance reporting (ESG) becomes a standardized, legal requirement for many organizations. Stakeholders will expect organizations to set decarbonization targets and report measurable progress towards those targets on a quarterly and annual basis, much more aligned with historical financial reporting.
3) Data: Many organizations lack common processes and controls to capture carbon data on a routine basis. Currently, senior management typically relies on decarbonization analysis prepared at varying levels within the organization and it’s manually aggregated for corporate sustainability reporting. The foundation for a decarbonization strategy is for any organization to truly know and understand its current carbon footprint. Processes and controls need to be designed and implemented to capture carbon data at the source, so that it can be measured and reported on a timely basis.
Renewable sources of energy are now more cost competitive and becoming a growing percentage of the energy mix as each year passes. It’s clear renewables and the move towards net zero emissions — both adopted by the oil and gas industry and others — will have a major impact on oil supply and demand going forward. This is creating a particularly harsh reality for Canadian oil and gas companies who rely on long-term oil demand to get a fair return on their capital-intensive investments.
Fortunately, the industry has a well-established culture of innovation and ingenuity that has proven to be resilient through the many ups and downs of commodity cycles. And many organizations are already driving greater efforts to both respond to evolving demands and enhance their own ESG practices. Identifying baseline metrics, setting reduction targets and ensuring management is aligned to achieve those targets are essential elements to success.
Just last week, Enbridge Inc. demonstrated their leadership by announcing it will link progress on ESG targets and goals to incentive compensation. Linking executive compensation to ESG metrics can be a critical steppingstone for the sector to encourage further decarbonization and ensure the transition strategy is measurable and transparent.
Canadian oil and gas companies recognize the opportunities that decarbonization can offer to evolve and continue their own pathway to long-term success. Organizations who can balance supply and demand with navigating the path to energy transition will be in the best position to secure greater capital and attract the next generation workforce that the industry will require to move forward.
Kent Kaufield is the Energy Leader at EY Canada, based in Calgary. For more insights on navigating the energy transition, visit www.ey.com/en_ca/energy.
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