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Counting Carbon: Navigating the Energy Transition


Cowen’s Energy & Sustainability teams have developed an emission-based framework to explore how hydrocarbon companies navigate the Energy Transition. We explore pathways for the power and transportation sectors to decarbonize based on economic clean-tech substitutes, and how those efforts affect both oil & gas demand and emissions. We also examine how companies account for their own emissions, comparing metrics and targets within the hydrocarbon subsector.

The World Is Undergoing an Energy Transition

Climate change is a result of growing greenhouse gas emissions (GHG). Energy consumption accounts for 75% of GHGs. Oil & gas emissions account for 50% of global GHGs. Put another way, oil & gas companies produce and distribute products that are responsible for half the climate change problem, and essentially all their products contribute to climate change. As a result, the world is diversifying energy sources, known as the “energy transition.” Oil and gas companies and investors alike are reexamining these companies’ business models.

Emissions-Based Framework to Explore Oil and Gas’ Role in Energy Transition

We have established a proprietary emissions-based framework to ascertain how oil and gas companies will manage the energy transition. We evaluate relative economics between incumbent fossil-fuel energy sources and clean-tech alternatives and aggregate GHG emissions from those fossil fuels.

The purpose of this framework is twofold:

  1. to forecast the trajectory of oil & gas demand over the next decade, critical to the immediate financial health of oil and gas companies
  2. to forecast emissions reduction progress relative to global goals to limit the impact of climate change

These forecasts will help determine when and to what extent oil and gas companies should diversify.

Stable Oil & Gas Demand to 2030 With Limited Emissions Reductions

The next decade will be critical for proving the viability of alternative energy solutions. Our cost curve analysis suggests solar and wind power will continue to grow market share from ~10% currently to 30% in 2030. This will drive incremental demand and coal substitution. Economic substitution for other renewable energy sources is less clear.

Medium-duty commercial vehicles, which account for 5% oil demand, are most likely to decarbonize. Combustion engine passenger vehicles currently account for 23% oil demand. Passenger vehicles could see an increase in market share of battery electric vehicles (BEVs). We expect an increase from <1% currently to 10% by 2030. However, penetration could be regionally varied and subsidy driven. Low-emissions substitutions in other sectors remain unclear.

We see oil demand flat to up through 2030 and gas demand growing through 2030 despite clean-tech penetration. This is based on an assumption that underlying energy demand continues to grow. As a result, we expect the world to fall short of 2030 greenhouse gas emissions reduction targets.

Two Scenarios for How Climate Change Is Addressed Globally

We expect the world to adjust to falling short of its GHG emissions reduction targets. There are two potential paths that are not necessarily mutually exclusive.

In the first scenario, current technologies establish a trajectory in the late ‘20s to significantly reduce hydrocarbon demand in the 2030s. This would come about due to economic improvements and/or government subsidies.

The second scenario is one in which alternative energy is unable to establish widespread commercialization potential. Thus, the world would adopt other carbon management tools that incentivizes carbon capture & storage (CCS) as well as increased usage of nature-based solutions (NBS).

The former scenario creates a circumstance in which oil and gas companies will need to significantly change their strategies to remain competitive. The latter scenario would require more modest adjustments.

Cash Flows from Legacy Hydrocarbon Business to Fund Transition

We believe companies need to retain a hydrocarbon footprint to generate the cash flows required to fund any “energy transition” investments. This is especially due to the lack of immediate scale in green energy.  We expect oil and gas companies to continue to establish targets to manage their own emission footprint, similar to companies in other sectors. However, ~90% of emissions occur when customers use the product, forcing companies to reexamine their strategy.

European IOCs Managing Energy Transition Best; US IOCs High Risk/High Reward

European IOCs are pivoting more quickly than the US. We see TOT best managing the risk by slowly ramping investments in energy transition verticals, while retaining its core oil & gas operations. BP is pivoting harder to renewables power, while divesting out of  its hydrocarbon business. We see this as a higher risk, lower cashflow proposition.

US IOCs are not making any material strategic changes. This could suggest they are waiting for clearer attractiveness in energy transition opportunities. This strategy is higher risk. They may need to invest a higher proportion of capex later to build the technical capacity to participate in spaces European peers are currently investing in. Though, there’s also an opportunity for higher reward if there is a change in regulation. If there’s a lack of global progress on emissions reductions, governments could incentivize decarbonization of legacy operations (particularly through CCS) and increase utilization of NBS.