By 2040, global power demand is projected to rise by a whopping 79 per cent. But within that energy mix, fossil fuels could make up just 23 per cent of the global energy mix – a fraction of the 61 per cent it contributes today.
The shift towards a world powered by greener energy is unambiguous. We are already seeing disruption occurring in the energy sector, with technological advances making alternative fuels even more viable and economical by the day. In the lead-up to a carbon-neutral energy market by 2050, which energy companies will be the ones to take the driver’s seat, and which will be the ones to lag behind?
Oil and gas companies must now reinvent themselves for the future – for sustained success. A company that is unable to make swift and decisive decisions to embrace the energy transition could miss the myriad opportunities it could bring to their bottom lines (and of course do some good for the environment and other sustainability goals).
And while many may see the transition as a threat to their core business, it takes boldness and transformative leadership to make the right move.
Choose your own adventure
We believe energy companies that are determined to capture opportunities, mitigate threats, and thrive in the future have a variety of paths they can take.
These paths do not necessarily have to be sequential but generally, we see that many energy companies would start with “cleaning the core” by minimising emissions from their asset portfolios, be they oil and gas or utility companies. The next likely step would be to “accelerate the transition” by exploring commercially-viable energy technologies such as wind and solar. Finally, they can “extend the frontier” with innovation – by scaling future fuels and going beyond what is technologically or economically feasible today.
As companies pursue various combinations and variations of these three themes, we believe that they will fall into three distinct archetypes as they navigate the energy transition: The Decarbonisation Specialist, The Energy Major, or The Low-Carbon Solutions Leader.
The specific role that each company steps into will be governed by their assets and capabilities, depending on where they are today. Industry players must assess their strengths and go all-in as one of these three to succeed.
Archetype #1: Decarbonisation Specialist
Developing into a Decarbonisation Specialist can be considered by companies that are already successful in their traditional businesses. The name of the game here is to focus on minimising emissions throughout the business and finding the most efficient production and emissions management capabilities, with an absolute focus on creating a resilient, high-performing core with the lowest emissions and highest value creation.
Companies here should aim to build up a competitive asset portfolio to extend their assets’ viable lives and capture disproportionate value from their assets. They will become the masters of circularity, as characterised by the reduction, reuse and recycling of equipment and waste.
Archetype #2: The Energy Major
As a major disruptor that enters new growth sectors with scale, both oil and gas companies as well as utility companies have the potential to leverage and extend their business and operating models into the wider energy system. Feeling both a push from their current assets and a pull towards new opportunities, the Energy Major will build or add clean energy businesses to their existing assets, for many oil and gas players, this might entail ramping up investments in the electricity business, electric vehicle charging networks, or low carbon technologies. For utility players, they may take a broader look across the energy value chain to discover which areas add the most synergistic value to their existing business and direct investments there.
Archetype #3: The Low-Carbon Solutions Leader
The Low-Carbon Solutions Leader will undertake a profound strategic departure from its current business model. Companies choosing this path will embark on an exodus from their current core businesses, monetise their core assets, and then reinvest and leverage their capabilities and expertise to win in new areas of the emerging clean energy sectors.
They will then take the lead as an asset-light service-oriented solutions provider to support other energy companies in the energy transition by focusing on one or more areas of the new energy system, such as offshore wind, biofuels, hydrogen, or decarbonised fuels.
Back to the future part II: The Asian clean energy major
Clean the core, accelerate the transition and extend the frontiers – these are the next steps that energy companies must take.
Given that many energy companies in the Southeast Asia operate as integrated companies – be it across the oil and gas value chain or as national utilities covering generation, transmission and distribution and retail - they are most likely to find a strategic fit as Energy Majors. Within the region, Petronas was the first oil giant to commit to reaching a net-zero carbon footprint by 2050. Others have followed suit by aspiring to reduce their greenhouse gas (GHG) emissions with varying levels of commitments.
While the reality now is that many regional energy companies are still engaging in their respective traditional business activities, they do have an eye firmly on the future – many have begun investing in the renewables space to grow their clean energy portfolio and, more importantly, their capabilities. Petronas, for instance, set up its Gas and New Energy unit in 2018 and promptly bought a leading Singapore-based solar company AmPlus in 2019.
Nevertheless, regardless of which archetype they choose, all energy companies will first need to start with developing end-to-end visibility of their carbon emissions as well as the associated value pools. They will then need to take action in six areas:
- Measuring and monitoring carbon emissions across all transformations and transactions
- Auditing, recording and reporting carbon emissions against financial models and metrics
- Target and performance-setting
- Reducing, replacing, optimising and offsetting emissions through actions and interventions
- Predicting and rebalancing their portfolios to take into account the financial impact of carbon emissions, costs, and interventions at asset and portfolio levels
- Trading and monetising carbon to enable product and service differentiation
All these are key to driving fresh mindsets and actions across the leadership and workforce as companies work their way towards becoming a sustainable energy business. The time for reinvention and change is now.
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Disclaimer : This content is provided for general information purposes and is not intended to be used in place of consultation with our professional advisors
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