IOCs rapidly transform on climate: A Q&A with IHS Markit's Atul Arya on CERAWeek
The incoming US government made a decisive re-entry to the Paris Agreement on 19 February. Couple that with the stricter pledges to reduce greenhouse gases that national governments and multinational energy companies are expected to make or already have made by the time the November 2021 UNFCCC Conference of the Parties (COP) rolls around in Glasgow, Scotland. These are just a few circumstances spurring the energy transition that will be the subject of dynamic discussions at IHS Markit's annual CERAWeek event on 1-5 March, held virtually this year.
Atul Arya, a senior vice president and chief energy strategist with IHS Markit and a well-known figure behind the event, discusses what the experiences of the past year have been like for the world's largest oil & gas companies, and how the events of last year, particularly the COVID-19 pandemic, have put their energy transition plans into the global spotlight.
In the conversation below, Arya, an engineer by training and education who has previously served in global positions at BP for over 20 years, shares what he expects to hear at CERAWeek 2021.
How is the current market environment being experienced by international oil companies (IOCs)?
Arya: I think we need to look back at the last year a little bit to see what has happened and where the IOCs are because at this time last year, the world was looking pretty good. The economy was strong, and there was strong growth in demand for hydrocarbons, oil and gas in particular. Of course, the pressure was increasing to address climate change, and invest in more non-hydrocarbons, but cash flow was very good.
The world has completely changed for the IOCs in the last 12 months. There was a significant drop in oil price, and very poor cash flow. Most of the IOCs reported large [full year] losses and large losses quarter on quarter, which has not happened for a long time, so they are struggling.
What should IOCs do to succeed, given finance and transition pressures?
Arya: They have started to think more about the energy transition and investments in renewables, or more broadly lower-carbon investments. They need money for that, and if the money to invest is going to come from their oil and gas operations, then that money is not there to pay dividends and provide debt reduction. What they're doing is improving their performance, reducing their cost base, streamlining their operations—and then figuring out how quickly they can ramp up their investments in the energy and transition space.
One thing they have done very well in the crisis is to keep the operations running and the world supplied with oil and gas, which was a huge challenge, at least in the beginning. Now, they have to shore up their finances, which means a combination of dividend policy changes, divestments, and reducing their capital investment to keep their balance sheets sound.
What strategies have IOCs adopted on the energy transition?
Arya: Not all the IOCs have the same strategy. You can see there's a big contrast between the US and the European IOCs. In the US they are talking more about climate change, but they are not investing in power. They're taking a more cautious approach. The investor pressures are higher in Europe. Regulatory and [other] government pressures are also higher in Europe.
Now, I think in the US, the landscape is changing because of the new administration. They [US oil companies] will see more pressure as the Biden administration has made climate change the centerpiece of its policy.
You know, one of the things which has been interesting is that, in spite of the pandemic, and somewhat surprisingly, the companies have not gone backwards. In fact, they accelerated their targets, and [many] announced net-zero goals. They are putting more focus on this. Normally, you would say, well, in a downturn, kind of going back into the shadows is good, but they have not.
So, I think this transition is here, and companies will have differentiated strategies, and the amount of investments they will make will also vary from company to company. What percentage of their capex and how much in actual dollars they will spend will also vary, but I think I see this trend continuing, this year, and I'm sure he will be covering this at CERAWeek.
What's on the near-term horizon in the energy transition?
Arya: I see a lot of activity leading up to the COP meeting in Glasgow. I think energy companies are going to become more public and more vocal about their views, and also engage more seriously in the public debate and the public discourse, just as they are doing in diversity and equality since the start of the Black Lives Matter protests in the US. Energy transition is becoming a major plan, for not just for oil and gas companies, but also banks, plastics companies, and food companies. You name it. Everybody's focused on that.
What role do you see for IOCs in a decarbonized economy going forward and do you expect to have those discussions at CERA Week
Arya: The general view is that we expect our participants will say the oil and gas companies should go faster on decarbonization. The reality is that oil and gas is going to remain in the mix for a long time to come.
And I think what the oil and gas companies will want to do is make their operations low cost and low emissions. There's a lot of emissions which come out of just producing oil and gas in the operational dimension, such as running a refinery or in the field. [The oil and gas companies] are very large, they have large balance sheets, and they have a global presence.
So they are not going to just see the world disappear, and they will want to be there in the future. And what we have seen in the last six months is that everyone of them, and this is pretty amazing during the pandemic, have come out with a new strategy on energy transition. Shell for instance just last week came out with its strategy on energy transition.
This year, we have speakers of pretty much every single IOC speaking at CERAWeek, and one thing we are doing for the first time is pairing them with someone from a different sector. So, for example, the CEO of Shell will speak with the CEO of United Airlines because airlines are a big consumer of oil, and they need to decarbonize. The CEO of Total Patrick Pouyanne will speak with the CEO of Iberdrola, which is one of the largest utilities in Europe. What is the future of the electricity business and how does an oil company become an energy company? That's the big thing right now. How does an IOC become an IEC or international energy company. Keep in mind there will be big competition right now as big utilities won't want to see their share taken away.
Specifically, when you talk about the energy transition trend, there's been a lot of calls for disclosure of climate risk. Do you expect CERAWeek speakers to address that?
Arya: We have the acting Chair of the US Securities and Exchange Commission, Allison Herren Lee, attending, and she will be talking about what the SEC, a key regulator, is going to be doing about [climate risk]. The trend in Europe is that already there are more disclosures, and we see more of that happening in the US as well.
I think the one big issue we're going to discuss with Allison is the issue of standards and metrics, because right now there is no single reporting standard—in fact, there are many disparate standards and many different reporting metrics, which means that the companies have a lot of reporting to do, [which] could be streamlined. We will discuss that with not only with Alison Lee from SEC but also with major banks and major oil and gas companies. What is it that they would like to see? This is a rising trend.
Are you expecting any major announcements at CERAWeek?
Arya: I would say watch this space because this is going to be the first major platform for many of the senior people from the Biden administration to discuss US climate plans. For example, John Kerry [US Special Envoy for Climate] and the White House National Climate Advisor Gina McCarthy are already confirmed to speak. We have some politicians speaking: US Senators Joe Manchin, Democrat-West Virginia who chairs the Senate Energy and Natural Resources Committee, and former chair Lisa Murkowski, Republican-Alaska, as well as the chair of the House Select Committee on the Climate Crisis, Representative Kathy Castor, Democrat-Florida.
So, you never know what announcements will be made. Alok Sharma, he may make some news as it is the first time he will be speaking with a big energy crowd since he became the President of the UN COP26.
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