Oil and gas industry doubles down on green investments, DNV GL claims

The oil and gas industry expects to boost investment in the energy systems of the future this year as companies seek to transform for the long term, DNV GL said.

In a new report named ‘Turmoil and Transformation: The outlook for the oil and gas industry in 2021’, DNV GL claimed that a record two-thirds (66 per cent) of senior oil and gas professionals report that their organization is actively adapting to a less carbon-intensive energy mix in 2021.

This number is up from just 44 per cent in 2018. Some 57 per cent plan to increase investment in renewables, up from 44 per cent last year, half (48 per cent) expect to increase investment in green or decarbonized gas. 

DNV GL found that just a fifth (21 per cent) would increase investment in oil projects in 2021, as the sector increasingly comes to terms with the notion that the world’s demand for oil has peaked or will peak in the short to medium term. Expectations for an increase in natural gas investment remain steady at 37 per cent.

The majority of senior oil and gas professionals expect these shifts in investment will lead to a wider reshaping of the industry. Most expect increased consolidation in the year ahead, which could involve asset and business sales, with 63 per cent expecting more demergers, divestments and spin-offs.

DNV GL added that transformational investments come despite a crash in confidence for industry growth following the Covid-19 pandemic and subsequent oil and gas market crash. Only 39 per cent of senior oil and gas professionals are confident about industry growth in 2021, down from 66 per cent last year.

According to the report, priorities are shifting as investors reassess the risks of financing oil and gas projects, and as governments and industry pour billions into green recovery strategies following the Covid-19 pandemic.

Remi Eriksen, group president and CEO of DNV GL, said: “Net-zero climate policies began to proliferate in 2020, from Europe to China and made it onto the table in the U.S. Long term, net-zero policies have the potential to drive deep decarbonization of the world’s energy system, and they are already changing the direction of the oil and gas industry”.

The company noted that the oil and gas industry was going through its third major downturn in 12 years, but the outlook for 2021 was influenced by the possibility that this downturn may be different from those of the past. Perhaps the most significant difference for the industry for 2021, is the shift in capital away from fossil fuels. 

“The financial markets – through the effects of the Covid-19 pandemic – have seen what peak oil demand could look like and are increasingly factoring in changing sentiment in society towards a decarbonized future. Decarbonization has moved from something on the horizon to an immediate priority, and there are signs that our sector may invest to transform rather than cut its way out of the present crisis”, Eriksen added.

Cost-cutting will still be a universal priority (96 per cent) for 2021, but the industry is already lean. A resilient 63 per cent say their organization will still achieve acceptable profits if the oil price averages between $40 to 50 per barrel in 2021. However, there are signs that traditional cost-cutting methods are hitting their limits.

Hans Kristian Danielsen, VP at DNV GL, said: “The trouble with the industry’s available cost-efficiency levers is that most of them have been pulled quite hard already. Cost efficiency has been an uninterrupted priority in each of the past seven years.

“For some, it is getting harder to squeeze any more water from the sponge. Four-fifths of senior oil and gas professionals say cost-cutting will be more challenging than ever in 2021”.

Significantly, the oil and gas industry is not hitting the spending brakes as hard as it did after the downturn in 2014. While the proportion of respondents expecting to maintain or increase capex in the year ahead has fallen to 62 per cent – down from 72 per cent going into 2020 – this is much higher than the 43 per cent recorded following the last downturn.

“Companies are betting long term when making transformational investments, aiming to navigate the multiple transitions taking place at different speeds around the world. While we see a crash in confidence for industry growth in 2021, we see growing confidence in the opportunities that lie in a decarbonized future”, Danielsen stated.

In related company news, DNV GL earlier this month decided to change its name to DNV, starting from 1 March 2021. The company decided on the move after “a comprehensive review of the company’s strategy as it positions itself for a world in which many of DNV’s markets are undergoing fundamental change”.