The energy industry has made strides in the past decade to build a more sustainable energy system. Recent global and geopolitical events, however, have revealed how vulnerable the industry is to supply and demand disruptions. As a result, many energy companies have shifted their focus from energy sustainability to energy security. This reassessment is understandable. But it is also shortsighted.
Many believe the dual imperatives of energy security and sustainability are at odds. They are not. While it is likely that a near-term focus on energy security may result in companies paying less immediate attention to sustainability, that imbalance won’t be long-lived. In fact, we believe a focus on energy security now will actually serve to accelerate the drive to net zero over the medium and longer term. That is because companies reimagining their strategies around energy security will quickly learn that future security depends on a more diversified mix of energy sources. In this regard, the near-term focus on energy security could provide a catalyst for more ambitious and achievable sustainability goals.
Security: Energy for all
Energy is one of the critical enablers of economic prosperity, sustainable development and societal health. Yet for decades, the energy that is needed to meet the needs of many poorer countries and emerging markets is either unaffordable or simply unavailable. Their livelihoods and wellbeing are perpetually at risk. Today, nearly two billion people have either no access or just limited access to energy.1 That number will surely climb as the world adds another two billion people in the coming years, mostly in developing nations where energy security already poses the greatest challenge.2
But the issue of energy security is no longer limited to emerging markets. A historic shortfall in energy supplies, inflationary pressures and Russia’s invasion of Ukraine have caused OECD countries and developed economies to also experience energy insecurity—many for the first time. Europe, for example, is poised to see energy demand outstrip supply by 21% according to our analysis.
Ramping up the capacity of alternative energy sources, such as renewables or nuclear energy, can help close the supply/demand gap. However, that effort will take considerable time. While coal could be used to fill some of the energy demand-supply gap, that approach jeopardizes the world's commitment to decarbonization. The short-term solution will involve upping production of oil and gas.
Demand for oil and (to a lesser degree of likelihood) natural gas may peak in the next decade as new technologies and alternative energy sources become more competitive. But even if oil and gas lose a bit of their share in the global energy mix by 2050, total volumes of oil and gas are expected to grow for at least the next decade and possibly beyond. Energy security will, therefore, depend on companies’ abilities to maintain oil and gas production, while also investing in alternative energy sources.
Sustainability: Energy for good
Energy security cannot be achieved in a vacuum. It must be accompanied by a strong focus on sustainability, Scope 1-3 emissions reductions and scaling and expanding clean energy technologies and supplies. Secure energy is sustainable energy. And sustainable energy can be a compelling business.
We believe sustainable energy is the field in which companies can capture future growth and related market multiples. In a world with increasing energy needs and a compression of fossil fuels’ share in the energy mix (from 80% to up to 50% by 20503), low-carbon energy can grow by leaps and bounds. We have already seen that in wind and solar. We are now set to see, or at least require, faster growth in areas like carbon capture, utilization and storage (CCUS), hydrogen, alternative fuels, and energy storage. In other words, low-carbon plays are essential for the long-term vitality of energy companies.
The good news is that over the past several years energy companies have embraced the sustainability agenda. There are several reasons, including customers and investors’ growing interest in environmental stewardship and regulators’ toughening stances on carbon emissions. The benefits of energy sustainability, however, extend beyond goodwill and investor interest. Our research has found that energy companies that achieve better financial performance seem to be the ones paying greater attention to environmental, social and governance (ESG) metrics. While it’s too early to attribute causation, a correlation appears to be emerging between ESG performance and better stock prices, lower cost of capital and higher shareholder returns.
Even better news: Our most recent research confirms that energy companies are placing greater importance on both security and sustainability. From an overall sample of 201 companies, energy security is now getting the most attention. But companies identified as reinvention leaders in our survey are emphasizing both. As they should.
Among oil and gas companies, both energy security and sustainability are growing in importance.
Please indicate the level to which the geopolitical events in the past months have changed focus of you company in terms of energy security vs. energy sustainability? Source: Accenture Oil and Gas Reinvention Index 2022 N=201 c-suite executives from 2021 companies globally.
A reversal of fortunes
Since the previous economic downturn in 2010, the energy industry consistently underperformed. But in 2021, high commodity prices—as well as ongoing digital transformations and financial discipline—led to high profitability. The industry’s lackluster stock market performance came to an end. Returns, cashflows and investor interest all made a strong comeback. The timing is perfect, since new and significant investments will need to be made in energy security and energy sustainability.
A successful transition to a secure and sustainable energy future will require appropriate investments in hydrocarbon and non-hydrocarbon energy production, as well as in decarbonization technologies. The level of investment required is enormous. Our analyses show that new investments of approximately $100 to $125 billion each year in oil are needed to meet demand by 2030. Similar yearly investments will be needed in gas and, particularly, liquified natural gas (LNG).
Ensuring energy sustainability will require nations and energy companies to also ramp up their investments in clean technologies, energy efficiency solutions and low-carbon fuels. We believe technological advances in three areas, in particular, will be critical to ensuring a sustainable energy future: Hydrogen; biofuels; and carbon capture, utilization and storage (CCUS). Further, we estimate the industry will need to at least double (and likely triple) its annual spending on such solutions to drive the energy transition. For example, investments in energy efficiency solutions need to grow by 94% in just the next eight years. Investments in low-carbon fuels and CCUS will need to grow by more than 850% over the same period. The new investments that are needed will exceed $4 trillion per year by 2030.
Focusing on either energy security or sustainability at the expense of the other will potentially derail the entire energy transition.
A reversal of investment strategies
While the industry now has the money to start making the types of investment needed to ensure energy security and sustainability, there is little evidence they are doing so. The industry has slashed its capital expenditure over the past eight years. Spending on capital projects is not keeping pace with the growth in demand for oil, gas and LNG.
There is a good chance that this lack of investment may continue. Our analyses suggest that, despite their improvements in financial performance, energy companies will be slow to jumpstart their investment strategies—both in securing energy and in making it more sustainable. Today’s high inflationary environment complicates matters. Costs that are 25% higher than five years ago will need to be covered by additional spending on capital expense, limiting the actual net investment.
Cash from operations, investments and ratio.
Source: Accenture analysis based on Rystad Energy data.
Clean energy investments needed by 2030 could exceed $4 trillion.
A balanced energy transition strategy
A sustainable energy system that does not ensure energy security is not sustainable at all. Conversely, a secure energy system that is not sustainable will do little to ensure long-term energy access and affordability. Energy security and sustainability go hand-in-hand. Striking the right balance between the two is critical.
The energy industry now has the opportunity (and financial wherewithal) to set a new course to balance their energy security and sustainability agendas. We believe there are five actions they need to consider.
Accenture estimates that global demand for energy will grow by approximately 16% by 2035. This means that the calls for energy companies to temper their production are not realistic. Hydrocarbon providers will play a critical role in the energy system for years to come, which means traditional hydrocarbon investments must be maintained and expanded to achieve short- and medium-term energy security.
But the future of the energy industry does not lie in hydrocarbons. The long-term imperative for energy companies must involve scaling technologies that offer the fastest route to decarbonization. We believe renewable power, hydrogen, biofuels and CCUS hold particular potential for creating an energy system that is as sustainable as it is secure. Equally, if not more, important will be investing in solutions that will reduce the energy intensity of the entire system.
The homogenous energy system we’ve grown accustomed to is becoming much more heterogeneous. The new system will enable consumers to tap different sources of energy to meet the needs of different industries and geographies. To compete in this new environment, energy companies need to define the role they want to play in a secure and sustainable energy future. We believe there are three options: Hydrocarbon Specialists; Energy Majors; and Low-Carbon Solutions Leaders.
Leaders across these archetypal roles will need to reshape and balance their portfolios to deliver on the dual security/sustainability imperative. New capabilities will be needed to understand market-by-market and sector-by-sector demand dynamics, as well as returns on all their capital allocations. This will enable them to adjust their asset portfolios to the most economical plays on a per-Joule basis.
Accenture research has found that enterprise reinvention leaders in the energy industry are moving beyond pilots and rapidly deploying new strategies and ways of working across the value chain. They are using frontier technologies, data, artificial intelligence (AI) and agile methods to drive a step change in performance. And perhaps most significantly, they are compressing their transformations by focusing on several aspects of change simultaneously.
Energy companies have embraced ambitious net-zero targets for 2050. But the scale of investments and scope of actions needed to achieve their sustainability (and security) goals require a steady pace. The only way energy companies can stay on track is by setting interim targets for 2030 and 2040 and clear accountability around short- and medium-term milestones and introducing greater rigor and consistency to carbon measurement and intelligence.
The level of investments required to achieve energy security and sustainability are so significant that the onus of responsibility cannot fall to a single company, industry or country. Private-public partnerships and collaboration with industry peers and across sectors will be key. This is especially relevant in the development and scaling of new technologies and in tackling Scope 3 emissions of hard-to-abate industries.
Working together will allow industry players and public partners to achieve economies of scale and drive system-wide efficiencies. Collaboration will spark further innovations that would drive costs of these new technologies down and enable the development of full-scale projects. It will help create a secure and sustainable energy future.
The energy industry is at a pivotal moment. The ongoing decarbonization transition, coupled with more recent concerns about energy access and affordability, is forcing all industry players to re-evaluate how they will compete in the new energy system. How they will deliver—and generate—value. And how they will balance the energy security and sustainability imperatives.