How oil and gas companies can be successful in renewable power
Climate change is here, and humanity is already grappling with its effects and taking action in all parts of the economy. As part of these efforts, the transition to a lower-carbon energy system requires urgent and fundamental shifts in how energy is produced and used the world over. Such shifts, in turn, require strategic responses from businesses.
Oil and gas companies, whose fossil-based products have long been integral to the energy-supply landscape, are no exception. They need to navigate an environment in which increasingly stringent carbon-reduction targets affect investment decisions, with strong uncertainty about where and how to support activities such as offshore generation, electric-vehicle (EV) charging, and hydrogen production and development. As a consequence, operating models for new and legacy businesses are changing fast.
According to McKinsey’s Global Energy Perspective 2022, fossil fuels such as oil and natural gas will continue to make up a significant share of the energy mix by 2050, partly because of how they combine affordability and security of supply.1 Nonetheless, we believe that oil and gas companies are well positioned to play a meaningful role in the energy transition. Reasons for this include their global scale, the risk appetite of their investors, their large balance sheets and cash positions, and their long-standing relationships with energy customers and stakeholders.
We have analyzed how strategic choices can help build a sustainable-power value chain and have outlined four ways oil and gas companies can lead in the energy transition. These include developing business models with customer centricity at the core, improving energy management and risk-exposure practices, diversifying energy portfolios, and pursuing capital excellence and project capabilities.
A global shift in how energy is produced and used
Shifting toward net-zero emissions requires replacing fossil-based electricity and heat with renewable energy and hydrogen power while balancing the demand for affordable energy as the world transitions (Exhibit 1). Projections to 2030 and 2050 illustrate how this shift could also further the electrification of industry, transportation, and construction while adding new sustainable fuel and hydrogen to industrial processes and transport.
The shift of oil and gas companies into the power industry is not new. In fact, private international oil companies (IOCs) and state-owned national oil companies (NOCs) started investing in cleaner energies decades ago. In the early 1980s, the first major oil company invested in renewables generation by supporting solar-component manufacturing as well as solar and wind project development. Nearly 40 years later, it bought a stake in one of Europe’s largest solar developers. Another major oil company made several investments in the 2000s; in the past decade, it has established a renewables and energy solutions arm and invested more than $5 billion in a variety of business models, including renewables generation, power retail, distributed generation, energy services, and EV charging.
One of the largest NOCs in the world recently announced a target of net-zero emissions by 2050 as well as significant investments in renewable energy. Others have committed to investing billions over the next few years to building a renewable-energy business and launching a fund of approximately $500 million to invest in energy efficiency and renewable-energy solutions.
The success of these investments has been mixed, but there is evidence that momentum will not falter as customer demand for cleaner energy grows and regulatory incentives to decarbonize strengthen. Capital markets are placing higher value on firms that are structurally aligned with the energy transition across sectors such as liquid fuels, power, and equipment manufacturers. By contrast, the major oil and gas companies that are most invested in low-carbon markets have not yet benefited from material uplifts in company valuation. In fact, our research shows that the upside for some leading firms starts to materialize when more than 40 percent of total portfolios are low carbon, while leading oil and gas majors typically allocate less than 25 percent of their new investments into new energies.
Many oil and gas companies are well positioned to become leaders in the energy transition. This is not only because of their global scale, the risk appetite of their investors, their large balance sheet and cash positions, and their long-standing relationships with energy customers and stakeholders, but also because of their unique capabilities related to offshore projects and hydrogen and sustainable-fuel production and transport.
On these points, oil and gas players can offer distinctive value propositions in the following four areas of the energy transition:
- Offshore project development. Oil and gas players with extensive experience in large-scale projects can develop and build integrated projects, including renewables generation and hydrogen and heat production. In addition, some bidders for projects provide offers that include heat and hydrogen investments.
- Hydrogen production and transportation. Oil and gas companies often have long histories with hydrogen production in their refining and chemical processes. In addition, existing capabilities in gas storage and transportation are relevant for hydrogen production and transportation because of their chemical similarities; both gas and hydrogen are flammable gases that need to be kept under pressure and carefully managed.
- EV charging. Players across the value chain, including retailers, refiners, and producers, can leverage their brands, customer relationships, real estate, and fuel stations near roads and highways to deliver fast-charging services for EVs.2
- Decarbonization solutions. Pressure on oil and gas companies to decarbonize has pushed them to develop technical solutions and know-how that can be relevant to other industries. Oil and gas companies can leverage these to offer decarbonization solutions, including renewables generation, energy retail, batteries, and carbon capture, utilization, and storage (CCUS). And because the industry currently relies on fossil fuels and has long-standing relationships with suppliers, its representatives also belong at the table when designing the transition pathway.
