How the Energy Transition is Shaping the Oil and Gas Landscape

As the last few years of volatility have shown, the oil and gas supply chain is complex. Adding in renewables and considering the energy transition adds yet another complicated layer to the mix, especially for procurement teams.

However, the energy transition is a crucial consideration, as 2023 was the warmest year on record, and extreme weather and climate-tied events continue to worsen globally.

As oil and gas companies seek areas where they can improve efficiency and increase investments in clean energy, they’re also cognizant of the current demand for oil and gas products and byproducts. With more scrutiny on oil and gas companies than ever before, it’s crucial to understand how the current landscape and energy transition are affecting oil and gas procurement teams and what technologies can drive positive change.

This blog dives into the current oil and gas landscape, providing an overview of the history of the energy transition such as the Paris Agreement, what’s currently impacting the supply chain, and how oil and gas companies might move forward by improving their procurement function through Predictive Procurement Orchestration (PPO).

Decarbonization: What it Means and Why it Matters

Decarbonization refers to reducing or removing human-caused carbon dioxide (CO2) emissions into Earth’s atmosphere. It is achieved through reducing or eliminating high carbon energy sources, such as fossil fuels like oil and gas. Terms like “carbon neutral” and “zero net emissions” describe efforts by companies and governments to offset their carbon emissions or remove them entirely.

While decarbonization is a crucial component of fighting the factors leading to a warming planet and climate change, achieving decarbonization requires a fundamentally different energy system. More alternative energy sources and infrastructure are needed to implement decarbonization. Therefore, as the leaders in the energy space, oil and gas companies are on the frontlines of decarbonization initiatives, from exploring green alternatives to accelerating efficiencies within the current system that reduce carbon emissions. 

As governments and businesses are confronting climate change, collective goals, regulations, and requirements around decarbonization have come into play for oil and gas companies.

The Paris Agreement, Explained

In 2015, the Paris Agreement was adopted by 196 parties at the UN Climate Change Conference. The agreement was developed to avoid severe climate change impacts and requires economic and social transformation to keep “the increase in the global average temperature to well below 2°C above pre-industrial levels” and pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels.”

The 1.5°C threshold is recognized by scientists worldwide as the tipping point for limiting climate change from trapped carbon emissions in the atmosphere. In other words, if the planet warms an average of 1.5°C from pre-industrial levels, the climate impacts will be severe.

The Paris Agreement outlines a five-year cycle of climate actions to be carried out by countries. Since 2020, countries have submitted nationally determined contributions (NDCs) to reflect their climate goals to maintain the 1.5°C threshold.

Recent studies indicate that oil and gas companies are not up to speed with the ambitious parameters set by the Paris Agreement goals. However, the solution is anything but simple as the global energy demand is increasing, including demand for oil and gas, even amid the rise of emerging technologies like electric vehicles (EVs).

Shifts in Energy Production and the Rise of EVs

If you’ve noticed an increase in electric vehicles in your city, you’re not alone. EV sales are becoming increasingly more attractive to consumers and are expected to reach 10 million by 2025 — an increase that has the potential to reduce oil demand by 350,000 barrels per day. By 2040, projections anticipate EVs will reduce demand by over 20 million barrels of oil per day. 

While this potential hit to the oil and gas industry’s baseline could be dramatic, the popular notion that the only way to reach sustainable targets is to replace every car with an EV all at once isn’t realistic or feasible. The reality is certainly not so dire for oil and gas companies, as fossil fuels are expected to drive 48% of the global energy mix by 2050.

“We should abandon the fantasy of phasing out oil and gas and instead invest in them adequately, reflecting realistic demand assumptions,” said Saudi Aramco CEO Amin Nasser, as reported by Axios.

Oil and gas leaders have quite the challenge before them. Recognizing the importance of balancing current market demand with increasing investments in clean energy, all while improving legacy systems and already complex supply chains is no easy task.

Increasing Value and Scale in the Supply Chain

One thing is for certain, oil and gas companies are uniquely positioned to impact and profit off of the energy transition. Their global scale, increasing investor interest, and legacy relationships with customers all make investing in an alternative green supply chain a viable and valuable proposition. However, to get there, key technologies and incentives need to be aligned.

Currently, 63% of heavy industry executives don’t see priority decarbonization measures as economically attractive before 2030. Similarly, only 5% of oil and gas power providers say they expect to support decarbonizing heavy industry before 2043. However, with the next three years defining the long-term future and success for all players in the energy transition space, oil and gas companies can’t afford to wait to invest in opportunities such as:

• Green premiums to finance industrial decarbonization
• Low-carbon power and hydrogen at scale
• Reducing expenses for low-carbon infrastructure

As more and more investments are being made in clean and renewable technologies, the evidence that power markets have the potential to adopt change is compelling. For oil and gas companies to maintain a stake in the energy sector, they need to consider inserting themselves into more areas of the green energy supply chain, such as ExxonMobil’s new lithium production operation (an important component of EV batteries).

As the global supply chain continues to evolve and demand continues to increase, oil and gas companies have unique opportunities in areas such as EV charging, offshore project development, and more to both stay ahead of the curve and do their part in ushering in a new age of cleaner energy. For oil and gas procurement teams, this has the potential to add even more complexity and inputs to an already challenging role.

With Arkestro’s Predictive Procurement platform, oil and gas companies can make gains where it matters most, such as reducing friction with suppliers, speeding up negotiations, and optimizing efficiency at scale. Learn more about PPO here.